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By IPSIPay team

How to Calculate Exchange Rate for International Money Transfers and Online Payments

Here are some tips to help you with interbank transactions in different currencies. Learn how to calculate the exchange rate and when you should do it.

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People that care about their finances always try to find a digital payment provider with the best currency conversion rate. Exchange rates are particularly important for overseas payments, be it an international money transfer, online shopping, or utility bill settlement for overseas property.

Here are some tips to help you with interbank transactions in different currencies. Learn how to calculate the exchange rate and when you should do it.

How Does Foreign Currency Exchange Work?

Whether you exchange cash or convert USD to foreign currency for bank transfers, there will be a certain ratio between what you sell and receive in exchange. For example, the Federal Reserve System set the USD/MXN currency pair for 19.927/1 as of September 2, 2022. It means that one dollar trades for 19.930 Mexican pesos, and conversely, you get one peso for 1/19.930=0.0502 USD.

But if you check it with online currency converters, you’ll see that the ratio changes as you reverse the exchange from USD-MXN to MXN-USD. For instance, trading USD for MXN gives you 19.78 MXN; for reverse exchange, you may expect 1/19.78 = 0.0505 USD. But the actual amount is a bit lower and stands at 0.0500 USD. So a reasonable question arises: why do currency exchange rates get less advantageous when you purchase dollars for pesos?

This gap, known as the buy-sell spread or forex spread, stems from the difference between the bid and ask price for foreign currency in retail markets of a particular region. It’s one of the essential criteria to consider for the best money transfer rates. So, the same money-sending app or service might not be as beneficial for incoming transactions as for outgoing. That’s why you should choose money transfer apps carefully and mind their transfer fees.

Why Payment Services Have Different Exchange Rates

Conversion rates significantly differ depending on the type of service you choose. There are numerous reasons for that:

  • The buy and sell prices for intermediaries are inconsistent. All finance service providers participate in the interbank exchange market. Trading quotes for local and foreign currency fluctuate, just like share prices.
  • Offline financial institutions have larger expenses. Running a wire transfer at a bank or credit union branch involves tellers and other employees. Offline companies also need to maintain an extensive network of branches. So obviously, providers need higher markups and fees to stay afloat.
  • Obligatory сredit/debit card foreign transaction fee. The conversion rate of Visa, MasterCard, and American Express doesn’t differ much from interbank rates. However, bank card networks add a foreign transaction fee of 2.5% – 3% to the converted amount. It happens each time you pay from a credit card for services priced in foreign currency. The same goes for transferring money from a credit card in USD when the beneficiary receives payment in local currency.

Therefore, the general advice to get the best money transfer rates is to:

  • Look for the comparison of exchange rates among money transfer services on the Internet.
  • Consider online currency converters’ value as a mid-market one and compare it with the offers from financial institutions and online services.
  • Check for the perks of internet banking. Experts consider it cost-effective to exchange funds between a national currency bank account and a foreign one.

How to Calculate Exchange Rates for International Money Transfer

Mind that regulatory-compliant providers always reveal the actual amount the recipient will get. Your receipt or a confirmation form must also include the initial amount and all service charges. This way, you can calculate an exchange rate applied to your transfer – add the deducted fees to the resulting amount and divide it by the initial payment.

Once you know how to calculate the exchange rate for a particular payment method, it will be easy to find the rate for other available options. So spend a couple of minutes assessing the rates and comparing them with similar services on your shortlist. Some services may even publish exchange rates on their websites to simplify the research.

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Most Common Reasons for Making a Foreign Currency Exchange

Today, banking and non-banking transactions cover the entire globe. Since people often pay using local currency, conversion occurs one way or another. Here are the main cases when you should double-check exchange rates:

Money Transfer to Your Family Abroad

Shopping for the best money transfer rates makes sense if you financially support your relatives across the border. You want to send as much as possible without unnecessary fees.

Yet, other factors may be as important as low money transfer costs. Many customers favor particular remittance services to send money to relatives because of their accessibility, convenience, payment processing speed, etc. Of course, it doesn’t mean that better exchange rates won’t sweeten the deal. So you should decide what matters the most to you and select the provider that meets your needs.

Transferring Money to a Foreign Bank Account

Foreign bank account transfers are common for:

  • Dual resident taxpayers. 
  • Foreign nationals that pay loan interest rates in their native land monthly.
  • Making individual remittances (employment-based immigrants).

When running interbank money transfers, the first thing to be aware of is a double currency conversion. Typically, it occurs when you send money between bank accounts in the same currency, but it differs from the national currency of the origin and destination countries. For instance, you send USD from a checking account in the Philippines to a USD savings account in Mexico. Consequently, the conversion includes USD → PHP → USD. And if your beneficiary receives money in MXN, the conversion is USD → PHP → USD → MXN.

Of course, it results in financial losses. So it’s better to prefer services that directly convert your money to a destination account currency. They usually complete transfers between debit and credit cards and charge a reasonable 1% – 1.5% fee.

Paying Bills for Property Abroad

There are many convenient and affordable options to settle utility bills online (e.g., international debit card transfer providers, mobile apps, and online services for bill payments). They support direct currency conversion to help you avoid exchange fees.

Alternatively, foreign account holders can choose online banking as a simple and cost-effective way to settle bills remotely. 

Buying from Abroad Online

Foreign stores support either Dynamic Currency Conversion (DCC) or the conversion rate of your card issuer. DCC transactions can be more costly as the merchant sets the rate with a higher exchange margin. One way to get a more beneficial rate and avoid foreign transaction fees is to pay with a travel credit card. Alternatively, you may pick a foreign currency for payment if you have such an option at the checkout.

Spending During Vacation

It’s certainly not the best idea to rely on debit cards or cardless payments during vacation. Debit cards have high foreign transaction fees, while cardless transactions may be unavailable in your destination. So always double-check and prepare an alternative just in case! A travel credit card may be the best choice. You should also purchase cash after arrival to be ready for unexpected situations.

Instant International Money Transfer at Beneficial Exchange Rates with the IPSIPay App

IPSIPay app offers affordable international money transfers to 200+ countries. We provide accessible 24/7 personal remittances to all underbanked regions worldwide, making cross-border money transfers quick and easy. IPSIPay keeps our exchange rates low so that you can make international payments with any currency at any time.

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