You’re about to conduct an overseas business transaction so you do a quick Google search to check the current foreign exchange rates. The search results are reporting the current day’s mid-market rate. But wait – that’s not the rate your regional bank is quoting. The rate you’re being offered is much wider than those search results.

What’s going on? 

Why Your FX Payment Rate is Higher than it Should Be

Many businesses use the foreign exchange services offered by their regional banks. What these businesses may not be aware of is that these regional banks are often, in turn, using a much larger institution. There are three valid reasons for this: 

1. Either no or minimalist trading desk.
2. A need to keep the payment and FX conversion housed within their core banking platform.
3. It’s more convenient for them to utilize the larger institutions’ payment infrastructure in order to move currency overseas

The rates coming down from these bigger institutions, such as JPMorgan, Bank of America, Wells Fargo) will often have a much wider margin than the published mid-market rate. On top of that, the regional banks often add on a margin of their own so they can capture some of the FX revenue as well. 

A Brief Refresher on Exchange Rate Margins

When you do a foreign currency exchange, it’s not free. For every exchange you make, you’re charged an exchange rate margin. The exchange rate margin (or foreign exchange margin or international conversion margin) is the way banks and other currency exchange service providers make a profit from handling your FX.

By trading between one another at the “real” mid-market exchange rate (i.e. the one you see on Google) and charging you an additional foreign exchange margin of their own, financial service providers take a percentage of every transfer you send abroad.

Let’s look at an example. At the time of writing, January 2021, the Interbank mid-market exchange rate for the dollar to euro was around 1.2200

Indicative exchange rate offered by two random regional banks to sell euro were 

Bank A: 1.2505 250bps or 2.5%

Bank B: 1.2566 300bps or 3.0%

An indicative rate from GreenShootsFX could be 1.2261

This supports the view that the FinTech exchange rate is considerably better than that offered by the bank.

We can take this a step further and see exactly what this costs in USD terms for a payment amount of EUR100,000

Bank A:  $125,050

Bank B:  $125,660

GreenShootsFX $122,610 (or a saving of circa $3,000)

How This Impacts Your Business

The upshot of this is small businesses get a wider rate than the currently published mid-market exchange rate. Oftentimes, customers assume the rate they’re getting from their bank is the best in market, coming from a source they trust. If the customer has time to investigate other options, they may well find a much narrower rate.

Why Do Banks Keep their Margin Rates High?

Short answer: because they can! 

Big banks are providing their own rates and their own payment infrastructure. Though they could reduce their rates and still be relatively profitable, chances are they won’t, because they don’t want to cannibalize their revenue.

Think about it realistically: large financial institutions have hundreds of thousands of shareholders. And those shareholders are expecting to see the bank’s revenue increase year over year, right? So it makes sense the banks would be reluctant to narrow their FX margin and potentially realize less revenue. 

In addition, banks have many, many departments, all of which have financial targets which increase every year. And, with thousands of employees across scores of internal divisions, and branches, mid and larger-size banks see internal expenses that are much higher than they’d be at a smaller FinTech. 

Consider also the multitudes of regulations forced on to banks, courtesy of the plethora of individual business lines they are involved in. 

Of course, these are all generalities. A large corporation may get a more favorable rate from a bank as part of their overall financial relationship. Companies that are a bit smaller may enjoy slightly less service, but still receive some focused attention. The smallest companies are probably given the fixed house rate, aligned with the level of service they’ve contracted for.

In some cases, banks empower their relationship managers with the ability to improve on the margin for an individual business client. A knowledgeable relationship banker with the time to spend focusing on individual customers is often able to offer a more attractive margin, but it’s all subjective and therefore often inconsistent in its approach.

In Europe, many of the larger banks have long since realized the FinTechs are here to stay and are chomping at their heels for a slice of the FX and payment revenue  Consequently, international payment fees have been reduced or, in some cases, removed altogether coupled with an improvement in FX margins.  The US does not appear to be keeping step.

Options for Small Businesses (or ANY business, for that matter!)

One way a small business can realize a more attractive margin is by partnering with a Fintech PSP (Financial Technology Payment Service Provider). A PSP such as GreenShootsFX is 100% focused on cutting out payment fees and providing its clients with a FX margin that can reduce the value of USD paid, or increase the USD value collected on any inbound currencies (i.e. from sales of exported goods and services)    

Often, we can save a client in the region of $2,000 for every $100,000 converted which can help support the business with meeting its financial obligations from loan repayments to preventing employees from being furloughed.

Find out more by connecting with us today!