7 Corporate FX Secrets Your
Bank Doesn’t Want You To Know
EIGER FX
INTERNATIONAL PAYMENTS AND RISK
MANAGEMENT SERVICES
FIND US ON:
I f yo ur co m pa n y h a s corp orate FX need s , you wil l
a l m o st ce r ta i n l y h a ve exp erienced one or more of
t h e s e 7 un de r h a n d ta ctics th at are u nfortu natel y
a l l to o co m m o n i n bus ines s cu rrenc y exch ange.
T h e f i rst s te p i n a vo id ing th es e tricks and th ereby
p ro te ct i n g yo u r co m pany is to ed u cate you rs el f s o
yo u k n ow w h a t to watch ou t for. Read on to find
o u t 7 pra ct i ce s w h o se m ain p u rp os e is s im p l e:
to ex t ra ct a s m uch profit as p os s ib l e from you r
co m pa n y.
1
Peer to peer foreign exchange
Peer-to-peer foreign exchange or P2P FX as it is also known,
while theoretically a fantastic idea, is virtually impossible to
achieve in reality. This has not stopped a significant number
of companies of falsely claiming that they offer a peer to peer
currency exchange service.
P2P FX is the idea of matching two companies directly for a
currency transaction. For example, if company A in the UK
needs to sell pounds for euros and Company B in France
needs to do the opposite, a peer to peer system would match
these companies. The benefit would come from cutting out
the traditional middleman - a bank or broker - and therefore
eliminating costs and making the process more efficient.
But it is simply false. Here’s why:
In order to have a fully-functioning P2P FX market place, the
amount of liquidity in various currencies would need to be
frankly enormous, as well as the number of companies. In
practice, an FX service provider that claims to offer P2P would
need to have hundreds of thousands of clients or more, with
large volumes of multiple currencies involved. Every company
that claims to offer you a P2P service goes to the wholesale FX
market through banks and liquidity providers, not by matching
you with a counterparty. Fact.
This is because banks, through their own liquidity levels but
crucially also through their banking network and interbank
currency trading, are capable of providing the necessary
liquidity. Only banks can do this and this fact will not change
any time soon.
Ta kea wa y: D o n ’ t b eli eve th e P2P curren cy
exch a nge hy p e, b ecause th at’s all i t i s.
2
The so-called “mid-market” exchange rate
This “mid-market” rate claim goes hand in hand with P2P, as it claims to offer an exchange
rate without a spread. But as we know P2P FX is a fallacy, so too is the “mid-market.” This
is because there is a spread. There always is. In order to access the currency markets,
banks - the FX market gatekeepers - charge a fee on the exchange rate - a spread. You
do not and cannot receive an exchange rate with no spread. The spread is the fee an FX
provider charges, which without they would go out of business.
Takeaway: The “mid-market” rate is simply a marketing ploy to turn heads. If you
do consider a provider that claims to offer this, we advise you to clarify the fee
percentage and importantly, the spread on top of the exchange rate that is 100%
certainly passed on to the FX provider from their liquidity provider and then to your
company.
3
0% commission claims
This one is all too common, though it is of course complete hogwash. Here’s how it works:
• The commission is simply added to the exchange rate in the form of a spread.
• The spread - the amount you are being charged on top of the spot exchange rate - is not
divulged to you. Usually even upon asking for this information, your bank or broker will try
to divert you from the question. The last thing they want you to know is how much they are
really charging you.
• As the spread is not divulged, the bank or broker uses this as a marketing tactic by falsely
claiming that you don't pay a commission.
There are even brokers who claim to charge nothing only to say that they do however
include a spread on your transaction, which is essentially like saying, “We don’t charge you
a thing, but really we do, and we don’t tell you how much.”
Takeaway: Ask for concrete details on the spread, ie. the exact number of basis points
applied to the exchange rate. This will tell you how much you are actually being
charged. If your FX service provider is not forthcoming with this information, it is a
clear sign that they are not transparent with you.
4
Additional fee on top of the
exchange rate spread
We know now that on any currency exchange
transaction, there is a spread, without exception.
But many FX service providers go even further by
charging you other fees on top.
These fees can include the following:
• A transaction processing fee
• A “platform” subscription fee
• Penalties for late or incomplete payment on time
• Wider spreads on certain currency pairs than
what may be advertised*
*Often a broker claims to charge say 10 basis
points on the exchange rate as their spread.
However in reality, this only applies to the most
common currency pairs. If a minor or an exotic
currency is needed, the basis point amount on the
spread is much higher. But they often refrain from
telling you this.
Takeaway: Clarify everything by asking the
right questions to do with the spread, any
additional or late payment fees, and doublecheck the small print.
5
Daily exchange rates over live
exchange rates
Banks and many brokers use daily benchmark
exchange rates in their quotes. The problem with
daily exchange rates is that the FX market is in
constant movement. Exchange rates move by
the second. Yet banks and many brokers insist on
using daily exchange rates.
If the exchange rate moves in your favour in real
time, and you close a transaction with a provider
that uses daily rates, you won’t get that better rate.
There is also the possibility that your bank closes
your trade at the real time rate, quotes you the
daily rate, and keeps the difference without you
ever knowing.
Takeaway: Real time rates are accurate. Daily
rates are not. With daily rates, the opportunities
of closing trades at more favourable rates are
much greater. Verify whether your provider, be
it a bank, broker or alternative provider, bases
their exchange rates on daily or real time
live rates.
6
Failure to keep you informed of
when the market moves significantly
In order to execute a transaction at rates you would like you need to know when the
market moves in your favour. But with daily rates this is much less likely to happen, and
lesser still because most banks and brokers just do not let their clients know when the
market moves significantly.
Takeaway: A corporate FX service provider really should keep their
client informed of market movements as it means the difference
of considerable amounts of money. If this is not included as
complementary, it’s a sign that it’s time to consider looking elsewhere
for a provider that does offer you this important service.
7
Strategic upselling of complex products
Simplicity is always the best course of action for efficient business. But the problem for
banks is that the more simplified hedging products such as a currency forward or options
contract are not nearly as profitable as they would like, regardless of the fact that they
more than cover the hedging needs of their customers in many scenarios.
This is where upselling comes in. Banks have large sales teams whose job it is to
aggressively “sell” as many complex hedging products to you as possible. Why is this?
Well, they are simply much more expensive and therefore profitable.
The sales reps are pushed - they have targets and their prime motive is to simply make as
much money for their bank as possible.
Takeaway: Know your hedging needs by analysing your exposure and
ensure you keep things as simple as possible. There is no need to buy a
more complex product when a simple options contract is all you need. It
complicates your workflow and it costs your company money.
Final Word
Knowledge is power and so we hope that this has helped you to be more aware of the tactics that are all
too prevalent in corporate FX and international payments. Tactics that unfortunately banks and scores
of brokers really don’t want you to know as it is much easier to take advantage of someone who doesn’t
understand something that they need for their business to operate successfully.
Our advice is to keep this list handy and use it to benchmark your current FX provider, as well as if you
choose to shop around.
Importantly, don’t be afraid to ask questions. If an FX service provider begrudgingly answers or seems
impatient, do you really want to choose them as your corporate FX provider? A provider you can trust will
be completely transparent and happy to field your questions. The health of your company’s FX operations
will be all the better for it.
EIGER FX
Eiger Foreign Exchange Limited
22 Calvin Street
London
E1 6HF
Phone: +44 (0)20 7426 5833
Email: [email protected]
Eiger Securities LLP
22 Calvin Street
London
E1 6HF
Phone: +44 (0)20 7426 1494
Email: [email protected]
Follow Us:
Eiger FX is a trading name of Eiger Foreign Exchange Limited which is authorised by the Financial Conduct Authority under the Payment Service Regulations
2009 for the provision of payment services. Our registration number is 533391. Eiger Foreign Exchange Limited is regulated by HM Revenue and Customs
under the Money Laundering Regulations 2007. Our registration number is 12621485. Eiger Foreign Exchange Limited is a private limited company registered
in England & Wales number 07386073. Our registered office is 22 Calvin Street, London, E1 6HF