About FX exchange rates – many ways to pay for your Harley Holiday

For my US friends it may be irrelevant, but here in Europe, specially if you live in the UK, you may not just forget your passport, but you also need sufficient money in the different currencies.


Since the introduction of the Euro, it is much simpler to travel in Germany, France, Belgium and Italy, but there are still islands (like Great Britain or Switzerland) who do not accept the Euro as their national currency. Lets not discuss if this is good or bad, its a fact that you have from time to time exchange one currency for another.

Currency exchange is a messy business, offered by your trusted banker, glossy online brokers and then some dodgy homeless unshaven street fraudster offering “velly cheap” rates, preferably bought in combination with some illegal telephone cards.

I had some serious exchange to do, and choosing the right path can save you hundreds of £ or €, and more US$. The problem is, you never know what the right path is, and I decided to to split my transfer from Germany to the UK into 3 equal portions, choosing 3 different means of transfer and comparing the final result. One will be the best way, the others… lets call them a learning fee.

The task was simple: exchanging Euros to Pounds, while making a international fund transfer from a German € account into a UK £ account, and I choose 3 path, blue, yellow and green, coloured by the logo of the institution involved in the actual FX trade.


The blue path

the SEPA way


European bureaucrats hail SEPA (Single Euro Payments Area) as a big financial step in unification money transfers in the Europe. And I must agree, it is very comfortable. All you need is a IBAN and SWIFTBIC code, and you can transfer funds from Germany to England, from France to Luxembourg, with one form, and unified fees, most often no fees. The catch is that you can only transfer Euro’s, so you can send Euro’s from Germany to the UK, but if you want British Pounds coming out of the pipe, the exchange will be done after the actual money transfer, by your UK local bank.

The yellow path
traditional international money transfer

This is done with long forms, many informations, you need the address of the receiving bank and the recipient, so in case anything goes wrong they can send you a letter. Quite traditional, and slower, and there is a fee. But the major difference to SEPA is: you can send a foreign currency, not just Euro’s. Using this path, you can select for the exchange from Euro’s into Pounds is done at the origin of the transfer, in Germany, and the UK bank receives Pounds, which they then just deposit into your UK account.

The green path
using a online foreign exchange broker

I think we all have a healthy portion of distrust to big banks, specially in the field of foreign exchange, where there is lot of movement but little accountability. Using a online broker is a interesting alternative, as they offer online a high level of information, transparency and control. You decide what exchange rate is used, you can wait for it to go up or down, and lock it in simply by pressing the enter key. You then have sold and bought the currencies involved, and have 4 days to provide the money.

Not sure what happens if you do not provide the money, but maybe you will have a chance to meet some friends of Tony Soprano… kidding, it just gets quickly expensive with roll-overs, so better pay in a timely manner, or if there is a problem: call them and be honest. This green path requires more actions then just filling in one online form, but you feel like sitting in the driver seat, informed about what is going to happen at what rate.

The results

Surprisingly to me, the clear winner was the traditional international money transfer, the yellow path. No SEPA IBAN hype, no online trading, it even had a clear advantage over the online broker, and I may have saved hundreds of pounds if I went for this path alone. But I didn’t, and it would never have been my first choice, as I am a confessing Nintendo kid, enjoying my online experience.

As you can see from the table above, I made some adjustments (negative values) for the yellow and green path. On the yellow path its the German fee of 19.50 € converted into 16.08 £ and for the green path its the difference in trading date, as the first 2 trades were done on the 11.1., and the third one 2 days later. By then the FX rate improved for a sale of Euro’s, thus the small “handicap” of 14.80 £ to make the results comparable.

I am most disappointed by my UK bank, not only for applying a very bad retail rate, but also for not even telling me in the statement what exactly contributed to the final amount.

The big blue-yellow difference can not be found in the FX mid rate fluctuation, as it was trading in a narrow band from 10.1.-12.1.  All rates (blue, yellow and green) are for normal customers, no friend and family bonus applied. All orders were placed online, the blue and yellow ones on a Sunday within a short time window of few minutes.

Following these results, I gained 2 major insights:

1) understand the fees, but do not worry too much about them

At first sight I was shocked to be charged a fixed fee on the yellow path, but this actually proved the most economical route. Fixed fees are good for large amounts, but bad for smaller amounts to be exchanged. In the business of currency exchange, fees are usually well hidden, and please do not trust anybody who starts his advertisement with a “No fees” promise, run away quickly. Everybody always charges fees, there is no free lunch, if it sounds to good to be true, it isn’t true.

Most of the time, the fee, or profit for the bank or broker, is hidden in the exchange rate offered. The professionals will not use the mid rate, but their sell or buy rate, and the distance of these rates to the mid rate are in effect the hidden fees.

I liked the transparency of the green path, the broker clearly quoted the mid rate (0.8355), also called the commercial rate, and the used rate (0.8143), called the retail rate. For the 4k of Euro’s exchanged this represents a implied fee of 84.80 £, or about 2.6%. If you want to learn more, watch the educational video “Commission Free” is a Myth <<< of RabbitFX.

2) the music is in the FX mid rate used

The biggest factor in foreign exchange is timing, but to get that right you have to understand the market. I assume no one of us is a FX professional, monitoring the market movements on a daily basis and understanding the influencing factors, therefore we are ready to use for occasional currency exchange the rate is prevailing at the time of exchange. But even some days of observation, trying to hit at the right time, can save you more money then all the fees directly or indirectly charged by the banks or brokers.

If you look at the pink points, representing 2 very different FX rates just for this one week, and manage to hit the right (high) rate on the Friday, the difference can suddenly be 80£ more positive on 4k€.

I will make this effort next time I have a greater amount to exchange. As you plan your holiday well in advance, you should also try to understand the exchange rate tendencies, at least have a feeling to better wait some days, or quickly exchange right now. And then the green path may well be the best path.

The online website of brokers provide a lot of analytical information, and you could quickly “earn” the money for your first candlelight dinner on the beach.

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