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What Is The Difference Between Bank and Broker Foreign Exchange Rates?
In this post I’d like to explain the differences in the foreign exchange rates you’re likely to receive from a high street bank, compared to a foreign exchange broker. This post might be useful if you’re thinking about changing currencies, but aren’t sure where to go to get the best foreign currency exchange rate!
Best Foreign Exchange Rates?
In almost all cases, banks provide foreign exchange rates that are substantially worse than those you can receive from a foreign exchange broker. By substantially worse, I mean rates that are up to 4-5% poorer, compared to the benchmark interbank rate. For instance, if the pound to euro interbank rate is 1.20 one morning, you might expect to get something in the range of 1.18-1.19 from a foreign exchange broker. From a bank by comparison, the rate is likely to be around 1.14-1.16 if not worse.
Why does this matter? Because if you’re exchanging a large amount, that 3-4% difference in the exchange rate can add up to a huge total across several thousand pounds. Imagine for instance that you’re purchasing a villa on the coast of Spain for €300,000. If you receive an inferior exchange rate, it will then cost you thousands of pounds more to reach your required euro total. That (obviously enough) is not a favourable outcome.
Why The Difference in Foreign Exchange Rates?
You might therefore ask: why do banks provide such inferior exchange rates compared to foreign exchange brokers, and why do brokers offer superior ones? First of all, banks provide inferior exchange rates simply because they can get away with it. High street banks such as HSBC and Natwest for instance are household names, and trusted by millions of people across the UK for their financial dealings.
When someone decides to transfer a large sum of money abroad then, their first choice is naturally their bank, because they used them before and feel they can trust them. The problem though is that high street banks know this: they realise people will use them regardless of the exchange rate they provide, and so aim to take as large a percentage is possible.
Foreign Exchange Brokers
By comparison, foreign exchange brokers can provide better rates because, unlike high street banks, they specialise solely on foreign exchange services and nothing else. So if you contact a bank, you might end up dealing with someone who both changes currencies for clients while doing a dozen other things. With brokers meanwhile, you’ll deal with someone that aims to get great exchange rates and nothing else. The superior rates they provide are a consequence of specialisation.
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