Foreign exchange, also commonly known as “forex” or “FX” is simply the exchange of one currency for another at an agreed exchange price. The value of any given currency is determined by prevailing market forces such as trade (imports and exports), interest rates, investment, tourism and geo-political risk. Most countries ‘float’ their currencies freely against those of others, which keeps them in constant fluctuation in response to market forces.
The foreign exchange market is the largest trade market in the world with an average traded value in 2013 of $5.3 trillion per day. It is not a physical market and there is no central location. Instead, currencies are traded 24 hours a day around the world through various financial parties such as central banks, high street banks, exporters, banks, forex brokers and day traders.
An exchange rate is simply the amount of one currency that is needed to buy one unit of another currency. For example, the EUR–USD exchange rate may be 1.4 which means that it takes 1.4 USD to buy 1 EUR.
As an example, if you want to buy goods or services from a supplier who is not located in the same country as you, you will usually have to exchange your own currency for that of the supplier in order to conclude a payment. The exchange rate comes directly into play to decide the quantity of the home currency that is necessary to meet the price of the supplier’s currency.
The interbank market is the top-level foreign exchange market where banks exchange different currencies exclusively between themselves and is an important segment of the foreign exchange market. It is a wholesale market through which most currency transactions are channeled, used for trading among bankers and other intermediaries. Interbank pricing is not available directly to retail personal or business customers of the type Kwanji services
In principle the rates and fees a bank charges you for an international payment should be as competitive as any forex provider. They are accessing the very same markets that the forex provider does but as banks (never one to lose a trick to make money easily) banks are clearly choosing to retain a very fat margin on the forex rates.
They may be relying on the fact that the foreign exchange market feels inaccessible to most people, that most of us generally don’t notice or that they are trusted entities! But lets face it – banks aren’t working on our behalf the work on behalf of their shareholders (and bonuses). But, whatever the reason, it clearly makes sense to start to shop around when you need to make a forex payment to get the best deals and levels of service that you are entitled to.