Many money transfer providers claim to be transparent by using the mid-market rate as a benchmark. The idea is to assume that the mid-market rate is the best possible foreign exchange (FX) rate available, so any mark-up over this rate seems fair.
Unfortunately, this is grossly untrue, and you could be losing over 3% of your money transfer or remittance transaction by using the mid-market rate as a benchmark.
What is the mid-market rate or Google rate?
The mid-market rate, or also known as the interbank rate, is the mid-point between what foreign exchange participants in global currency markets are willing to pay for and sell for currencies. There is no singular mid-market rate for each currency pair because organizations aggregate different currency data from different participants to calculate their mid-market rate.
For example, the mid-market rate that Reuters publishes for SGD/MYR may be slightly different than the rate you see on Google, because Google’s currency convertor uses data from Morningstar. In Singapore, the Monetary Authority of Singapore (MAS) publishes exchange rates from Refinitiv that are quoted around midday in Singapore.
Even though there is no one single mid-market rate, they do not differ much and most consider them to be interchangeable for retail reference. It is also often considered to be the fairest FX rate for retail use because it is derived from the trading activities of the largest foreign exchange participants such as global banks and foreign exchange dealers.
Why using the mid-market rate or Google rate as a reference is wrong
While most retail executable exchange rates follow mid-market rates closely, the demand and supply dynamics of the retail market are ultimately different from the interbank market. As a result, retail executable exchange rates can be better than mid-market rates. Furthemore, the mid-market rate is not your opportunity cost, so it should not be used as your reference, especially when there are many money transfer providers offering exchange rates that are better than mid-market rates. Here are the exchange rates for SGD/CNY retrieved on 09-Jan-2022 from Google, various money transfer providers in Chinatown and Raffles Place in Singapore, Wise, and Western Union.
If you compare the SGD/CNY from Wise against the mid-market rate published by Google, the difference is 1.05%, and many SMEs may mistakenly believe that their cost is only 1.05%. However, the comparison should be made against their opportunity costs, which is other money transfer providers.
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