What Do Currency Brokers Do?
Currency brokers convert money into different currencies and transfer money between countries. Whether a person is looking to convert their domestic currency into a foreign currency or to convert a foreign currency back into their own, they can do so with the help of a currency broker.
Currency brokers came about as an alternative to banks for exchanging currencies. Before currency brokers became mainstream, businesses and individuals would generally exchange larger sums of money into different currencies through banks. However, they charged (and still do) more money for doing so than currency brokers did.
As well as undercutting banks in terms of price for currency exchange, currency brokers are also specialists in the field of currency conversion. Currency brokers can facilitate fast international transactions and offer expert advice on matters such as currency exchange timing and risk avoidance.
Currency Brokers are Not the Same as FX Brokers
One point which should be noted is that currency brokers are not the same as FX (foreign exchange) brokers. FX brokers provide access to the foreign exchange market for individuals and businesses who wish to speculate on movement in the foreign exchange market for the purpose of making a profit. That is people who trade specifically in currencies to make a profit.
Currency brokers just provide conversion of currency for international payments where a client wishes to either send a payment to or receive one from a foreign country with a foreign currency. A typical example is where a business wishes to import goods by sending a payment to another business in a foreign country.
What Currency Brokers Offer
Here are the main things that currency brokers offer to people and businesses which use them.
Better Rates than Banks
As we already mentioned, currency brokers are able to undercut banks in terms of the fees that they charge to their customers for converting currency. Where currency brokers typically charge less than 1% of the value of a transaction, banks often charge up to 5%. This cost-saving is the main reason that they are a popular choice for converting currency.
How Do They Get Better Rates?
The top level of foreign exchange buying and selling is the interbank market and this is the level at which banks buy and sell different currencies from each other. The exchange rate which they offer to each other is known as the interbank rate and is effectively the rate at which the buyer pays the least for buying a currency. By buying currency in bulk, currency brokers are able to get close to this rate. They then pass this saving onto their customers in the form of low fees for currency conversion.
Obviously, banks are able to either buy currency at the interbank rate (because they set it) or get close to it at least and so should theoretically be able to compete with currency brokers in terms of price. However, banks function differently as a business than currency brokers do and do not exist to compete on price for currency conversion.
Currency brokers are often able to offer quick transactions for people or businesses which need to transfer money to or from another party in a foreign country. Many currency brokers aim to complete a transaction within 1-2 days, which is relatively quick when compared to other transaction facilitators, such as banks. While they aim to transfer money quickly, some international transactions, such as to exotic currencies or locations can take longer.
Fast transactions are convenient and, particularly in business, can be an important reason for a currency broker’s customer choosing to use them over another transaction handler. As well as offering fast transactions, currency brokers also aim to verify transactions, so that funds are always delivered to the correct recipient. This may sound unnecessary, but mistakes do occur in international transactions, and having transactions verified can be useful. On top of this, currency brokers can facilitate smoother transactions by having knowledge of the local markets in which a transaction will take place.
Currency brokers can offer personalised services and can provide expert advice to their customers on the best way to approach a currency conversion. As well as this, they can also keep people informed of progress while a transaction takes place.
One way they can help is by advising their customers on whether or not any additional services that they offer could be useful.
There are various additional services that currency brokers can offer to their customers. A common one (and one in which Bound specialises) is FX hedging.
Where a customer who intends to exchange currency at a future date is put at risk by the possibility of an adverse change in the exchange rate, they can hedge against this risk by using certain financial products. Forward trades and option trades (both provided by Bound) are two of the most common ways that businesses hedge themselves against the risk of exchange rates changing while they are trading foreign currencies.
Forward trade and option trades both allow a currency broker’s customers to fix an exchange rate for a future date. This means that the customer can exchange currencies at this set rate in the future, even if normal exchange rates change in the meantime. This provides certainty to the customer about what exchange rate it will receive at a future date, allowing them to plan without being at risk from exchange rate changes.
Forward trades simply fix an exchange rate, whereas option trades also allow the possibility of exchanging currencies at the current rate (when the time comes) if exchange rates have actually moved favourably.
How Do Currency Brokers Make Money?
Currency brokers make money by charging fees to their customers for exchanging currencies. Normally this is done by adjusting the exchange rate that they offer to their customers in order to include their fee. Some charge a separate fee or commission on top of this, although normally all charges are made within the adjustment they make to the exchange rate.
As we said earlier, most currency brokers aim to charge fees of 1% or less for carrying out currency exchange. Generally speaking, the larger the amount of currency that is to be exchanged, the lower the fee the customer will pay.
A Rate Example….
The exchange rate for British pounds to US dollars may be 1.3743 at a particular point in time. However, a currency broker may offer a rate of 1.3605 to customers who wish to buy US dollars with British pounds. The adjustment in the rate allows the broker to include a fee of 1%.
The rates offered will vary according to the kind of exchange that a customer is taking. Exchanging currencies through a forward trade, for example, will come at a different rate than what is offered for an immediate exchange at the current market rate.
How Have Currency Brokers Changed?
Currency brokers have changed in recent years, mostly because of advances in technology. Services that were traditionally handled over the telephone through a specific point of contact (a currency broker) have been replaced in many cases by computer technology. Online platforms provide a high level of security, simplicity, and adaptability which has led them to replace many traditional currency brokerage services.
As well as changing the way that currency brokers operate, technological advances have also brought currency brokerage and similar services to more people and businesses.
What Does Bound Do?
Bound is not a bank or a currency broker but is a company made up of foreign exchange professionals. The Bound platform is geared towards business use and offers all the advantages of having a currency broker, without having to go to one. Through the Bound platform, businesses are able to convert currency at the spot rate (the current market rate) and to protect themselves from any risks that they may face from currency fluctuations.
While currency brokers have their uses, for many businesses, there is no need to use one. Bound offers very competitive rates and a high level of service. On top of this, Bound operates with complete transparency and can integrate seamlessly with a company’s existing accounting software.
As we already mentioned, Bound specialises in FX hedging through forward and option trades. The tools which Bound provides to their customers to hedge transactions with FX risk allow companies that trade in foreign currencies to operate with complete certainty about what they will send or receive. This is in spite of the fact that exchange rates are constantly changing.