Foreign Exchange Providers: How International Money Transfers Work

If you are transferring money between countries, the exchange rate you receive really matters, as not every foreign exchange provider will offer you the same deal.

Checking which provider is going to give you the best deal is sensible, and understanding how these providers work is the best way to get the best deal on your foreign exchange transactions.

This guide explains:

• What FX providers do.
• How exchange rates are calculated.
• What costs to compare to make sure you get the best deal for you.
• When specialist FX services should be used and what they offer you.

What Is a Foreign Exchange Provider?

An FX provider specializes in converting money from one currency to another, and makes transfers internationally.

Unlike a bank, which specializes more widely in financial services, and will typically offer you a worse exchange rate as a result, specialist FX services often focus on large transfers, transparent exchange pricing, and currency management tools.

How exchange rates work

There are two parts to every foreign exchange trade. The first is the:

Wholesale (Interbank) Rate

This is the rate that banks use to trade currency between themselves.

The Provider’s Markup (Margin)

This is the percentage added by the provider, which is where they make their money. For example, if the wholesale rate for the pound to the euro is £1 to €1.10, then the provider may offer you €1.08 instead, so their margin is €0.02.

While this may not seem much, if you are making a very large transfer of funds, this can add up. Let’s say you’re sending £100,000 to Europe because you’re buying a property. If you were to get the €1.10 rate, you would be sending €110,000. If you got the €1.08 rate, you would send €108,000 – that is €2,000 difference simply because of the margin.

Even if you’re sending smaller amounts regularly, you will still see these margins eat into the amount you’re sending. There’s no way to avoid them, as this is how the providers make money. But reducing them to a minimum and ensuring you don’t pay any other transfer fees, is essential.

Types of FX Transfers

There are different types of transfers, and the one you need will depend on when and why you’re sending the money.

Spot transfers

This is a currency conversion at the rate offered on the day.

Forward contracts

These lock in a specific rate for a transfer you need to make in the future. You will usually pay a fee for these.

Limit orders

You set a target rate for a transaction you need want to make, and the transaction will automatically be executed if the exchange rate reaches that rate.

Regular payments

These are automated transfers that recur on a regular basis.

When Are FX Specialists Commonly Used?

FX services are often used for:

• Property purchases abroad
• Regular payment of bills or rent abroad.
• Pension transfers
• International relocation
• Business payments
• Investment funding

For smaller, everyday spending, multi-currency accounts may also be used. But it is always worth checking whether you can get a better exchange rate by using an FX provider.

What Costs Should You Compare?

When reviewing FX providers, look at:

• Exchange rate margin – explained above.
• Transfer fees – you may be charged a fee for the transaction – more likely with a bank than an FX provider, but check if there are any transfer fees no matter who you’re doing your transfer with.
• Minimum transfer amounts – some providers will ask you to transfer a minimum amount.
• Payment methods accepted – find out how you can make the payment for the transfer.
• Settlement time – you may need to pay the money within, say, 24 hours. So be prepared with the money ready, because once you agree the transfer, it is a legally binding transaction.
• Regulatory status – check whether your provider is regulated.

Are FX Providers Regulated?

Reputable FX providers are authorised by financial regulators in the countries where they operate. They are required to safeguard client funds, but they are not banks.

Always check:

• Regulatory registration number.
• Licensing authority.
• Client money segregation rules.

Risks to Understand with Foreign Exchange Services

• Exchange rate movements – you need to consider how your transaction would be affected if exchange rates moved.
• Contract obligations in forward agreements – be aware of what you’re legally responsible for when you sign a forward agreement.
• Market volatility – various things can change the markets, often geopolitical unrest or wider stock market volatility.
• Minimum transfer requirements – check whether you need to transfer a minimum amount for the FX provider you’re using.

Frequently Asked Questions

Are FX specialists cheaper than banks?

In many cases, particularly for larger transfers, specialist providers may offer more competitive pricing. Costs vary.

Is there a minimum transfer?

Some providers require minimum transfer amounts.

How fast are transfers?

Speed depends on the currency pair and payment method.

Disclosure:

CompareExpatMoney provides general comparison information and does not provide personalised financial advice. Some providers may compensate us. This does not influence our comparison methodology.