What is the interbank exchange rate? And why is it such a big deal?

5 minute read

Any time you send money abroad, or travel abroad and need to change some of your home currency into the local currency, you should be paying close attention to the interbank rate between the two.

Why? It’s the key to getting the best deal on a currency exchange and not losing any money just because you want to spend yours.

Not sure what the interbank rate is or how to get it? Want to know exactly why it’s so important to try to get the interbank rate whenever you’re making a currency exchange?

This article will cover:

  • The definition of an interbank exchange rate
  • How the interbank rate is calculated
  • Why the interbank rate matters to you
  • The real question – can you get it?
  • A hidden fee called “spreads” that you’ll wanna know about

Read on to find out all you need to know.

defining interbank exchange rate

What is an interbank exchange rate? A quick definition.

The interbank exchange rate is called that because it’s the rate that banks use when they’re trading large amounts of foreign currencies with one another.

Unfortunately, this rate is pretty much always reserved for big banks and Wall Street big shots trading currencies in huge quantities. Which means the average person making a smaller money transfer is far more likely to be offered a marked up rate so the service making the exchange can make a profit.

Basically, exchange rate markups mean you have to pay just to use your money the way you want to.

How is that fair?

The interbank rate is sometimes also called the mid-market rate, the spot rate or the real exchange rate, because if you Google the current exchange rate for the two currencies, the interbank rate is what you’ll see. You can also check services like Reuters or XE to see what the interbank rate is at any given time, keeping in mind that it can fluctuate by the minute depending on many factors – but more on that below.

calculating the interbank rate

How is the interbank foreign exchange rate calculated?

The interbank exchange rate is found by taking the midpoint between the buy and sell rates for a currency on the open market.

There are also generally different rates depending on whether you’re buying or selling a currency. These prices, called the bid-ask spread, are set by brokers, who generally set the selling price a small fraction of a unit higher than the buying price, meaning they can make more money off currency conversions.

However, when you’re sending money abroad, the interbank rate is the closest to aw true exchange rate at any given time. Any deviation is often an inflated retail rate, usually with a profit built in for the bank or exchange service providing you with the exchange.

The interbank exchange rate can fluctuate at any time, based on a number of factors, including:

  • Supply and demand for the currency
  • Interest and inflation rates
  • Trade deficits
  • Government debt
  • Political and economic stability

Armed with the basics, you can calculate an exchange rate yourself when you see a rate pairing. But what helps the most to find if you’re getting a good deal is to compare the rate you’re offered to the real, interbank rate. You can do that with a quick Google search or by using an online currency converter.

why the interbank rate matters

Why does the interbank rate matter to me?

If you’re letting a bank, credit card, or exchange service do your currency exchanges, you’re likely not getting the interbank rate. Which means you may be paying a hefty markup on every transaction. On average, banks can mark up an exchange rate by 4-6%. Those costs add up fast, and can have a major effect on your wallet if you make international transactions regularly. You want to get a rate as close as possible to the interbank rate, because that means you’re saving as much money as possible.

can i get the interbank rate

Can I get the interbank rate?

It’s tough to get the interbank rate from a retail establishment. Take the Wise founders’ story for example. Taavet worked for Skype, so he was paid in euros – but lived in London. Kristo worked for Deloitte in London, paid in pounds – but had a mortgage in Estonia. The two friends realized that by using their banks to transfer money from the countries where they were paid to their home countries, they were losing their hard-earned cash on exchange rate markups.

So instead, each month they looked up the interbank exchange rate and used that to pay each other – Taavet put his euros into Kristo’s account, and Kristo used his pounds to pay into Taavet’s account. In doing this, they saved a ton of money, and also started to wonder if there were others like them who needed a way to move money in our increasingly global world without getting ripped off. That’s why they founded Wise.

Wise allows users to transfer money internationally at the exact interbank exchange rate. All it costs is a small, fair transfer fee that’s spelled out before the transfer is made. Which means no hidden costs or markups. It’s fast, safe, transparent, and often cheaper than transfers made by banks or other more traditional routes.

And that was just the beginning for Wise. Since beginning as a money transfer platform, it now offers borderless multi-currency accounts with debit cards and world-class business accounts. Wise is now 3 million global customers and counting. Try it today to see how Wise works and can help you save while you manage your money without borders.

hidden fees in the interbank spreads

A hidden fee called “spreads” you should watch out for

Unlike banks and many other currency exchange services, Wise doesn’t buy into spreads, which allow brokers to buy your currency and then sell it at a markup. The markup is essentially another hidden fee you end up absorbing the cost of when you use services that exchange currency with a spread.

Wise offers the real exchange rate, straight from Reuters, meaning you’ll always get the best available deal when you choose to use Wise to move or manage your money.

Need proof? Compare the rates you’re offered by Wise to the rates you find on Google. You’ll find the rates to be almost identical – and sometimes Wise’s rates are even better – because Wise always offers the interbank rate.

Before you decide on a money transfer service, make sure you’re getting the best possible rate. No one wants to pay money just to use their money, and any exchange rate that isn’t the interbank rate is requiring you to do just that.

Good luck!

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| This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. |

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