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What is the mid-market exchange rate?

Last updated: 19.12.2024

New to international transfers? Learn how mid-market rates can affect your transaction costs and profit margins

Key takeaways

The interbank or mid-market exchange rate is the rate banks and financial institutions use to trade currencies with each other
Factors like interest rates, political stability, and trade balance can significantly impact mid-market exchange rates
Banks and payment providers add markups to mid-market rates to cover costs, so compare fees before transferring money
WorldFirst caps its markup at 0.60% for international transfers and 0.80% for 1688 payments

Introduction

Ever wondered why every bank and payment provider offers a slightly different exchange rate? And why do their exchange rates differ from those you see online on Google or any other currency exchange platform?

It’s because banks and payment provider add their own markup to current market exchange rates or mid-market exchange rates to cover the cost of implementing and managing international transfers.

If your business is involved in global trade, understanding how mid-market exchange rates work can help you save more on international transactions and protect your profit margins.

In this article, we’ll delve into what mid-market rates are, how they are calculated, and the best way to access competitive exchange rates.

What is the interbank or mid-market exchange rate?

The interbank or mid-market exchange rate is the rate banks and financial institutions use to trade currencies with each other.

This rate is considered the most accurate representation of a currency’s value because it’s based on the global market’s consensus. When customers exchange currency at a bank or money transfer service, they might pay a slightly higher rate due to fees and markups, which helps cover the costs of providing secure and convenient currency exchange services.

How does the interbank or mid-market exchange rate work?

Imagine a global marketplace for currencies. Just like a regular marketplace, there are buyers and sellers. Banks and financial institutions are the main players in this market.

When a bank wants to buy a currency, they offer a price. This is the bid rate.

When they want to sell a currency, they ask for a price. This is the ask rate.

The mid-market exchange rate is the average of the bid rate and ask rate

How are mid-market rates calculated?

Mid-market rates are calculated by averaging the bid and ask prices quoted by currency dealers in foreign exchange.

Bid price: The price at which a dealer is willing to buy a currency from you
Ask price: The price at which a dealer is willing to sell a currency to you

The mid-market rate is considered the fair market value of a currency pair. It’s often used as a benchmark to calculate exchange rates offered by different providers.

Here are the calculations involved for mid-market rates

Add the bid and ask prices
Divide the sum by 2

For example, if the bid price for EUR/USD is 1.0800 and the ask price is 1.0810, the mid-market rate would be (1.0800 + 1.0810) / 2 = 1.0805.

How do you find the interbank rate?

To find the interbank rate, you can

Use online currency converters: There are many currency converters where you can find e real-time mid-market rates
Check financial news websites: Financial news outlets like Bloomberg, Reuters, or The Wall Street Journal frequently publish interbank rates

What are the factors affecting the mid-market rate?

Multiple factors contribute to the fluctuation of mid-market rates. Some of these are:

Economic indicators: Factors like GDP growth, inflation rates, interest rates and unemployment can significantly impact a country’s currency value. For instance, a country with a growing economy and low inflation may see its currency appreciate.
Political stability: Political instability or uncertainty can negatively affect a country’s currency. Investors may be less willing to invest in a country with political turmoil, leading to a depreciation of its currency.
Trade balance: A country with a trade deficit (imports exceed exports) may see its currency depreciate as more of its currency is needed to purchase foreign goods. Conversely, a trade surplus can lead to currency appreciation.
Interest rates: Higher interest rates in a country can attract foreign investors, leading to increased demand for its currency and appreciation. Lower interest rates may have the opposite effect.
Speculation: Market speculation can also play a role in influencing exchange rates. If traders believe a currency will appreciate, they may buy it, driving up its value. Conversely, if they believe it will depreciate, they may sell, causing it to fall.

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Is it possible to send money at mid-market rates?

No, it is not possible. Usually, banks and payment providers add a markup to the mid-market rates to cover their operational costs and make a profit on the transaction. This markup can be hidden within the exchange rate or disclosed transparently by your payment provider.

Before making an international transaction, you should compare the total cost of a transaction, including the exchange rate transaction fees, and any other fees involved.

How to get competitive exchange rates and save more?

Here are a few ways in which you can get the best exchange rate and save some money:

1. Find a provider with low markup and transaction fees

Always compare markups and transaction fees offered by different payment providers. Additionally, be aware of any hidden fees or charges that may be added to the exchange rate. To better understand a provider’s reliability and customer service, read reviews and testimonials from other customers. You should also check the official currency calculators present on the payment provider’s website to calculate transaction costs.

2. Consider a forward contract

A forward contract lets you lock in a specific exchange rate for a fixed period of time, allowing you to hedge against exchange rate fluctuations and protect your profit margins. However, keep in mind that forward contracts may not be available with all providers and there may be minimum transaction amount requirements.

3. Set up a firm order

A firm order allows you to specify the exchange rate at which you want to execute the transaction. Once you set the desired rate, the provider will monitor the market 24/7 and automatically execute the transaction as soon as the specified rate is reached.

4. Use a multi-currency account

A multi-currency account allows you to send, receive, and hold funds in multiple currencies through a single account. You can hold the received funds in multiple currencies and wait for favourable exchange rates to convert them, reducing transaction fees and simplifying international transfers. You can also convert currencies between different account balances when rates are favourable.

Get competitive exchange rates with WorldFirst

WorldFirst aims to simplify international payments and collections for online sellers, SMEs, and global businesses. With WorldFirst, businesses can make fast, secure and reliable international transfers at competitive exchange rates.

You can send payments in over 40 currencies across 130+ countries and regions and receive payments for free in 20+ currencies. You can also collect and hold funds in over 15+ local currency accounts.

With WorldFirst, you can:

Save more on international transactions: We cap our currency conversion fee at 0.60% for direct transfers and 0.8% for 1688 payments. There are no hidden fees.

Choose your exchange rate: You can select your exchange rates with WorldFirst through firm orders, forward contracts, and spot contracts.

Collect marketplace payments: Easily collect payments in 15+ currencies from over 100+ marketplaces and payment gateways including Amazon, eBay, and Etsy

Pay overseas suppliers like a local: Pay your suppliers on time with WorldFirst’s same-day and next-day transfers (cut-off times apply)

Disclaimer: The information contained is general only and largely our views. Before acting on the information you should consider whether it is appropriate for you, in light of your objectives, financial situation or needs. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions, estimates, mentioned products/services and referenced material constitute the author’s own judgement as of the date of the briefing and are subject to change without notice. WorldFirst shall not be responsible for any losses or damages arising from your reliance of such information.

Written by Rick Hill, Head of Sales ANZ at WorldFirst

Rick Hill has worked in payments and financial services for the past nine years. He began his career at a large institutional bank and has since worked across startups and scaleups. Over the past four years, his experience with e-commerce retailers has led him to believe that WorldFirst will be crucial in helping brands expand globally by demystifying the complexities of entering new markets.