Exchange Rate Margin

What is an Exchange Rate Margin?

An exchange rate margin, sometimes referred to as an "international conversion margin" or a "foreign exchange margin", is the percentage difference between the exchange rate at which banks and currency exchange services trade and the exchange rate offered to consumers.

Understanding Exchange Rate Margins

Strictly speaking, an exchange rate margin is the difference between the mid-market exchange rate and the exchange rate offered to private customers by banks and currency exchange services. This margin is how many services and banks make money on currency transfers, and customers often have to pay them over and above other fees such as commissions or fixed charges.

For example, let's assume that one is converting from British pounds to US dollars, and the mid-market exchange rate is US$1.30 for every £1.00. A currency service may sell US$1.28 for every £1.00 sold to them. In this case, the margin would be US$0.02 or around 1.50% of the transfer value.

While this may sound like a small amount, bear in mind that the costs stack up very quickly, and 1.50% is reasonably fair as far as exchange rate margins go.

Exchange Rate Margins as 'Hidden Fees'

In Monito's reviews and analyses, we frequently refer to exchange rate margins as 'hidden fees' — and for good reason.

Banks and currency exchange services are seldom fully forthcoming about how these fees are levied from international money transfers, with different institutions adhering to very different degrees of transparency in this regard.

Some currency exchange services, for example, will completely omit any mention of this fee on their consumer-facing money transfer websites, instead burying the details deep within their terms and conditions.

On the one hand, many others still make clear that they charge a fee on exchange rates but will seldom go a step further to explain how much the user is ultimately charged for this fee.

Rules of Thumb for Exchange Rate Margins

While one typically cannot avoid exchange rate margins altogether, there are two major tips to keep them low:

  • Banks, PayPal, and traditional cash-based currency exchange services (e.g. Western Union and MoneyGram) tend to charge the highest exchange rate margins., while digital money transfer specialists (e.g. Wise and Paysend) tend to charge the lowest exchange rate margins;
  • Comparing multiple services before sending money abroad enables you to ensure that your recipient receives more money. Using Monito's real-time comparison engine, you can find out exactly how much each service charges and the exchange rates they offer.

Photos by Alexander Popov and Niels Steeman on Unsplash

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