In an alternate universe, there would be one consistent, universal exchange rate, and you would always know exactly what you’re getting with every money transfer. Although, in reality, currency values are subject to constant change, and a rate you see one day may be drastically different from the next. Due to this, the mid-market rate is what sets the rhythm of global money transfers and foreign exchange transactions.
The ‘Real’-Rate
In essence, a mid-market exchange rate is the currency exchange rate used by banks and money transfer services to transfer or send money to one another and in most cases, it’s the best rate you can find to send money abroad. Alongside that, to a large extent, bankers are willing to buy and sell currencies for a certain price.
Thus, simply put, it is the midpoint of these prices that is known as the mid-market rate. As that’s how the market sets its rate, it is the most real and the most equitable deal out there.
As such, the following pitfalls must be recognized during the conversion process:
- Misleading pricing: Beware of offers for 0% fee, zero commission or best rates.
- A set day rate: A majority of providers take the mid-market rate and apply a margin on top, without being transparent. As a result, your overcharge is largely unknown.
- Unfair deals on your currency: Most providers hide the real cost in the exchange rate it offers, hence making huge profits at your expense.
Accordingly, international money transfer providers boast that their “mid-market rate” is the best rate available. Yet how does it exactly work? Here’s an overview:
How Mid-market Rates Work
Currency exchange rates change quickly, by the day, at each hour and even every minute. This rate is important because it’s tied to those hidden fees that you’re paying.
A financial institution takes the mid-market rate and then applies a margin on the top of that, passing the additional cost on to the customer. Banks and brokers typically apply “spread” to this rate, which are hidden charges that amend the “real” rate.
- Understanding the Spread: In forex trading, the spread is the difference between the bid (sell) price and the ask (buy) price of a currency pair. There are always two prices given in a currency pair, the bid and the ask price. The bid price is the price at which you can sell the base currency, whereas the ask price is the price you would use to buy the base currency.
The problem, however, is that often the unexpected additional cost is not transparent and catches even the savviest of consumers off-guard. The details are in the fine print, but at first glance, how do you know what you’re paying? And equally important, how can you pay less?
The answer lies in understanding what the mid-market rate is, and then figuring out what you’re being charged so you can determine whether that spread is reasonable or too high.
To Conclude
Since several costs are buried within the buy and sell prices, knowing the mid-market rate upfront provides you with a better perspective of what other fees have been added on top of the actual exchange rate. In addition, the mid-market rate is regarded as the most unbiased and transparent rate and is widely used around the world. Therefore, it can also be identified as the only exchange rate that needs further consideration.
With an efficient FX management solution provider, you receive automated spot pricing and instant settlement, all delivered via a developer-friendly API.
