Paying Your Tuition: What is a Good Rate to Exchange Currency?
In the last post, we explained what is a conversion rate. Using a Google search of “50,000 Malaysian Ringgit (MYR) to Canadian Dollar (CAD)”, we found that the conversion rate is 0.323 MYR:CAD.
Now, if you are going to a merchant or a bank to convert some currency, what is a rate that you should expect?
What is a good currency conversion rate?
The rates shown by major search engines are usually the mid-market rate, which is the midpoint between the global demand price and supply price of a currency, making it the fairest exchange rate possible. However, the mid-market rate changes with each transaction, and someone who is not a high volume trader on the financial market for currencies cannot get this rate.
Regardless, we calculated it as a benchmark to compare the rates that we get. How much are retail merchants trading their currencies? Here’s an example:
Notice that now our MYR:CAD rate gets split into a “Buy” rate of around 0.312 and a “Sell” rate of around 0.332.
What do these mean? Recall that we had a 0.323 MYR:CAD mid-market as of this afternoon, meaning that 1.00 MYR, if priced in the fairest way possible, is worth 0.323.
Now,
- If someone had 1.00MYR, how much would the bank buy it for?
By stating the “Buy” rate above, they are willing to buy it for 0.312. They will only purchase the money at 3.4% below the fair rate.
- Now, the bank has 1.00 MYR. How much would the bank sell this 1.00MYR?
By stating the “Sell” rate above, they are willing to sell it for 0.332. Their selling price is 2.8% above the fair rate.
When selling your base currency, you want to see that the “Buy” Base:Target rate to be high. Usually, people say that bank rates are the lowest.
Let’s list the “Buy” rate offered by different types of merchants at the time of search:
+ — — — — — — — — — — — — — — — + — — — — — +
| Mid-market Rate | 0.32295 |
| Credit Card Transaction Rate | 0.32 |
| Finance transfer app | 0.3185 |
| Retail Bank | 0.3119 |
| Chain Money Retailer | 0.3043 |
+ — — — — — — — — — — — — — — — + — — — — — +
As you can see, the rates has a range of about 0.016. For an amount of 50,000 MYR, a difference of 0.016 is 800MYR. The effect can be large for recurring conversion. So, I guess this is worth thinking about.
