Technology has made the world a global village. Today, people from different countries work under the same company through remote working. E-commerce platforms cater to people all over the world. International partnerships and people are also globe-trotting to feed their interest in adventure. All these activities require access to different currencies, depending on the country they’re being done in. As such, exchanging currencies is still relevant today.
You need information on the interbank exchange rate when exchanging currencies for business. This rate will help you determine the value of your money once you transfer it from foreign to local currency. Besides that, when a business transacts in foreign exchange, there’s a fee they have to pay when converting the foreign currency back. The fee is calculated as a percentage of the money being transferred. Although many factors determine the cost of the fee like the interbank exchange rate, there’s still no way to determine the real cost. In aggregate, such miscellaneous affect the performance of a business.
However, it’s not all doom. Even though you can’t completely get rid of the hidden fees, there are tips you can use to reduce the hidden cost of interbank exchange rate. The article has put together those tips. Keep reading to learn more.
Interbank Exchange Rate 101
The interbank exchange rate is the rate used by banks when selling and buying foreign currency with each other. Banks determine this rate by finding the midpoint of the current exchange rates for each currency. The interbank exchange rate is also known as the real, spot, or mid-market rate. Banks can have different interbank exchange rates. The rates can also change depending on the fluctuations occurring in currencies.
As mentioned before, there are hidden costs associated with interbank exchange rates. Here are tips to help you avoid some of these hidden fees:
1. Consider Using Other Currency Exchange Companies
Banks aren’t the only institutions that can provide currency exchange services. Nowadays, companies are known to offer currency exchange services at a cheaper fee than banks. Some of these companies include:
- Wise, also referred to as TransferWise
- Currency Fair
- Curse, and many more
So, how do these companies help you avert the hidden fee? First, you need to transfer the currency you want to be exchanged. You can do so by making a wire transfer to your company of choice account. Your chosen company will exchange the money you’ve sent to your preferred currency and transfer it to your account.
However, you should note that such transfers are made using bank accounts that have multiple currencies. Unfortunately, not all banks support multiple currencies. Therefore, if you use this tip, ensure that you open a bank account with multiple currencies.
2. Get A Credit Card With No Foreign Transaction Fee
If you want to expand the operations of your business to international levels, you may have to visit foreign countries. It could be to acquire supplies of better quality at a lower price. Another reason for traveling may be to benchmark other successful international businesses in your industry.
When traveling to foreign countries, you need to exchange your home currency for foreign currency. To avoid hidden fees in exchange rates, you can use credit cards that don’t charge foreign transaction fees. An example of such a credit card is the Home Trust Preferred Visa. Apart from zero foreign transaction fees, these cards earn you cashback on transactions made.
On the other side, one of the disadvantages of these cards is they limit the number of transactions you can make in a day. However, this shouldn’t be an issue for small businesses as they don’t make a lot of transactions in a day.
3. Use Banks That Offer Open Banking
Open banking is a system that banks use to give access to data to third parties. This data can include the difference between the exchange rate and interbank exchange rate. Knowing these two rates’ differences helps you determine an estimate of the hidden charge.
The hidden charge is the difference between the interbank exchange rate and the exchange rate. With this information, you’re better positioned to choose banks with a small hidden charge. This will reduce the cost of your business transacting.
Furthermore, open banking has other benefits. Some of these include:
- It charges lower fees when processing payments
- It saves time as it makes customers’ information available automatically
- It offers all-in-one mobile-first customer experiences
- It helps you figure out the authenticity of customers’ information such as their identity as well as bank information
- It has higher acceptance rates of transactions than some cards
- It doesn’t allow chargebacks hence preventing the risk that may affect future processing rates
- It helps you have a whole picture of your business’s finances by providing single interfaces
4. Be Careful Not To Accept Dynamic Currency Conversion
Dynamic currency conversion is an option some bank ATMs offer to use your home currency when making payments in foreign countries. Dynamic currency conversion (DCC) is offered to avoid the hustle of calculating how much of your home currency is equivalent to the amount you need in foreign currency.
It may seem very helpful, but DCC has hidden fees that increase your costs. When you decide to accept DCC, you’re allowing a foreign country’s bank to make currency exchange on your behalf and get it by withdrawing from its ATMs. The fees paid in such an exchange will be higher since most banks tend to charge more to foreign customers. Moreover, despite an ATM’s exchange rate being tied to interbank exchange rates, it may have higher exchange rates because of some hidden fees.
When using foreign ATMs, here are some hidden fees you might be charged with:
- Conversion charges. Most banks, especially in America, Australia, and Britain often charge conversion fees when you use a foreign ATM to withdraw your local currency.
- Surcharges. These are fees charged by small banks for using their ATM service. To avoid such charges, you can use big banks’ ATMs.
To reduce these hidden costs, you can opt to deal with currency calculations by choosing to make payments using your home currency. This means your home bank will take care of the currency exchange needed. As a result, you’ll avoid the hidden fees charged when using foreign banks.
Wrapping It Up
Businesses use an interbank exchange system to convert their currency using the set rates when making international transactions. However, interbank exchange rates are higher than exchange rates due to the hidden fees. These hidden fees result in more costs incurred in a business. If you’ve been wondering how to reduce or avoid these hidden fees, consider using the tips in this article.