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What do the rates of exchange I see online actually mean?


Google 'Pound to Euro exchange rate' now and click on the first search result to appear.

We're going to use that search result to frame our explanation of what you see when you look online for an exchange rate and it will also frame our explanation as to how what you see isn't necessarily what you're going to get.

The first thing to say is that the website you're looking at is not faceless. It has not come top in your search by coincidence.

If it is the same one that appeared at the top of our search, it is in fact an online currency transfer business.

Like us, this company assists people who want to exchange currency between bank accounts; as you can imagine, they pay a lot to be top of your search.

What you will also see just below their representation of 'the rate' is a little disclaimer stating:

"All figures are based on live mid-market rates. These rates are not available to consumer clients."


This begs the questions:

'what are 'live mid-market rates?'

and

'what rates are available to consumer clients?'

If you are showing me a rate of exchange, why is it not available to me as a 'consumer client' and what is?

Forgive us if we're teaching you something you already know. If we are then great, but, this post might not be for you.

For those unfamiliar with the jargon being used, let us set the scene with regards to currencies, 'markets' and the exchange of money around the world:

Globally the sales and purchase of businesses, currencies, securities and all manner of other things private capital can buy and sell, takes place within a sort of virtual 'network' which is commonly referred to as a 'market'.

Imagine a real 'market'. Like a farmers market, except rather than twee little candy cain awnings shielding cheeses, bread and fresh veg, the vendors in these markets are selling a euro, or debt in a company, or a share in a listed business, or a house.

Amazon is considered an online 'market place' and certain big financial institutions might even be considered the financial equivalent of a super market as they have a huge variety of products, financial instruments and so on under one roof.

We appreciate that this may seem an overly simplistic analogy, but, a 'market' in the context of financial services really can be understood in this way as the old traditional markets, with a buyer, a seller and potential for negotiation based on volume, demand and payment in cash (for instance).

At the moment the UK runs on a free-market economic model. We aren't economists, so we won't go into the alternatives, but, in a nut-shell this means that the state, other than through regulation of certain markets, is not directly intervening in the prices set by the vendors within these markets.

Prices are, for the most part, determined by the market and what it's participants are willing to pay.

So, when you hear someone refer to the 'currency markets' you could and should quite understandably visualise a series of market stalls all over the world selling euros, dollars, sterling, yen.

Some stalls will only sell the wears of the territory they operate in.

Some very rich market participants can and do stockpile the currencies of other stall holders.

All of this happens above our heads down here on the high-street, but, it all has an affect on what rates of exchange filter down to you and I.

Generally speaking the main purveyors of currencies in this virtual market place are banks.

We could go in to more detail, but, let's say that banks are the sellers in this market place and everyone else is the buyer; if we accept that then the premise is easier to extrapolate.

So, a big market place with many stall holders all of which are banks.

How then do you and I or anyone else 'looking-in' know what a country's currency is worth relative to another currency elsewhere in the market?

With so many different vendors and purveyors of currencies, how do we know what the actual rate of exchange is given that all these banks might be asking you to pay a different price for the currency they're selling...?

Well, certain financial and news focussed organisations will publish a feed of the average rate offered by a selection of these banks.

It is a snap shot of the average of all these rates to buy and sell currencies offered and made by banks.

Some of these outlets update their feeds and averages in real time, so it is rolling ever climbing and falling average.

You could liken bank exchange rates to your facebook or twitter feed, and organisations like Bloomberg or the BBC are publishing the 'trending' numbers across that feed, providing you with an average or an overview of what banks are talking about between themselves.

Other outlets update their published rate every 15 minutes or just twice daily.

Most daily news papers will only publish this average in their morning run.

How often the feed or averaged rate is updated does not matter unless you're trying to use that middle-market for an actual calculation.

So, when you search the web for a rate of exchange, the results you are met with are not actually the rates that one bank will offer you...they are, more often than not, the average rate being presented to 'the market' by a variety of these banks.

The average rate is also known as the 'mid market' rate.

So, bringing us back to your initial search...the rate you see is a reflection of the mid-market average and, as per their disclaimer, this is not available to you as a consumer.

So, what is?

Minute by minute, second by second, sophisticated electronic systems are matching up someone at a bank who wants to buy a currency, with someone at a different bank who wants to sell one.

Were I a bank and if I am 'in the market' to buy a currency then I can tell the other participants in the market what I am prepared to pay for a currency.

I can place a 'bid' of what I am prepared to pay and software used by all those banks operating at an 'inter-bank' level will match my bid with what someone else is asking for...their 'ask'.

When these sophisticated electronic systems match my 'bid' with the price that an institution might 'ask' the deal/exchange is automatically executed.

Now, you and I as individuals sadly don't exchange enough currency for us to have access to the market place used by banks and other big institutions.

We are not banks, so we cannot expect to achieve this rate.

Our (yours and my as individuals) route to buy currency is either through our bank directly...which is what you may be doing already, or it is through another institution who can broker for us a better rate than our bank will give us direct...someone like Prime Cap for instance.

Because the 'bid' prices and the 'ask' prices within the global virtual market place that is the 'interbank market' are triggering and matching second by second, the rate you and I see online 'published' changes with mind boggling speed.

You may have seen those cliched images on the news of 'traders' sitting in front of screens covered in numbers changing between red and green. That is quite literally what it is like, but, what those panic inducing images don't tell you is that most of the work is done by computer.

It does make sense that all these hundreds of sellers selling all these hundreds of currencies have the rates at which they're selling them condensed down in to one average. It is really the only way you and I or anyone else could make head or tail of the value of our currency.

You won't see much difference between what you see on Google and what you might see on Bloomberg or the BBC websites or in a newspaper.

They all rely on much the same sources for these rates and there are only minuscule differences between one bid and one ask rate. This renders the question of where is the best place to follow the rates a bit moot.

Prime Cap's Data Centre has it's own interbank feed, so please do put that in a bookmark on your web browser.

It will also show you whether the pound has gained or lost in recent trading and by how much - useful stuff, but, still not what you would receive were you to exchange currency with us.

Now, the reason why the rate you get when you try to exchange currencies differs to that which you see online when you're researching is because the institution or business you're using to conduct the exchange applies a very small mark up to the rate.

As an individual I might see an exchange rate online of 1.50 if I am researching the exchange between Sterling (GBP) and US dollars (USD).

However, when I login to my online banking and go to the 'international payments' tab and get a rate I am actually presented with a rate of 1.47.

This is because my bank's mark up is 0.03 of a dollar.

So, for every one pound I am exchanging/selling, my bank pockets 0.03 of the dollar amount they are selling me.

Every mark up is different. So, just because your bank offers you what they do doesn't mean another bank with do the same. Likewise, not all brokers' margins are the same.

All I need to do is to find someone who applies less of a mark up than the next institution and I will be saving money...because, I will be getting more USD for my one pound the less of a margin that institution applies.

If my bank gives me a rate of 1.47 and I want to exchange £1000, then, with my bank I can buy $1470. If the 'inter-bank rate' is 1.50 then, of the 1500 my bank can buy, they keep $30 and sell me the remaining $1470.

If my currency broker applies a mark up of 0.02 then I get a rate of exchange of 1.48 and I receive $1480 - so $10 more.

If I was exchanging a larger amount - maybe £10,000, then, by the same metric, I would be receiving £100 more through my broker and were it £100,000 I would receive $1000 more.

So, the 'mark-up' or margin applied by the company or institution I am exchanging with is what determines the rate of exchange I get. That is the only thing.

The problem for you and I is that no institution or company publishes the mark up they apply to their rate of exchange.

This is because their own margins will vary depending on a number of different factors, but, interestingly, the won't know the rate on to which they apply their margin because institutions like Prime Cap get that base or wholesale rate when they ask the bank.

Someone just researching the rate of exchange can't account for how the company or institution they're getting a rate from is going to perceive that quote in terms of how competitive they need to be.

One of the interesting things we like to note is that some of these purely online transfer platforms (like the one in our initial search) - the one's where you just sign up and input the amount you want to convert etc. - some of them do not tweak or change their rates to reflect the specifics of the transaction you want to conduct.

A bit like you're bank...you get what you are given.

Sure, you're given a better rate than your bank, but, if someone were assessing your exchange personally, it stands to reason they might give you something even more attractive, especially if they knew you were comparing them elsewhere.

Therefore, it is very easy for a business like Prime Cap to, when pitted against an online platform, tailor our mark-up to undercut the other platform.

This is why we emphasise the fact that all our rates are bespoke and unique to the transaction at hand. We think it always pays to call us.

If you are converting £1000 in to US dollar then a mark up of 0.02 might seem quite reasonable.

It might not seem so reasonable if you were converting £5,000,000 as it would equate to £100,000.

Your App based transfer system won't allow for that difference.

That is why the talking through of the transaction with our team and the making use of our blended online and voice broking approach is the best way to get the best value on a case by case basis.

When companies refer to the 'live' rate of exchange, essentially what we mean is that we are getting a real-time rate from our source institution.

Some banks will set the retail rate of exchange they offer their clients in the morning.

If the general inter-bank rate of exchange does not move over the course of the day then that bank will continue to conduct exchanges at this pre-determined rate.

This is why, when you call the customer service line of your high street bank, the person who tells you the rate might be giving you a figure completely different to what you see online. That person is simply telling you what rate the bank set that morning.

A live rate is simply one that is bespoke to the current conditions of the currency market at the moment the market is looked at.

Live rates do move continually, so, when you 'get rate' through our platform, for instance, you will see a 10 second timer appear.

This is because one could reasonably assume that the rate will have changed in 10 seconds, so, a live rate would, were there a move, need to be requoted higher or lower depending on the direction in which the mid-market rate has moved.

The idea of a 'live' rate doesn't really mean much to you or me when it comes to whether or not the rate is better or worse for us.

Yes, it does have an effect on what your currency will achieve, but, the actual thing of importance is the margin your chosen institution will apply.

Many brokers use the term 'live' to give a sense of energy or preference to what can be a rather drab subject, so, if someone doesn't expressly reference a 'live' rate then do not think less of them.

We use the term 'live' rate to express how frequently the market moves. Quoting you a 'live' rate means we a giving you the most accurate quotation as to what your currency is worth.

So, if you get a rate from us in the morning time you should expect that rate to be different in the afternoon, simply because the interbank rate will likely have moved.

At the end of the day it is important to remember that the rate you see broadly expressed online or across a public platform is not the rate you will get. This is for definite.

Institutions and companies, like Prime Cap, will be closer or further from that published rate depending on a number of factors, the most prominent of which is the size of the mark-up they apply to the rate at which they can negotiate currency from a wholesaler of it.

When we say that our rates are unique to the relationships we have with institutions, we mean that the mark-up applied by someone who sells currency to Prime Cap might be more or less than the mark-up applied to the rate when that same institution is selling to one of our competitors. The rate we get from our banks and market-counter parties is unique and tailored to our relationship with them in exactly the same way as the rate we quote you is unique to our relationship with you.

And, one of the fundamentals of our 'reason for being' is the belief that our customers get better value by talking to us and us understanding their requirements...much like the local bank managers of old, but, all served up using the most cutting edge, innovative and efficient mechanisms for execution.

If you would like to find our more then some common questions are answered on our FAQs page but, as you might expect, we would be delighted to hear from you by telephone.

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Prime Cap Payments Limited (T/A Prime Cap | Prime Cap Payments | Prime Cap Global Payments) is registered in England and Wales No: 10755730. Registered address: 27 Old Gloucester Street, London, WC1N 3AXPrime Cap is partnered with, and a programme manager of, Ebury Partners UK Limited who provide Prime Cap's FX and payment services.  Ebury Partners UK Limited is authorised and regulated by the Financial Conduct Authority as an Electronic Money Institution (Financial Services Register No. 900797) and is registered in England and Wales (registered no. 7088713). Registered office: 3rd floor, 100 Victoria Street, Cardinal Place, London, SW1E 5JL.  Ebury Partners UK Ltd is registered with the ICO with registration numnber ZA345828.