Foreign exchange commissions and how to avoid them

In today’s globalised economy, it’s becoming more and more important for businesses of all shapes and sizes to have an international presence. Whether that means expansion abroad, international clients or suppliers based in foreign countries, going international represents a real opportunity.

However, there are complications that come with international expansion, and today we’re going to be talking about one of the big ones.

Foreign exchange commissions.

We’re going to cover some of the basic questions surrounding foreign exchange commission, such as how it differs from foreign exchange fees, how financial intermediaries determine their commissions and what you can do to reduce the impact of these fees.

But before we dive into any of that, let’s start with a nice and simple definition.

What is foreign exchange commission?

Foreign exchange commission is a fee charged by a financial intermediary, such as a bank, for converting one currency into another. 

Of course, this can apply to individuals changing currency – for instance, when going on holiday or sending money overseas – but also to businesses making cross-border payments to suppliers or employees based abroad. 

Whenever you’re making an international transfer in a foreign currency, you’ll receive a transaction notice that includes the following information:

• The amount in the foreign currency being transferred within or outside the designated currency zone.
• The exchange rate used to convert the amount into the desired currency.
• The value in the desired currency debited from the account.
• The applied fees and foreign exchange commissions, either in percentage or fixed amounts.

Easy, right? It gets a little more complicated when we talk about foreign exchange fees, though, as the two are easily confused.

Foreign exchange commission refers specifically to the charge or fee imposed by a financial institution or service provider for facilitating the currency exchange transaction. It is typically a percentage of the transaction amount or a fixed fee that the institution or provider earns for their services.

Foreign exchange fees, on the other hand, are a broader term encompassing various charges associated with foreign currency transactions. These fees can include not only the commission charged by the institution but also other charges such as handling fees, processing fees or service fees that may be incurred during the currency exchange process.

Specific costs associated with foreign exchange fees include:

• Fees for international transfers conducted online or in-person. Depending on the billing option, the cost may or may not be shared with the beneficiary (BEN, SHA, OUR).
• Specific fees for expediting international payments.
• Fees for issuing SWIFT documentation, investigation fees, internet subscriptions and additional charges.
  
  

Who charges foreign exchange commissions?

Now that we know exactly what foreign exchange commission is (and just as importantly, what it isn't), let's consider who's who, and where the fees are coming from.

Unlike other exchanges, the foreign exchange commission is not controlled by a specific banking regulation. It's freely operated by the financial intermediaries who provide the foreign exchange transaction service, meaning foreign exchange commissions can be charged by various entities involved in currency exchange transactions.

Below, we’ve taken the liberty of listing a few for you:

• Banks: Commercial banks often charge foreign exchange commissions when individuals or businesses exchange currencies through their services.
• Currency exchange bureaus: Dedicated currency exchange bureaus, whether physical locations or online platforms, may charge commissions for converting one currency into another.
• Online foreign exchange platforms: Online platforms that facilitate currency exchange, such as forex brokers or money transfer services, may charge commissions as part of their fee structure.
• Credit card companies: Some credit card companies charge foreign exchange commissions when customers make purchases or cash withdrawals in a foreign currency.
• Financial institutions: Other financial institutions, such as investment banks or specialised foreign exchange providers, may charge commissions for providing currency exchange services to individuals and businesses.
  
  

Why does foreign exchange commission cost so much?

We’ve all got to earn a living, and financial intermediaries who provide the foreign exchange transaction service are no different, which is why they charge fees. But because they set their own rate of commission, the fees can vary greatly depending on the establishment.

Financial intermediaries are only obliged to communicate their pricing list with their clients, including their set fees for each service.

When it comes to criteria for commissions, there are several factors that can influence the rate. Those are as follows:

• The number of foreign currency payments made during the year.
• The total foreign exchange volume made by the company with the intermediary.
• The internal classification of clients within the intermediary.
• The individual banks themselves and their overall fee structure.
  
  

How to avoid paying foreign exchange commission

Because foreign exchange commission is set by financial intermediaries, its rate can fluctuate from one provider to the next. This can cause big problems for businesses who are looking to manage their costs accurately and efficiently.

It's therefore crucial that you shop around to make sure you're getting the best possible deal for you and your business. 

Unlike most traditional financial intermediaries (most notably banks) who charge a plethora of fees, iBanFirst does not impose any commissions or fees on currency conversions. iBanFirst only applies fees for payments, which are fixed but vary based on the payment network, specific instructions and desired speed of transfer.

These payment fees are clearly displayed when creating a payment and selecting different payment options.

If you want to take control of your cross-border transaction, why not speak to one of our experts today to find out more? Also, you can try out iBanFirst's Foreign Exchange Cost Savings Simulator, and in just a few clicks, see how much money you could save.