Mid-market rates set the pulse of global money transfers and foreign exchange transactions. Continue reading to find out more about mid-market rates and what you should know before sending funds overseas.
A mid-market exchange rate is the currency rate that banks and money transfer providers use to transfer or send money to each other. In some countries, it’s known as an interbank or middle rate.
In short: the mid-market rate is the “real” exchange rate at any given moment. It’s usually the best exchange rate that you can find when you want to send money abroad. But as you’ll discover in this article, being offered the mid-market rate doesn’t guarantee that you’re getting the cheapest money transfer.
Banks buy and sell currencies with each other at the standard exchange rate, which itself is determined by factors such as a nation’s inflation rate, debts and political stability. As a result, standard exchange rates can fluctuate on a daily basis.
Banks use one currency to buy another. This is called a currency pair. For example, pounds to dollars is a currency pair.
Imagine that Bank A buys money from Bank B at the standard exchange rate of £1 = $1.30. In this case, 1.30 is the buying price or buy rate.
Bank A also sells currency to Bank B at the standard exchange rate of $1.24 = £1, which means, 1.24 is the selling price or sell rate.
The mid-market rate, in this case, is 1.27 – but how is that figure determined?
How is the mid-market rate calculated?
To understand mid-market rates, it’s important to first get to know what the “spread“ means. The spread is the difference between the buying and the selling price. In the scenario above, the spread is $0.06.
The mid-market rate is calculated by finding the average (or midpoint) of both the buying price and the selling price – which is 1.27.
If you transfer money abroad regularly, you’ll be familiar with terms such as the real exchange rate and the fair exchange rate. In most cases, these variations are both referring to the mid-market exchange rate.
A good money transfer service should give you a rate that’s as close to the mid-market rate as possible, i.e. offer you a small spread.
Why is the buying and selling price of the same currency always different?
If you’ve ever been past a Bureau de Change (BdC) you may have noticed that next to each currency there are two columns. One will say “we buy’, and the other, “we sell”.
What that means is that the BdC is prepared to buy currency X from you at one rate and sell that same currency to you at another. If you look closely, you’ll discover that these rates are never the same.
As previously mentioned, the difference between these rates is known as the spread – and it’s the provider who benefits from it. They pocket the profit from buying currency at a low price and selling at a higher one.
Who sets the mid-market rate?
Banks, high street providers and money transfer services all set their own mid-market rate, but they are under no obligation to offer it to you.
When banks and money transfer services adjust the mid-market rate in their favour, it’s known as ‘marking up’ the price. So if you’re exchanging pounds for dollars, rather than give you the mid-market rate of $1.27 for every pound, they might offer you $1.17 instead.
10 ¢ might seem like a small difference but, with larger sums of cash, that’s more money in their pockets and less in yours.
Better than mid-market rates
Sometimes you may see money transfer services claim to have “better than” mid-market exchange rates. The reality is, they’re not lying, but they may be misleading you.
If they’re offering $1.35 for every pound when the mid-market rate is $1.27, that’s way above the mid-market rate. It looks like a great deal.
But rates like these are normally off-set by the provider hiking up other fees associated with the transfer. The same goes for companies like Transferwise who offer the mid-market rate on all transactions. It sounds like a great deal, but it can end up being more expensive than other providers after you’ve taken their fee into account.
Azimo’s pricing page shows you how much you can save by using Azimo instead of high street money transfer shops and other online providers.