Preparing for a large foreign exchange transaction and international transfer may seem like a daunting task. This step-by-step guide should help explain the costs, process and risks to help you send and receive more money by making an informed decision about foreign exchange.
1) Find out how much you can really save
One of the key benefits of using a currency broker instead of your bank is the actual exchange rate you get when converting currency and sending it abroad. There are two main ways a currency broker can help you save money:
- Converting money at a better exchange rate
A currency broker will always offer better exchange rates closer to the interbank mid-market rate. A banks typical rates may be up to 5% from the mid-market rate where as a currency broker can offer exchange rates of less than 0.5% from the mid-market. On a conversion of £100,000 that would potentially save a customer £4,500.
- Locking in a beneficial exchange rate up to a year before you need foreign currency
The price of one currency against another can move significantly over the days, weeks and months leading up to a currency conversion. Currency brokers can lock in a favourable exchange rate for settlement up to a year in advance on a “buy now pay later basis” with a forward contract. Some currencies can move up to 10% in 6 months, potentially saving up to £10,000 on a £100,000 transaction.
2) Getting the best exchange rate
Ensuring you get the best possible exchange rate at the time of transaction is imperative to cost effective foreign exchange. When you request a foreign exchange quote a broker or bank will usually quote a price based on a percentage from the mid-market. This is generally known as the spread, margin, mark-up, basis points, pips or clean/dirty price.
Whatever terminology is used the principle is the same, the cost to you is the difference in price between where your bank or broker buys or sells money and the price at which you as a client send or receive it.
When you convert funds with a currency broker such as Berry FX you are able to see in real-time where the underlying currency mid-market is as well as your price.
By providing client exchange rates a fixed percentage from the mid-market we are able to provide total transparency in our fees and rates, which will be at a significant discount to the banks and competition.
You may also find our guide on how to compare exchange rates helpful.
3) Reducing your risk by using currency forwards
It is possible to lock in beneficial exchange rates for transactions up to a year in advance.
Using currency forward contracts can help predict cash flow and futures costs without the worry of currency prices moving against you.
If for example you have £12m to convert into EUROs over the course of a year (£1m a month), but were worried that the exchange rate may move against you, therefore reducing the amount EUROs you receive as time goes on. We can convert £12m up front and split it into 12 different settlement dates a month apart. A small deposit would be required of between 5% and 10% but the balance of each transaction would not be due until the currency is needed and the conversion settles.
As an example the GBPEUR price has moved 6.73% over the last 6 months – which can have big impact on receivable EUROs.
6 months ago converting £1m GBP was worth EUR 1,425,00. Today (1st Feb 2016) £1m is worth EUR 1,315,400.
4) FX costs explained: Zero % commission myth exposed
There is no such thing as zero 0% commission. Foreign exchange fees are built into the exchange rate.
Your bank may charge an admin fee for each conversion, add commission on top of a widened exchange rate and there may be some charges for receiving funds into a foreign bank account.
When banks advertise FX as 0% they make it notoriously difficult to see your actual transaction costs. The transaction costs would be the difference between the mid-market and your price.
If you have an example of a previous foreign exchange transaction we can tell you how much you are being charged. It is possible to save several percent on the value of a transaction by switching to a currency broker.
However, with a currency broker all fees and charges are totally transparent.
5) An example of how the process works
Unlike your bank, each customer is assigned a dealer who can handle all aspects of the transaction and onward payments.
Your dealer will be familiar with your transaction types and be on hand to provide advice on strategy, market timing and assistance with administrative issues.
The below example assumes you are converting £1m into USD.
- When you want to convert money you either go online or give us a call and ask us to convert £1m into USD
- We convert £1m GBP into USD at an agreed rate a fixed percentage from the mid-market.
- We send you a contract note with the breakdown of the transaction.
- You send £1m to our segregated client tier 1 bank account.
- When funds arrive and are matched we send the USD out. This can either be to your USD account or an international or domestic single or multiple beneficiaries.
6) How a currency broker can help…
We aim to provide the best FX rates in the business and are totally transparent with our pricing. All quotes are a fixed amount from the mid-market interbank rate. When you request a quote online or with our dealers we show the mid-market price as well as your rate. This is also shown on all your trade confirmations. We do not charge a commission or fee for onward payments – all our charges are built into the FX rate.
But more importantly we can provide advice and strategy that will reduce your foreign currency exposure protecting the value of your money. Including a variety of ways to convert money:
- Same day/spot – you can convert funds and have it sent out on the same day to either a single or multiple beneficiary
- Future date/forward – you can lock in today’s rate and convert funds to be used at a future date with only a small deposit. This is a common method of protecting future purchases from currency fluctuations
- e-wallet – you can convert funds 24 hours a day and leave them in your online account for when you need them.
7) Getting pre-approval from your bank.
If you are making a one off large foreign purchase you will need to send money from your bank to your currency broker to settle the trade. Most normal bank accounts have limits on the amount you can send in one go without notice, so may cap payments at £10,000.
So make sure you notify your bank that you will be making a large payment. In some cases you may need to provide your currency brokers banking and settlement details to get it approved from your bank.
8) Receiving foreign currency from abroad
One of the most expensive mistakes made when it comes to foreign exchange is receiving foreign currency into your GBP bank account. If you have funds coming in from abroad you could lose out significantly on the amount of GBP you receive if you allow your bank to manage the process.
When foreign currency is deposited into your GBP bank account the bank will generally do the conversion automatically at their standard rates.
Something else to avoid is letting the funds be converted into GBP before being sent to you, as this also results in large FX transaction costs.
Both of these scenarios mean you have no control over the exchange rate or timing of the conversion. Which could result in receiving significantly less GBP.
It makes sense to arrange for foreign currency accounts to be set up with your domestic bank, then convert funds into GBP at a beneficial rate using a currency broker.
You can also use a currency forward to lock in the current exchange rate for a payment you are expecting up to a year in the future. By using a currency forward you protect yourself against the actual currency price moving against you and can budget accordingly.
9) Online Currency Conversion & Back Office Demo
Clients can choose to convert funds online or over the phone. The online platform is available 24/7 where you can convert money, see live quotes, view your cash balances and check forward prices. You can also add regular beneficiary details and check audit trails of your previous conversions.
Watch this 1 minute video on how our online conversion and transfer platform works…
We have experienced dealers who can handle all aspects of the transactions over the phone and are on hand to provide expert advice on foreign exchange. All customers benefit from the same service regardless of if they are a multi-national business or an individual making a one-off foreign purchase.
10) Getting your account in place beforehand
It is sensible to have your currency broker account open well before you may need to convert money or arrange an international money transfer.
You can apply for an account online and the process takes less than a few minutes.
If you would like to convert funds with Berry FX, the next step is to register online. This can be done here and takes less than a minute.
You will then be asked to upload your proof of identity and address for our due diligence and AML checks. Once we have received this your account will be sent to compliance and normally approved within 24 hours if we do not require any further information.
If you have any questions at all please do not hesitate to ask – as we are happy to explain our services to new or potential customers.
You may also find our guide on how to compare exchange rates useful.