Finance & Currency Risk Management
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By Associated FX Analysis Team

Hidden FX Charges You Need to Know About

Published May 1, 2015

Banks and brokers may be bloating their profits, at your expense.

The forex market is huge. It is the largest market in the world, with $5.3 trillion changing hands every single day. With such huge amounts of money at play, it gives ample opportunity for various players to take as big a cut as they can get. Access to the FX market is dominated by banks and brokers, so, some inevitably take advantage of their position of strength in order to make bigger gains at their customers’ expense. Bigger gains than they should be taking as a commission, and much bigger than their clients are being told. Exchange rates fluctuate by the second, due to a range of supply and demand factors including interest rates, tourism and trade flows. The true exchange rate at any given moment between two currencies is known as the mid-market rate. And guess what? Most banks and brokers will never give clients this rate.

Calculating your total FX costs with a bank or broker is an intricate, complex process. Moreover, this complexity is what banks and brokers want and therefore entrench. It makes it easier to hide fees, to evade claims of excessive charges and to paint themselves as the expert you can rely on (while they take money out of your pocket).

The components of a bank or broker FX transaction:

  1. The exchange rate fee
    As mentioned above, a hidden charge, known as the spread, is loaded onto the exchange rate to boost the bank or broker’s profit on the transaction.
  2. The wire transfer fee
    Banks and brokers regularly charge an additional fee to move the funds to the beneficiary account. Like the exchange rate spread, it is nearly always completely excessive and much higher than the cost incurred by the bank or broker to carry out this step.
  3. The add-ons and small-print fees
    Add-ons include account maintenance fees, small-print amendments and other types of charges with the main objective to extract as much money as possible from you through as many different avenues as possible.

Additional bank and broker practices:

  1. Dumping
    Dumping is the industry-wide practice of attracting clients with the promise of incredibly low fees and unbeatable exchange rates. This may occur for the first transaction, only for subsequent transactions to be gradually increasingly loaded with steeper spreads.
  2. Selective exchange rate quotes
    Based on your importance in terms of capital to a bank or broker, you will receive a specific type of quote. Only the largest of multinational clients receive treasury desk quotes or anywhere close to the interbank rate. Most SMEs are locked out of these favourable exchange rates only on offer to the largest of firms and given a commercial rate.
  3. Selective exchange rate adjustment
    Rather than use the live exchange rate in real-time, you typically receive a daily quote. However, exchange rates move constantly, to the second. Typically, if an exchange rate moves worse than the daily rate, a bank will amend your quote to reflect this market movement though if it moves to a favourable position for the bank, this movement is not passed on to you.

Two companies in similar size and sector can easily have substantially different FX costs. It can help give you a competitive edge. Or it may already be helping give your competition an edge.

Optimising cost saving in foreign exchange is two-fold. One, in obtaining favourable exchange rate prices and two, in knowing and lowering your commission costs. The traditional foreign exchange providers – banks and brokers – do their utmost to ensure neither is straightforward, through an opaque payment structure, hidden spreads and dubious add-ons.

To make the process clear, at Kantox we provide a free savings analysis to all clients and interested businesses, with no obligation to trade whatsoever. You can request your free savings analysis here, or continue reading to find out how you can compare rates yourself instantly.

The importance of savings on your FX transactions

The importance of saving on your FX transaction is sometimes underestimated. Here’s why you should pay close attention to what you are really being charged:

  1. Commission percentage can be deceiving
    The commission percentage is small, and such small percentages can seem relatively trivial, though this is an illusion. If you make a foreign exchange transaction of $1,000,000 and your total commission (including the spread) is 1%, your fee is $10,000. If it is 0.29%, your fee drops to $2,900.
  2. Invisible mark-up in the exchange rate spread
    It’s a standard practice carried out by banks and brokers to include a spread in the exchange rate that is almost never divulged to you. The result is that you don’t know the exact amount the bank or broker is really taking. To combat this practice, you can benchmark your bank or broker quotes against the live mid-market exchange rate.
  3. Large cost impact
    Over the course of a financial year, adding up all the hidden spreads and add-ons from all your FX transactions amounts to a probable considerable amount, which with a more prudent and informed strategy is entirely avoidable. Being anything but completely thorough with your FX approach invariably leads to a big hit on your profit margins.

How you can check and compare your FX costs yourself, instantly

To find out the real costs of your FX transactions, you need to know the mid-market rate. As explained above, banks may include a spread in the rate they are giving you, in addition to the visible fees they are adding. The mid-market rate may be lower than your bank’s rate.

You can use Kantox’s free live rates tool for the mid-market rate:

  • Simply request a free account, you’ll get instant access.
  • Log into your account and go to the live rates tab.
  • Choose the currency pair you’re interested in and compare the rate to what your bank is offering!

Live Mid-Market Rates Illustration
(This is only an illustration. You can get a free Kantox account to see the current live rates)

Don’t forget to also compare the visible fees: Commission fees, international payment fees,… the list may be long. As a reference point, you can compare it to Kantox’s pricing (we do not charge any additional fees for international payments).



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