Banks often increase the cost of foreign exchange without making it obvious. These hidden markups can significantly impact businesses and individuals dealing with international transactions. Here are five common ways banks inflate exchange rates:
- Spread Widening: Banks increase the gap between the buy and sell price of a currency, especially during low liquidity periods. This can add 4–6% to transaction costs.
- Fixed Transaction Fees: Flat fees, often £15–£50 per transfer, disproportionately affect smaller transactions.
- Percentage-Based Markups: Banks add 1–3.5% to the mid-market rate, scaling costs with transaction size.
- Tiered Pricing Structures: Rates vary depending on transaction size or customer type, with smaller trades often facing higher fees.
- Reference Rate Manipulation: Banks adjust benchmark rates to their advantage, adding hidden costs to conversions.
These practices can shrink profits and increase costs for businesses and individuals. To avoid overpaying, compare exchange rates, explore alternative providers, and use tools like multi-currency accounts or forward contracts. Transparency and careful planning are key to reducing these hidden charges.
1. Spread Widening
Spread widening is a tactic banks often use to increase their earnings from foreign exchange transactions. The FX spread is the difference between the ask (sell) price and the bid (buy) price of a currency. By increasing this gap, banks boost the margin between what they pay for a currency and what they charge their customers.
This practice is particularly common during periods of low liquidity. For instance, spreads tend to widen during off-hours when fewer trades are taking place.
Typical Cost Range
For widely traded currency pairs like EUR/USD, spreads usually fall between 0.1 and 1 pip. However, less commonly traded pairs might see spreads ranging from 1 to 5 pips. When traditional banks get involved, they often add a markup of 4% to 6%. To put that into perspective, a £100,000 transaction could end up costing an additional £4,000 to £6,000.
During times of low liquidity or market turbulence, these spreads can grow even wider, pushing up trading costs even further.
Impact on Small vs Large Transactions
The size of the transaction plays a big role in how much spread widening affects you. Smaller transactions tend to feel the pinch more, relatively speaking. For example, a 2% spread on a £1,000 transaction translates to £20, which might seem reasonable. But apply that same 2% to a £500,000 transaction, and you’re looking at a hefty £10,000 – a cost that could disrupt your financial plans.
Wider spreads also mean you need larger price movements to break even, which can be a headache for businesses making frequent small transactions. Over time, these incremental costs can eat away at profit margins.
How to Minimise Spread Costs
To avoid excessive spread costs, timing and strategy are key. Instead of relying on traditional banks, consider using specialised online platforms or multi-currency accounts. These options often offer more competitive rates.
For larger international transfers, locking in favourable rates with forward contracts can help protect against the unpredictability of spread widening. Additionally, when making purchases overseas, it’s usually smarter to pay in the local currency. Accepting Dynamic Currency Conversion at the point of sale can lead to markups ranging from 2.6% to 12% above market rates.
Up next, we’ll look at another common way banks add to costs: fixed transaction fees.
2. Fixed Transaction Fees
Fixed transaction fees are flat rates charged by banks for currency exchanges, regardless of the transaction amount. Whether you're transferring £100 or £100,000 abroad, the fee stays the same, unlike percentage-based markups that scale with the transaction value.
Transparency Level
These fees are generally easier to understand compared to other banking charges. However, banks often bundle fixed fees with additional costs, such as receiving fees or correspondent banking charges. To get a clearer picture of what you're paying, check your bank statement for a detailed breakdown. It should show all fees, the exchange rate applied, and the total cost in pounds sterling.
Typical Cost Range
If you're using a UK high-street bank, expect fixed fees for international transfers to be on the higher side. Sending money abroad can cost up to £30 per transaction, while receiving money from overseas typically incurs fees between £2 and £7.50. Wire transfer fees across the industry usually fall between $10 and $50 (around £8 to £40).
Impact on Small vs Large Transactions
Fixed fees can hit smaller transactions harder. For instance, transferring £500 with a £30 fee means you're losing about 6% of the total amount, whereas the same fee on a £10,000 transfer only accounts for 0.3%. This makes frequent small transfers significantly more expensive compared to occasional larger ones.
Ease of Avoidance
The good news is that fixed transaction fees are often avoidable with a bit of planning. Here are some ways to reduce or eliminate these charges:
- Consolidate Transfers: Sending larger amounts less often can help. Some providers waive fees for transactions over £3,000 .
- Explore Fee-Free Options: Consider alternatives like foreign currency prepaid cards .
- Specialist Accounts: Opening multi-currency business accounts can help you sidestep conversion fees altogether.
3. Percentage-Based Markups
Banks often apply a percentage-based markup to the mid-market exchange rate, meaning the cost of currency conversion increases as the transaction value grows. Unlike fixed fees or spread-based charges, these markups scale with the amount exchanged, leading to higher costs for larger transactions.
Typical Cost Range
Banks typically add a markup of 1.5% to 3% on foreign exchange transactions, though this can climb to 4% or even 6% under certain conditions. Factors like market volatility, the volume of trading, your relationship with the bank, and competition between providers can all influence the markup rates .
Here’s a quick comparison of forex markups across common payment platforms:
"Markup in FX trading refers to the difference between the market price and a final quote by the broker of the transaction. This difference, often represented as a percentage, is a primary source of revenue for many brokers and payment service providers.
– epicofinance.com
Impact on Small vs Large Transactions
The percentage-based nature of these fees can have a significant impact, especially for larger transactions. For instance:
- A freelancer receiving £10,000 with a 3% markup would lose £300 on that single transaction.
- A professional receiving £5,000 monthly would pay £150 per transaction, adding up to £1,800 annually.
- For businesses managing larger sums, a company receiving £100,000 quarterly with a 3% markup would see £3,000 deducted per transaction - amounting to £12,000 annually.
"These small percentage fees, typically 1% to 3.5% of each foreign transaction, can significantly reduce your international earnings over time."
– Anoosh Kotak, Growth at Skydo
Transparency Level
Percentage-based markups are often hidden within the exchange rate, making it difficult to identify the exact fees you’re paying. Research shows that 9 out of 10 companies unknowingly pay above-market rates. To uncover these hidden costs, check your Foreign Inward Remittance Advice (FIRA) document, which outlines the exchange rate applied. Comparing this rate with the mid-market rate available on currency websites can help you calculate the effective markup.
Ease of Avoidance
Because these fees are embedded in the exchange rate, avoiding them requires a proactive approach. Some strategies include:
- Using multi-currency accounts to avoid unnecessary conversions.
- Locking in favourable rates with forward contracts.
- Selecting payment platforms that provide live forex rates and transparent fee structures.
- Asking providers directly about their markup percentage before committing to a transaction.
For businesses with frequent international payments, multi-bank dealing platforms can help secure more competitive rates.
Next, we’ll delve into tiered pricing structures and how they influence FX markups.
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4. Tiered Pricing Structures
Banks often categorise foreign exchange (FX) transactions based on factors like transaction size, customer type, or trading history. This system allows them to apply different rates and fees depending on which tier a transaction falls into. As a result, some customers may face higher costs, while others benefit from preferential rates.
Transactions are grouped into tiers with specific size thresholds and spreads. Larger trades or those with irregular patterns may face higher spreads, while frequent activity can influence tier placement. Recent trading history also plays a role in this classification, leading to varied costs that directly impact the overall efficiency of transactions.
Typical Cost Range
The cost differences between tiers can be quite pronounced, especially when comparing institutional and retail customers. For example, institutional clients often benefit from lower percentage fees on higher volumes, while retail customers might face flat or higher commissions.
Business banking providers also adopt tiered pricing models with notable cost differences. Take Revolut Business as an example: its Basic plan costs £10 per month and includes free currency exchange up to £1,000. Meanwhile, the Scale plan, priced at £90 per month, offers free currency exchange up to £60,000. Any amount exceeding these limits incurs a fee of 0.6%. On the other hand, traditional private banks like Coutts apply a maximum commission of 1% on FX transactions, regardless of size.
Impact on Small vs Large Transactions
Smaller trades often benefit from tighter spreads, whereas larger or irregular transactions may push customers into higher-cost tiers.
For larger trades, pricing tables are typically displayed on the deal ticket, outlining size thresholds and spreads for each tier. This provides some level of transparency regarding costs. However, smaller trades, which usually remain in the lowest tier, may not include such detailed pricing information. Crossing tier boundaries can lead to sudden and unexpected cost increases, creating additional challenges for customers.
Transparency Level
Tiered pricing structures are often criticised for their lack of transparency. The complexity of these systems, combined with the difficulty of understanding tier differences, makes it hard for customers to predict costs accurately or compare providers. Factors like recent trading history and the direction of transactions add another layer of uncertainty, further complicating cost estimation.
Ease of Avoidance
To minimise the impact of higher tiers, it's important to analyse your transaction patterns. Consolidating smaller trades into fewer, larger ones can help, as can discussing tier thresholds with your bank. Regularly reviewing and adjusting your FX strategy based on changes in transaction volumes can also improve cost efficiency.
Next, we’ll explore how banks might manipulate reference rates to introduce hidden costs.
5. Reference Rate Manipulation
Banks have been known to manipulate benchmark rates, adding hidden costs to currency conversions. By coordinating with other financial institutions, they can influence these rates, making it harder for customers to spot the additional charges. This practice, while subtle, can significantly increase conversion costs.
In November 2014, the Financial Conduct Authority (FCA) uncovered a scandal involving traders from five major banks. These traders, operating under nicknames like "The Cartel" and "The 3 Musketeers", used chat rooms to share confidential client information and coordinate their actions. By timing their orders and manipulating benchmark rates, they managed to profit at the expense of their customers.
This manipulation often involves sharing sensitive customer data to shift rates in ways that benefit the banks. Such coordinated activities, especially during key benchmark fixing times, can lead to price changes that inflate bank profits while raising costs for their clients.
Typical Cost Range
The financial damage caused by reference rate manipulation has been immense. Banks have faced fines exceeding £10 billion for their role in forex manipulation scandals. For Britain’s 20.7 million pension holders alone, these practices have been estimated to cause losses of about £11.5 billion annually. Considering the forex market handles an average daily turnover of £5.3 trillion, these figures highlight only a fraction of the overall impact.
Impact on Small vs Large Transactions
Manipulated rates affect both large and small transactions, though the scale of the impact can differ. Large institutional trades executed near benchmark fixing times are particularly vulnerable. Smaller transactions, which often rely on these manipulated rates, also face inflated costs. Automated trading systems, which execute trades based on benchmark rates, can be especially prone to unfavourable outcomes when rates are artificially adjusted.
Transparency Level
Reference rate manipulation is one of the most opaque forms of FX markups. The FCA has stated that banks "used confidential customer order information to collude with other banks to manipulate the G10 foreign exchange currency rates and profit illegally at the expense of their customers and the market". This lack of transparency makes it nearly impossible for individual customers to detect when manipulated rates are impacting their transactions.
Ease of Avoidance
Avoiding reference rate manipulation requires vigilance. Transactions around key benchmark times - typically 4:00 PM London time - should be monitored closely. Comparing rates with independent sources can also help identify discrepancies. Diversifying FX providers is another way to minimise reliance on a single institution’s rates. If you suspect manipulation, document your transactions thoroughly and seek legal advice. Legal firms like Hausfeld have pursued cases against major banks on behalf of affected clients involved in over-the-counter forex transactions.
Being aware of these practices can help you better navigate the FX market and avoid inflated conversion costs.
Comparison Table
When dealing with currency transactions, the type of markup method applied can significantly influence costs, transparency, and how different transaction sizes are affected. The table below outlines four common markup methods used by banks, helping you pinpoint which ones might be chipping away at your funds.
| Markup Method | Typical Cost Range | Transparency Level | Impact on Small vs Large Transactions |
|---|---|---|---|
| Spread Widening | 1–3% above mid-market rate | Low – Often disguised as "competitive rates" | Equal percentage impact, but large transactions lose more in absolute terms |
| Fixed Transaction Fees | £15–£50 per transaction | High – Clearly stated upfront | Disproportionately impacts small transactions; negligible for larger amounts |
| Percentage-Based Markups | 1–3.5% of transaction value | Medium – May be disclosed but not always prominent | Proportional impact across all transaction sizes |
| Tiered Pricing Structures | 0.5–4% depending on volume | Medium – Structure disclosed, but exact rate unclear until transaction | Favours larger transactions; penalises smaller amounts |
This comparison highlights how each markup method affects costs differently, offering insights into hidden FX fees. Traditional banks, for example, often apply markups of 4–6% above the mid-market rate, while specialised payment platforms typically charge less than 1% for major currencies. For a breakdown of specific scenarios and their financial implications, refer to earlier sections.
Transparency remains a major issue. In 2023, US consumers and small businesses paid around £14 billion in foreign exchange fees, with £4.6 billion (32%) attributed to hidden exchange rate markups. In Europe, 92% of banks fail to disclose their currency conversion fees clearly, leaving both individuals and businesses struggling to make informed choices about their FX providers.
"This lack of transparency causes unnecessary admin and worry for both people and business owners. Rather than focusing on growing their business and doing their job, too many entrepreneurs are spending valuable time trying to stay on top of disparate and vague payment processes." – Rasika Raina, Senior Vice President of Cross-border Payments, Mastercard
The impact of hidden fees on trust is undeniable. Nearly two-thirds (62%) of people report that encountering hidden fees has made them less trusting of financial institutions. As a result, 68% of consumers have switched providers for international money transfers due to exchange rate markups.
To make smarter FX decisions, tools like mycurrencycost.com can help you compare rates and uncover potential markups before committing to a transaction.
Conclusion
Knowing how banks increase foreign exchange rates is essential for safeguarding your finances. The five key methods - spread widening, fixed transaction fees, percentage-based markups, tiered pricing structures, and reference rate manipulation - can quickly eat into your profits. Even small markups on a market trading over £4.8 trillion daily can result in significant costs .
The solution? Transparency and careful comparison. Don’t just accept your bank’s quoted rate. Instead, check the mid-market exchange rate - the rate banks use when trading among themselves - and compare it with your provider’s rate. This simple step can reveal inflated charges and help you avoid paying more than necessary.
Taking practical steps can also make a noticeable difference. Consider negotiating fee waivers with your bank, using multi-currency accounts to sidestep double conversion fees, or batching payments to cut per-transfer costs. Timing your transfers when exchange rates are most favourable is another smart move that can help control expenses. This is especially important for businesses with global operations, where every percentage point saved can add up significantly.
For companies operating internationally, the stakes are even higher. A striking 90% of US businesses plan to purchase more currency options to manage foreign exchange risks. Regularly monitoring exchange rates and knowing when to transfer funds between accounts can provide a critical edge.
"In an increasingly globalized economy, foreign exchange is a critical aspect of doing business internationally. By understanding the impact of currency fluctuations and implementing strategies to manage foreign exchange risk, you can protect your bottom line and position your business for success in the global marketplace." - Commerce Bank
Technology can also play a major role in managing foreign exchange costs. Tools that track real-time rates and send alerts for optimal transaction times can simplify the process. Platforms like Mycurrencycost.com offer the transparency needed to compare rates and uncover hidden fees.
The takeaway? Stay informed, compare rates, and demand clarity from your provider. By understanding how markups work and leveraging the right tools, you can cut costs and ensure you’re getting a fair deal on your foreign exchange transactions.
FAQs
How can I tell if my bank is adding hidden markups to foreign exchange rates?
To uncover hidden markups in foreign exchange rates, start by comparing the rate your bank provides with the mid-market rate - also known as the interbank rate. This rate, often found online, is considered the most transparent and fair, as it excludes any extra charges.
Banks often add markups by offering exchange rates that are less favourable than the mid-market rate. These markups, typically ranging from 1–2% or even higher, are subtly included in the exchange rate spread and may not be clearly disclosed. If you notice that the rates you’re being offered are consistently lower than the mid-market rate, it’s a strong indicator of hidden charges.
Additionally, keep an eye out for fixed fees or tiered pricing structures, which can further inflate the cost of your currency transactions. By carefully comparing both exchange rates and associated fees, you can pinpoint and minimise unnecessary costs when dealing with foreign currencies.
How can I reduce the impact of fixed fees on small international money transfers?
To cut down the impact of fixed fees on small international transfers, try combining several payments into one transaction whenever possible. This way, the fixed cost is spread across a larger amount, making the transfer more economical. Another tip is to pay in the recipient's local currency, which can help you dodge extra charges like dynamic currency conversion fees - these often come with less favourable exchange rates.
It's also worth looking into services that specialise in low-cost international transfers. These providers usually offer better exchange rates and lower fees than traditional banks. If you frequently send money abroad, consider negotiating with your provider for more competitive rates. Over time, this could result in noticeable savings.
Why is it important to understand foreign exchange rate markups, and how can I ensure I’m not overpaying?
Understanding how foreign exchange rate markups work can help you steer clear of hidden charges that often make currency conversions more expensive. Many banks and providers include markups in the rates they offer, which can have a noticeable impact - especially for businesses handling international transactions.
To avoid paying more than necessary, compare the rate you’re offered with trusted benchmark rates, like those published by central banks. Make sure to review all fees carefully, whether they’re fixed amounts or percentage-based markups. Shopping around and comparing providers can also reveal more cost-effective options for your currency exchange needs.
By keeping an eye on these details, you can cut down on unnecessary costs and make your foreign exchange transactions more efficient.
