The world of international payments and foreign exchange (FX) can appear daunting. Markets are subject to frequent, often volatile, daily change. The risks are such, that for many businesses and individuals, banks can appear the best value and most secure method of making global transfers. This couldn’t be further from the truth. To combat this myth, we’ve answered five common queries about FX brokers, as well as why you should use them for trading globally.
- What exactly are FX Brokers?
FX brokers are currency conversion and international transfer specialists. In comparison to banks and other traditional providers, they’re able to offer better rates and a much lower, clearly defined pricing structure.
Why are FX broker’s rates and pricing better than banks?
The reason is relatively simple, foreign transactions are hugely profitable for banks. This is because FX rates are set by the Interbank Market. Banks use this to exchange currencies directly with each other. However, the exchange rate used by banks is never passed on to clients, even if you’re a large multinational. Instead, banks typically provide quotes between 4% and 8% higher than Interbank. If the payment involves an exotic currency or is to an emerging market it can be over 12% more. It doesn’t stop there! A host of unclearly defined transfer fees are then also applied. This turns a relatively simple, low-cost payment into a much more expensive transaction.
In comparison, FX brokers look to provide the best price and offer a rate as close to the interbank market as possible. As specialists, operating mainly online, they don’t suffer from the bureaucracy, fixed costs and inefficiencies that plague large banks.
How exactly do I start using FX brokers?
Using a broker for currency exchange & funds transfer is relatively quick and easy. That said before an organization can start making overseas payments there are a few stipulations that must be adhered to. Chief amongst these is the submission of supporting business and personal documentation. This is due to global regulatory anti-fraud and money laundering requirements.
Once these provisos are met, a broker will be able to approve an FX quote. At this point, funds from your domestic bank must be transferred to a client segregated account held by the broker. The funds are then exchanged before delivery to the desired overseas destination.
I have to transfer funds to a ‘segregated’ account, is this secure?
Yes, so long as a designated FX broker is reputable, regulated and compliant. This is of paramount importance. We always recommend using brokers regulated by the FCA in the UK or worldwide local equivalent. FCA regulation is amongst the most stringent and secure globally, so people transferring funds abroad have peace of mind that their funds are secure upon delivery.
Are all FX brokers the same, should I stick with a single broker?
No, not necessarily. Individual FX brokers possess different functionality and flexibility. Furthermore, the exchange rates different brokers can secure for a client can vary wildly for a multitude of reasons, changing constantly throughout the day. For this reason, it’s always prudent to shop around and compare different real-time quotes, limiting your risk of incurring high transfer costs and poor exchange rates.
We hope this guide has helped you better understand how Foreign Exchange and brokers work. If you’ve got any further questions don’t hesitate to get in touch!
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