There is a misconception that foreign exchange pricing is opaque and unclear. However, it is in fact very simple to benchmark your pricing nowadays simply by searching online for the interbank rate.
The issue is not transparency it is one of consistency.
A typical scenario is that one day you call your currency broker and the rate of exchange you were expecting based on previous transactions with them is significantly different. This time the currency you need to purchase is going to cost you a lot more than anticipated. This can have all sorts of budgeting and cash flow implications.
Why does this happen? Currency brokers are sales people and sales people in most organisations are usually under pressure from management to hit ever increasing revenue targets.
There are two ways for salespeople to hit their targets. One is to on-board new business. The other is to generate more revenue from their existing client base.
The latter is a quicker win and when under pressure to hit short-term targets the salesperson will usually go for this option.
One tactic is to sell clients more currency than they need – usually in the form of a forward contract. A typical sales technique that many currency brokers use to achieve this is the use of market data or events to nudge clients into making purchasing decisions rooted in fear or greed.
Another method is to widen the client’s margin relative to the interbank rate. Indeed, the later is a common practice amongst currency brokers particularly when it comes to keeping and winning new business from competitors.
We call this ‘Honeymoon Pricing’. The salesperson will draw you in with the promise of great rates (often undercutting your existing provider at a loss) and then widen your pricing out over time to recover that loss. The client will often realise later that they are no longer getting the great pricing they thought they were getting.
Therefore, the most important thing to establish with your currency broker is a fixed price that is fair in relation to the amount of currency you are purchasing and the regularity with which your purchasing it.
Consistency really is key. Ask your broker to put your pricing down in writing to. Your obligation is to be honest with the volumes of currency you are purchasing and not over inflate it otherwise the ongoing relationship with your broker will not be sustainable.
Building a relationship with a trusted currency broker will save you a lot more time and money in the long term rather than shaving a few extra pounds of here and there on the exchange rate.