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Be Canny with Currency

Imagine this scenario. You decide you need a new car. So you go down to the local garage, because it’s the closest and most convenient, and they have one in stock. You ask how much it is but they are a bit vague, they just say ‘about £10,000’.

You want to check whether you could get it cheaper elsewhere, so you pop into another couple of garages. But they won’t tell you how much their cars are at all unless you open an account with them and come back with the ready cash. The first one looks OK and it will do the job, so you agree to buy it.

A week later you get your bank statement through the post, and found out they have actually charged you £11,000 for the car. Plus a delivery fee, and a bit extra for luck.

Now, one question, would you think that was fair enough?

Of course you wouldn’t! I’m guessing you would be quite angry. Unless money is no object, nobody would be happy to buy something unless a) they know what they’re paying for it, and b) they don’t think they can get it significantly cheaper elsewhere.

Nobody likes to think they are paying more than the next person for exactly the same thing.

So why, you may ask, are banks, and it has to be said some of the sharper currency companies, allowed to get away with similar treatment in the sale of foreign exchange to customers buying property overseas?

The answer, I’m afraid, is rather depressing. Although almost every other commodity in the world is now openly and transparently priced, and for the most part available on the internet, allowing you to see whose mortgages, insurance or baked beans are the cheapest, the one thing that has slipped through the net is currency.

You can’t go to a competitor bank unless you have an account there, and a specialist currency provider is also unlikely to quote you a dealing rate unless you are registered as a customer and on the point of doing the deal.

There is no regulatory requirement or legal obligation on anyone, be they banks or specialist currency providers to reveal either the price they are selling at before you are ready to do the deal, or how much profit they are making on it.

The best you are likely to get is an ‘indicative’ rate – which may appear attractive but is effectively meaningless. It is just what it says, an indication of the price, but may, like the car example, bear little resemblance to the price they will actually transact at, thus making it extremely difficult to make accurate comparisons.

However, there is a solution. If you read this next sentence carefully and do what it says, you will be able to compare currency rates and it could literally save you thousands of pounds when you are ready to exchange currency to buy your house.

Ask the provider how many basis points they will charge you on the deal.

This isn’t as complicated as it sounds, and it will allow you to see who is giving you the best deal, even if they won’t quote you an actual rate or if rates are moving around quickly.

Although currency prices are changing all the time, there is always an underlying rate called the inter bank rate. Banks and currency providers base their currency quotes on this figure. The fewer basis points they charge away from the inter bank rate, the less profit they are making on your transaction, and the better deal you are getting.

When you are buying currency in size, say a few thousand pounds upwards, your provider should be quoting the dealing rate to 4 decimal places.

One basis point is the last digit after the decimal place and 100 basis points is one cent.

For example, let’s say the inter bank rate to buy Euros for Pounds Sterling is 1.2654. (You can see this rate on various web sites such as the BBC, or Yahoo! finance).

If a provider says they will charge 100 basis points for you to buy say 100,000 Euros, then their rate to you would be 1.2554. If they were charging 50 basis points, the rate would be 1.2604, and so on. In other words, they will transact with you at a worse rate than the inter bank rate, and the difference is their profit.

Even if they are unable to give you a dealing rate until you register as a customer, there is no reason why they won’t tell you how many basis points they intend to charge you on the deal. This is effectively how much they are making out of you. If they won’t, or if they try to make excuses not to – be wary. They may just be intending to make as much out of you as they think they can get away with!

You can ring 10 or so currency companies, then register with the three or so providers who say they will charge the smallest number of basis points. When you actually come to do the deal you can look at where the inter bank rate is and check they are giving you what they promised. Simply subtract one rate from the other (missing out the decimal points makes this calculation easier) to get the number of basis points difference.

E.g. 12654 minus 12554 = 100 (basis points).

At 4X Currency we do things slightly differently. We publish both the inter bank rate and our dealing rates on our web site, so you can easily see how much we are making on your deal. As the inter bank rate changes, so does our rate, so you always know exactly what price you are getting. We are very happy to do this, as we believe our prices are very competitive and we are completely open about them.

The foreign exchange market is worth absolutely billions, and there are big fat profits to be made from the unwary. There is no reason why consumers shouldn’t have the same kind of price information and transparency as with every other commodity. After all, it’s your money and you don’t want to give it away, do you?