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Why are Banks Currency Exchange Rates so Bad?

Banks are notoriously uncompetitive with regard to the foreign exchange rates they provide their customers.  This is regardless of whether you require a relatively small sum of travel money, or a much larger figure for emigration.

What is a ‘Bad’ Rate?

Before we discuss why banks rates are as bad as they are, we need to briefly elaborate on what a bad rate actually is.  Foreign exchange providers buy currency at, or very close to the interbank rate (the market rate) and they will in turn, sell the currency to their customers at a different rate.  The difference between these two rates is called a ‘spread’ and the spread you are charged is how they make their money.  In most cases it is flexible and the level of it is solely down to the discretion of the foreign exchange provider.

More about Spreads

As we mentioned, the spread is the difference between what the broker/bank buys the currency at, and sells it to you for.  As long as the rate they sell the currency to the customer at is above what they paid for it, the difference is pure profit.  Therefore, in the  majority of cases, they will be very flexible if the customer barters with them.  If you are able to negotiate a 0.3% improvement in the spread, this could end up saving you hundreds, if not thousands of pounds.

Bank Currency Rates

As discussed, banks are usually the worst businesses to use when exchanging currency, but why is this?  Well there are three main reasons why they can get away with charging such bad rates:

1.  Lack of regulation.   Perhaps most importantly, businesses that deal in FX are not required to disclose to their customers what they charge by means of a spread.

2.  Lack of public understanding.  Leading on from point one, most people see 0% commission and think they are getting good value for money when they walk into a bank, Marks and Spencer or any other one of the high street retailers.

3.   Trust,  People (rightly or wrongly – we’ll let you decide) in many cases trust their banks having dealt with them for many years.  Because of this, they often buy into the sales pitch and convert their currency, no questions asked.  On the other side of the coin, the majority of people have not heard of the large currency brokers such as Moneycorp and Currencies Direct and are wary of entrusting them with large sums of money.  As we have mentioned in previous articles, most of the top currency brokers are FSA regulated and come under even more scrutiny than the banks and are therefore extremely trustworthy.

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