Last week I received a flyer from An Post (the Irish Post Office, if you’re not from these parts), telling me that “An Post sells Sterling and Dollars COMMISSION FREE”. Well, who doesn’t these days? It seems to be the standard line everywhere; banks, bureau de change at the airport, and also most of the online brokers specialising in foreign bank transfers. What does it actually mean? Not a lot really, and in fact I believe that its use is often deliberately misleading.
It’s “Commission Free”, so it must be a good deal, right?
When you change money with your bank, or at the airport, or almost anywhere else for that matter, it is reasonable to assume that the person selling you the foreign currency is taking some sort of a cut. After all, they’re providing you with a service. This cut, unless you know better, you would probably assume is called “Commission”. So when you see, (and I quote again from the offending An Post flyer), “for a limited period you can buy your Sterling and Dollars COMMISSION FREE!”, you would be well within your rights to think “Wow, this is a great deal, I obviously can’t do better than that. Fair play to you, An Post”.
Don’t Be Fooled by Commission Free Deals
The thing is, “Commission”, in the currency exchange sense, isn’t “Commission”, in the everyday, rest-of-the-world sense. People who exchange a lot, or work in financial services, know that the real charge when you exchange currency is usually BUILT INTO THE RATE. It’s called “the spread”, and it works like this: In the worldwide foreign exchange market, (which by the way is massive, we’re talking trillions daily), there is a constantly changing, true rate of exchange between any two currencies. In the industry it’s often called the interbank rate, but you can also think of it as a wholesale rate, or even, for example, €1 IS WORTH £0.8345. Foreign exchange providers then apply their own markup to this rate, so effectively they sell the foreign currency on at a higher price. This makes sense; it’s just like what a grocery store does, but with currency instead of tinned peaches. If you want to buy €100, it won’t cost you £83.45 (the wholesale value), it will cost you, say, £87. This £3.55 markup isn’t commission though, believe it or not. Oh no, it costs you £87, COMMISSION FREE!
So what you have is a load of different providers, many of them claiming 0% COMMISSION, or COMMISSION FREE, and all charging you a different price to buy your Euros, or Dollars, or whatever. Some of them actually do charge commission as well, meaning that they give you a rate including their spread, and then charge you a percentage fee on top. Confusing? That’s the way they like it, because it makes it harder for you to make the best decision. That leads to a more imperfect market, and fatter margins for them!
So how do you find out where you’re getting the best deal? Unfortunately, you have to work it out. You need to calculate the final amount of foreign currency you’ll end up with, taking into account the different rates on offer, any commission, and also transfer fees for bank transfers or delivery fees for cash if that applies.
Commission Free= Poor Rates and Hidden Charges?
With CurrencyFair it’s pretty easy to do the maths. The rate you can see on our live marketplace, should you choose to match it then and there, is the final rate you get. If you’re the kind of person that likes to put up their own rate, and you get matched later on, then the rate you asked for is the rate you get. We don’t take anything off afterwards, except our transfer fee to send the funds to a bank account, which is 3 Euros or the equivalent in other currencies. We don’t deal in cash, so unfortunately we can’t help you if you need physical notes and coins.
The rates on our marketplace are generally no worse than around half a percent from the interbank rate, which is exceptionally good, but at times they can be even better than the interbank rate. That is simply IMPOSSIBLE anywhere else.
So don’t be fooled by COMMISSION FREE. It’s misleading at best, and at worst it’s a deliberate attempt to make you pay more than you need to.