In an increasingly global market place, particularly in Australia where the bulk of goods we consume come from overseas imports it has become important to understand Bank Exchange Rates and how they are calculated.

The strong Aussie dollar – near record highs – has seen the majority of Australians now buying their goods from overseas usually over the internet. The reason for this is usually two fold and comes down to ease and more competitive prices. Personally, I have traveled the world and have seen the prices paid for basic and non basic items and became somewhat disillusioned with the poor service and prices we receive in outlets across Australia. Without harping on too much, it is important to understand how the bank’s come up with this rate and what you can do to achieve the best possible rate.

First, we must understand that bank exchange rates are not the exchange rate today nor the official market rate. While this sounds obvious to me – I have worked in foreign exchange jobs for a number of years – it is not so obvious to others. And believe me over the years, I’ve been asked many times why it matters where you go to purchase your foreign currency.

As I mentioned above the Bank Exchange Rate you receive is not the market rate, the bank exchange rate rather is a function of the market plus the banks margin. The easiest way to describe this is to think of foreign exchange as a product. As we know before we buy anything we usually check a few prices, and if you did that today with the four largest Australian banks, you would get four different prices. Fortunately for the bank’s they are in the unique position where 99% of people do not check the price they are receiving, they are a true market maker.

In order to turn the tables on the bank and wrestle back some control in terms of the bank exchange rate you receive you will need to set-up more than one bank account and preferably with a non-bank foreign exchange provider, they typically compete much better on price and can give you the leverage you require to start saving money on your foreign exchange transactions. This would be particularly useful if you are an online trader with a business, or someone who purchases a large amount of goods online.

It also pays to do your research and ask the banks the tough questions. You would be amazed what they can do for you when they know losing your business is on the line. Good luck with that Bank Exchange Rate!

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