Introduction
Banks and brokers tend to dominate the FX market and some of them take advantage of their position of power to make bigger gains by exploiting their customers. Calculating your total FX costs with a bank or a broker is a complicated process, which makes it easier to hide fees, evade claims of excessive charges, and portray yourself as the expert.
Hidden Charges
The exchange rate fluctuates by the second, due to a broad range of factors, such as interest rates and tourism, along with trade flow. The true exchange rate at any moment between two currencies is called the mid-market rate, and most banks and brokers will never offer clients this rate. This means you may sometimes be able to shave substantial FX charges by bypassing your broker. Take note of the following charges to be able to get a fairer rate.
FX transactions made by a bank or broker usually consist of:
The Exchange Rate fee
“The spread” is a hidden charge that is added to the exchange rate to increase the bank or broker’s benefit on the trade.
The Wire Transfer fee
Banks and brokers also charge a fee to transfer funds to the beneficiary account. It is almost always absolutely unnecessary and much higher than the expense incurred by the bank or broker to carry out this step, just like the exchange rate spread.
The Add-Ons and Small-Print fees
Account management costs, small-print amendments, and other forms of charges are examples of add-ons designed to extract as much revenue from you as possible, through as many different channels as possible
In addition to the above, here are some more broker and banking practices:
Dumping
Dumping is the method of enticing clients with the offer of very low fees and unbeatable exchange rates. This could happen with the first transaction, and for subsequent transactions to be eventually filled with steeper spreads.
Selective Exchange Rate Quotes
You can get a particular form of quote based on your importance in terms of capital to a bank or broker. Only the biggest multinational clients are provided with treasury desk quotes or rates that are similar to the interbank market. Most SMEs are shut out of these favorable exchange rates, which are only offered to the biggest companies at a business cost.
Selective Exchange Rate Adjustment
Rather than using the real-time exchange rate, you will usually get a daily quote. However, exchange rates fluctuate on a second-by-second basis. Typically, if an interest rate falls lower than the regular rate, a bank will adjust the quote to accommodate this price trend; however, if it moves in the bank’s favour, this movement is not passed on to you.
Conclusion
Researchers have found that asset managers are still losing millions of dollars a year in hidden foreign exchange bank charges. Optimising cost savings is a two-pronged strategy. One is receiving favorable exchange rate rates, and the other is becoming aware of and lowering the commission costs. Having a best FX management provider will help you ease this process.