What Banks Do Not Want You to Know — The Huge Markup They Pocket on Your Currency Exchange
Millions of Canadians visit the United States over the course of a year, be it for business, school, or travel. And, like many, we opt for what seems like the most convenient and straight forward way of dealing with something as mundane as exchanging Canadian dollars into U.S. dollars; we go to the bank or transfer directly to our U.S. dollar account through our online banking platform. We usually end up surprised by the unexpected extra charges accumulated throughout this seemingly normal process, but brush it off, thinking there is no other alternative. At least not one that would make a difference in our pockets. That’s where we go wrong.
What most Canadians do not realise is that banks charge a significant premium in exchange for these convenient transfers. These come in the form of high exchange rate markups passed onto to you, the consumer. These hidden fees add up, as I’m sure you have experienced, and leave you with a lot less than you bargained for.
Many Canadians are aware of other means, including foreign exchange bureaus, but what we do not realise is that they are actually a more affordable option to exchanging currency. Specialized foreign exchange companies, such as KnightbridgeFX.com, offer lump sum, currency exchange online at a much more competitive exchange rate, in comparison to that of your local bank.
“The major banks don’t have to compete on price and aren’t incentivized to do so in any way shape or form,” says Rahim Madhavji, a private equity broker by trade and President of KnightsbridgeFX.com.
How do foreign exchange companies help you save money?
Companies like KnightsbridgeFX.com buy foreign currency in bulk to take advantage of the lower exchange rates. These bulk purchases provide them with a significantly lower exchange rate in comparison to the available public rate provided to you, the client, by your local bank. This factor alone enables the foreign exchange company to provide its customers with a much more attractive exchange rate. What’s more, in the case of Knightsbridge, they call the banks every morning to ensure they are providing the cheapest possible exchange rate daily.
Madhavji confirms: “KnightsbridgeFX.com’s markup is 0.5% on average, leading to savings between 1.5%-2.5% for our clients, over the big banks. These savings range from a few hundred dollars to thousands of dollars per transaction depending on the size of the transaction, straight into our clients’ pockets.”
It goes without saying; this type of saving is more significant to those travelling regularly and exchanging a significant amount of money on a regular basis. For individuals making short, sporadic trips, using a foreign exchange provider is likely not going make a substantial difference. However, for Canadians who spend a significant amount of time in the U.S. be it for extended holidays, frequent business trips or other, they do have alternative options that can result in substantial financial savings on the exchange rate when compared with their bank’s rates.
Why does your exchange rate differ from that published in the papers?
You may have seen newspaper headlines announcing that the Canadian dollar or the U.S. dollar has reached “X” level, leaving you, the bank customer, questioning why the rate you received differs dramatically from the announced rate in these headlines. The lower exchange rates promoted by the major news outlets are known as interbank rates. These are exchange rates for banks to transact large sums amongst themselves. When offering exchange services to everyday Canadians, financial institutions markup their exchange rates and in many cases, over 3% of the interbank rate.
Bank’s heavily pad their exchange rates in order to cover the cost of doing business at the retail level. Overhead costs are high, as banks not only need to purchase the currency that they sell, but they must also cover the administrative costs necessary to make the currency available to consumers through branches and ATMs.
How can you secure the best exchange rate?
Really the best way is to open a free account online with one of the currency exchange companies like KnightsbridgeFX. Once you have your account, you can book an exchange rate. You will receive written confirmation of the locked in rate before transferring the funds to KnightsbridgeFX, who will then send the converted funds to your desired destination. KnightsbridgeFX in particular, is integrated with many banks. This enables them to transfer funds between accounts free of charge, to you the customer. Knightsbridge can also keep an eye on the fluctuating exchange rate for you, enabling you to complete a transaction at the best possible exchange rate.
Banks in Canada have significant power over consumers in setting exchange rates. Several years ago, U.S. dollars could be purchased around par. As the cost of buying U.S. dollars is significantly higher now, companies like KnightsbridgeFX are becoming a more attractive alternative to currency exchange. Every penny counts, they say and why not save when you can. After all, it is your hard-earned cash. Why would you give it away, when you can keep it for you, and away from the bank’s bottom line.
About KnightsbridgeFX: KnightsbridgeFX is an online currency exchange company that seeks to undercut foreign exchange rates offered by larger financial institutions. Its head office is located in Toronto, Canada and it has another 7 bureaus across the country including: Montreal, Vancouver, Calgary, Ottawa, Winnipeg and Halifax.