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Why do High Street Banks Offer Different Exchange Rates?

Published on 5 January 2018 in News - Pages by Raffick Marday

While banks continue to provide a viable service in the digital age, they can still be relied upon to unnecessary complicate even the most simple of transactions.

Take exchange rates, for example, which in theory should be simple and easy to understand. After all, these refer to the value of one currency when it is exchanged with another, and they are applied whether you are buying funds for a trip abroad or trading forex through an electronic platform such as Oanda.

This issue is complicated by factors such as commission fees and variable rates, which move in unison with the market. Banks always offer changeable, non-standardised rates, for example, and the question that remains for many is why do they adopt such an approach?

Why do Banks Offer Different Exchange Rates?## 

In simple terms, all currency exchange providers (including banks) pay close attention to what is known as the mid-market rate. This is the mid-point between the buy and sell prices of any two currencies and is also known as the interbank rate by traders and financial market experts.

In truth, this serves as little more than a guideline for banks and currency exchange services, ensuring that variable rates at least stay within a relatively narrow range. Once the interbank rate has been determined, service providers then apply their own unique retail and day rates, in order to ensure that they make a profit on individual transactions.

These applications essentially serve as an invisible commission, which is charged through a variable rate rather than as a standalone, upfront fee. So, while banks and other exchange firms may well claim that they charge no commission, they do benefit from a markup and margin that is hidden within a fluctuating rate that often changes on a daily basis according to market conditions. This is evident with only a brief comparison of bank’s typical retail rates, which are clearly inflated and higher than those offered by providers who charge an upfront commission.

Banks and Exchange Rates – How do they Work?

The Last Word – Why do Banks Operate Like This?

While some may rage at the banks’ lack of transparency, there are obvious reasons why financial institutions apply variable rates. After all, banks are required to remain profitable if they are to function, as otherwise, they would collapse and ultimately take the global economy with them.

Variable rates enable banks to remain profitable in the prevailing economic climate and market conditions while creating an agile model that safeguards their capital. They will also argue that such an approach helps to cap hidden commission fees, ensuring that customers only ever pay a charge that is fair and relative to the market as a whole.

Sure, some will cite this as an example of rampant capitalism that is designed to confuse and dupe citizens, but the fact remains that it is actually a sensible way of delivering interest rates while enabling banks to remain profitable.

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