How Banks and Bureaus Make Big Money From Exchange Rates

Many financial institutions provide Foreign Exchange services to their customers.  These can include buying foreign currency in cash form, making International bank-to-bank transfers or providing pure Foreign Exchange dealing services for large multi-nationals.

These FX deals can be very profitable to the Banks, so where do they make their money?

Fees, Commissions and Exchange Rate Margins

Most Banks will charge a Fee on each transaction.  Often around GBP25/EUR30/USD40.

Money Transfer Bureaus will more likely charge a sliding scale fee that is very often considerably higher.

But very often it’s the margin (or the “spread”) they add to the Exchange Rate that generates the most income on a Foreign Exchange deal or transfer.

Exchange Rate Spreads

When you see a single exchange rate quoted on a web site or in the newspaper, this is the mid-market rate.  It’s the rate half-way between the sell rate and the buy rate that is in operation between the banks.  For example

If the GBP USD rate is quoted at 1.50 ($1.50 to £1),  then the Banks will buy GB Pounds from each other for slightly more than $1.50 and buy US Dollars for slightly less than $1.50.

For example;

  • Mid-market rate = 1.5000 USD/GBP
  • Interbank buy GBP = 1.5005 USD/GBP
  • Interbank buy USD = 1.4995 USD/GBP

These ‘wholesale’ rates are only available to large financial institutions (like RationalFX) who conduct a high volume of FX transactions.  The difference between the upper and lower rates is called the ‘Spread’.

However, when you as a customer buy or sell GB Pounds for US Dollars, you are more likely to get rates like these;

  • Mid-market rate = 1.5000 USD/GBP
  • Customer can buy GBP = 1.5400 USD/GBP
  • Customer can buy USD = 1.4600 USD/GBP

This is for bank-to-bank transfers and is higher if you are buying holiday cash.  The difference is an additional margin that the Bank makes on the transaction.

Bureau de Change Spreads

If you think that the Banks are charging a lot, the Bureaux de Change in your local High Street and, in particular, at the Airport, are likely to be charging you even more!  It is reasonable to expect to pay more for cash versus electronic transfers but even so, spreads of 10% are not uncommon.  e.g.

  • Mid-market rate = 1.5000
  • Buy USD via Bureau = 1.4000
  • Buy GBP via Bureau = 1.6000

RationalFX Saves you money

RationalFX are a FCA-authorised Foreign Exchange specialist that carries out hundreds of millions of GBP worth of FX deals each year on behalf of it’s customers.  Because of our volumes we get wholesale rates from our partners – and unlike our competitors we pass these savings on to you our customers.

As soon as you open a Free Personal Account, you can access our live highly competitive exchange rates online.  Why not open one today – there is no obligation to carry out any transfers or payments.  And you can compare actual Exchange Rates with any quote from a Bank or Bureau.