What Is an Exchange Rate Margin? Here’s Everything You Need To Know

Did you know that there's more than one exchange rate between two currencies? In fact, at any given time, there are many, many of them out there.

An exchange rate margin, sometimes referred to as an "international conversion margin" or a "foreign exchange margin", is the way in which banks and other currency exchange services make a profit off of this.

By trading between one another at the "real" mid-market exchange rate (i.e. the one you see on Google) and charging you with their own one, financial service providers walk away with a slice of every transfer you send abroad.

How Are Exchange Rate Margins Charged?

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 providers. This margin is how many providers and banks make money on currency transfers, and you'll often have to pay them over and above other fees such as commissions or fixed charges.

For example, let's assume that you’re converting from British pounds to US dollars, and the standard exchange rate is $1.30 for every £1. A currency provider may sell you $1.28 for every £1 you sell them. In this case, the margin would be $0.02 or around 1.5%.

While this may sound like a small amount, bear in mind that the costs stack up very quickly — and 1.5% is not bad 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 providers are seldom fully forthcoming about how these fees are levied from your transfer, with different institutions adhering to very different degrees transparency in this regard.

Some currency exchange providers, 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.

Many others still — while on the one hand making clear that they do charge a fee on exchange rates — will seldom go a step further to give context to how much the user is ultimately charged for this fee.

Two Rules of Thumb for Exchange Rate Margins

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

• Banks and traditional currency exchange providers (e.g. Western Union and MoneyGram) tend to charge the highest exchange rate margins. Money transfer services and fintechs (e.g. TransferWise and WorldRemit) tend to charge the lowest exchange rate margins.
• Try to compare multiple providers before sending money abroad. This way, you'll be able to ensure that your recipient receives more money. Monito's comparison engine tells you exactly how much each provider charges and the exchange rates they offer.

Photos by Alexander Popov and Niels Steeman on Unsplash