What is a spot rate? And why is it such a big deal?


Exchange rates can be confusing. Just trying to find the correct rate can be a headache. You’ll come across either what’s described as the retail rate or tourist rate or a different — and usually better — exchange rate called the spot rate, mid-market rate, or interbank rate.

In a nutshell, the spot rate is the one you want to use to get the best deal on your international transfer or currency exchange. Most services don’t offer it to customers, though, so you’ll need to find a service provider like Wise if you want to get the best deal.

Intrigued? Here’s all you need to know about the spot rate — and how to get it.

What is a spot rate? A quick definition.

When we’re talking about currency exchange, a spot rate is the exchange rate you’ll get for your currency pairing, if you do an exchange right now. Think on the spot.

Sounds simple enough. But, in fact, there are lots of different exchange rates out there, which can be confusing. As a customer, you need to be able to tell the difference between the real exchange rate and the rip-off rates.

Usually, if you see something described as the spot rate, you can be confident enough that it’s the real exchange rate. But it’s never a bad idea to double check, to make sure you’re getting a fair rate on your currency exchange. More on how to do that in a minute.

How are spot exchange rates determined? How do you calculate it?

The spot rate should always be the real exchange rate. It’s the rate that banks use when they sell currency between themselves and on global currency markets.

The spot rate is calculated by taking the mid-point between the bid and ask prices for a currency in forex trades. That’s why it’s also called the mid-market rate — it’s the midpoint between the price brokers are looking to sell a particular currency for, and what buyers are willing to pay.

However, the spot rate can be tricky to keep up with — exchange rates move up and down all the time. Sometimes it’s obvious why rates change. A big event like a Presidential election, or the Brexit vote, for example, can make rates wobble or take a nosedive. But sometimes the cost of a currency can bob up and down due to changes in market sentiment, or any one of a wide range of factors influencing global exchange rates.

It can be tricky to calculate the exchange rate yourself. For a much easier way to keep up with the real exchange rate for your currency pairing, check for yourself manually using an online currency converter or by searching on Google. Or for an even easier way, sign up for alerts with an exchange rate tracker.

Why does the spot rate matter to me?

If you’re making an international money transfer, paying an overseas invoice, or getting your holiday cash, the spot rate is important to you. The spot exchange rate is a big factor in determining how much your dollars are worth when you convert them to another currency.

It’s important to know that the exchange rate offered to you by your bank or money exchange service, more often than not, won’t actually be the spot rate. It’ll be an exchange rate made up by the bank, which is inflated to include their profit margin. This is even more likely to be the case if your bank says it offers money exchange without commission or a ‘fee-free’ service. The truth is that they have to make a profit somewhere — and if it’s not laid out upfront, then it’s probably wrapped up in the exchange rate.

So, before you choose which bank or money exchange service to use, you’ll want to check out the offered exchange rate — but you’ll also want to take into account the other costs involved in currency exchange. There may be upfront fees and charges, or there might be other hidden costs. More on that in a moment.

Can I get the spot exchange rate?

So now that you know what the spot rate is, there’s some bad news. Banks will generally tell you that it isn’t possible for consumers to access it — unless they have somewhere in the neighborhood of over a million dollars available to trade.

However, that’s not quite true. There are providers out there who believe that customers shouldn’t be mislead with fake promises of “zero commission” or “fee-free exchange.”

Don’t believe it? Meet Wise.

Wise was founded by 2 Estonians — Taavet Hinrikus and Kristo Käärmann. Taavet lived in London, but worked for an Estonian company, and was paid in euros. Kristo, on the other hand, was paid in pounds sterling, but needed euro currency to pay for his mortgage back home in Estonia.

Sick of being ripped off by hidden bank charges for international transfers, they cut out the middleman and came up with a new way to get the currency they needed, without paying a cent in unnecessary fees.

Taavet and Kristo simply agreed, one day every month, to check out the real, mid-market exchange rate on Google, and deposit the equivalent cash into each other’s bank accounts. Taavet gave Kristo euros; and Kristo transferred the equivalent amount in sterling to Taavet. All using the real exchange rate, and with no international transfer fees.

And so, a revelation came. If they could beat the banks, then maybe Taavet and Kristo could help everyday people like them do the same. All over the world. Wise was born.

Fast forward to today, and if you want to get the spot rate on your currency exchange, then Wise can help.

A hidden fee called “spreads”

Wise differs from most banks and currency exchange providers because they use the real exchange rate for every transfer.

Most other currency exchange and transfer service will add a spread — that’s simply a mark-up on the exchange rate to protect their own profit margin. They can then say that they offer a zero commission exchange, but still, pocket their cut from every transaction. That’s not transparent, and it’s not usually a good deal for customers, either.

You can see this easily with a quick comparison. Check out the exchange rate you get for your currency pairing with a simple Google search. Then look at what Wise offers. Most likely you’ll find the rate here to be even better or almost identical because unlike most banks, Wise offers these spot rates for every transaction. Check out how Transferwise works.

So there you have it.

Making an international transfer or currency exchange using the spot rate for your currency should mean that you get the best exchange rate out there. Make sure you check out the other costs and fees involved in the transaction, as well, so your hard earned dollars get you as many euros, pounds or rupees as possible.

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.

Please see terms of use and product availability for your region or visit Wise fees and pricing for the most up to date pricing and fee information.

This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise Payments Limited or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional.

We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.

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