When you send an international wire transfer, either you or the recipient may be required to convert one currency to another. But how is the exchange rate for such a transfer calculated? And how can you be sure that the rate you’re getting is competitive?
The mid-market exchange rate, otherwise known as the middle rate or mid rate, is the exchange rate that’s halfway between the bid and ask price for a particular currency. It’s literally the midpoint between the highest price a buyer is willing to pay and the lowest price a seller is willing to sell for. As such, it can serve as a helpful benchmark for what a fair exchange rate might look like.
Comparing the mid-market rate to the rate a bank offers you for an international wire transfer can help you avoid paying exorbitant exchange rate fees. In this article, we’ll cover the basics of the mid-market rate, including how to calculate it and what else to look out for when transferring money internationally.
To understand the mid-market rate, it’s helpful to first understand three other concepts commonly used in foreign exchange markets:
The bid rate is the highest price at which a potential buyer is willing to buy a currency
The ask rate is the lowest price at which a potential seller is willing to sell a currency
The bid-ask spread is the difference between the bid price and the ask price
For example, let’s assume the euro-dollar currency pairing is currently trading on an exchange with a bid price of $1.20 per €1 and an ask price of $1.10 per €1. This means that:
A buyer would have to pay $1,200 USD to receive €1,000 EUR ($1.20 USD per €1 EUR)
A seller who wants to exchange €1000 EUR for U.S. dollars would receive $1,100 USD ($1.10 USD per €1 EUR)
The bid-ask spread, in this case, is $0.10 USD
The mid-market exchange rate is the midpoint, or average, of the bid and ask rates. To calculate the mid-market exchange rate for the above example, we’d simply add the bid rate and the ask rate, then divide by two. Doing the math, we find that the mid-market exchange rate is $1.15.
The mid-market rate of a currency is typically the fair market rate determined by the demand and supply of that currency.
Because banks are the primary buyers and sellers of currencies, the mid-market rate is sometimes referred to as the interbank rate. This is the rate at which banks and financial institutions transfer money back and forth to one another. If you’ve ever googled the current exchange rate for a currency or used an online currency conversion calculator, this is likely the rate you’re referencing. Calling it a singular “rate” may imply that it doesn’t change very often, but the mid-market rate (or interbank rate) can fluctuate depending on when and where you look it up. The “when” generally matters more than the “where.” Most data used to determine the mid-market rate are pretty in line with one another, but the values of individual currencies can fluctuate over time.
Before making an international money transfer, it’s a good idea to compare the exchange rate you’re offered with the mid-market rate. Since the latter is generally considered a fair FX rate that banks use to exchange currencies with other banks, a “good” or “fair” rate will be as close to the mid-market rate as possible.
When making an international wire transfer through a bank, you may find that the FX rate on offer is not quite as favorable as the interbank rate. Banks often add a markup to the interbank rate, so you may find it difficult to get an FX rate that’s exactly the same as the interbank rate. Still, a comparison with the mid-market rate is helpful, as it allows you to determine the additional cost of making an international transfer with the bank.
Think of it like you’re buying a car. Before going to the dealer, you’d probably search for a fair market rate for the vehicle you want to buy. If the car dealer’s offer is way higher than what you could get the car for elsewhere, you may decide to walk off the lot. In a similar way, knowing the mid-market rate allows you to assess if you’re getting a good deal or not
Beware of confusing terminologies or too-good-to-be-true offers when sending or receiving cross-border payments. Here are a couple of other specific traps to look out for.
When a bank charges commission to access the mid-market rate or a relatively favorable FX rate, this may cost you more. Commissions are usually a percentage of your transfer amount and can be pricey.
A bank may purchase foreign currency at the mid-market rate, add their markup, and sell to you at a less favorable rate. So, even when they offer “zero fees” or 0% on foreign exchange transactions, they may be hiding their profits in the exchange rate they use to process your international wire transfers. With hidden exchange rates, you may not know the total cost of your foreign transaction until you complete the transaction.
For example, let’s assume you want to send a wire payment of €100,000 and the ongoing mid-market rate is €0.9083 EUR for $1 USD. Say the bank offers you a 1% commission for a more favorable marked-up exchange rate of €0.8701 EUR for $1 USD, and you accept. This will cost you an additional $5,911 to complete your transaction. That includes $4,834 for the FX rate, plus commission fees of about $1,077.
While it looks as if the bank is giving you a deal on the FX rate, the 1% commission makes it a potentially more costly transaction. A similar transaction with 0% commission and a less favorable marked-up rate of 0.8627 EUR for 1 USD will cost you $5,820—a savings of about $91.
When making international payments, watch out for high commissions, hidden fees, and unfavorable exchange rates. Once you look outside the world of traditional banking, you may find companies that offer lower fees and greater transparency in terms of the total cost of processing your international wire transfers.
Take Levro, for instance. We charge an FX fee of 0.25% on top of the mid-market exchange rate. That’s it. Our rates are not only lower than those of many banks, but they also come with no hidden fees. You’ll see exactly what you will receive before you initiate the transfer.
Ready to get started? Apply for an account today, or send an email to email@example.com to learn how Levro can help your business.