The exchange of currencies has existed since the beginning of international trade. Individuals and firms alike have continued to find new ways of exchanging different currencies, creating options for the exchange of currencies and hedging against risks associated with adverse currency movements in the future.
The evolution of international trade has continued to play a critical role in this ever-growing industry, one which until recently was dominated by banking institutions.
Due to their access to individual and corporate finances as well as the trust established between them and their clients, banks have over time been pivotal to the currency exchange process. Their role as an intermediary while at the same time housing client deposits allowed them to exchange currencies across countries and institutions and directly debit or credit their clients’ accounts. Their operations across borders, strong cross-border regulations and access to clearinghouses further cemented their dominance as the go-to option for currency exchange.
As with any industry, however, competition arrived to disrupt the norm. The introduction of currency brokers has come to disrupt an established industry offering more options and cheaper fees to their clients.
Their role, while similar to that of banks, has been to ease the process and make it more efficient for clients. Currency brokers took advantage of loopholes which existed in the execution process and made products designed to exploit them.
This was achieved through the employment of specialists in currency exchange who tailored different products specific to the above loopholes and who had an innate understanding of the currency exchange market.
In achieving this, these companies have developed products which have eased the transfer of money, ensured the risk associated with this transfer is mitigated and expedited the time frame within which this is executed; driving the concept of international fund transfer and consequently international trade to the next level.
What are Currency Brokers?
Currency brokers are a group of specialists who focus on the purchase and sale of currencies and the ability to transfer money abroad. Unlike other brokers, this group specializes in currencies only, and this allows them to have a deep understanding of the global currency market. This role, while seemingly easy, entails the knowledge of current global macroeconomic conditions as well as their forecasts, the global political climate, technical currency movement analysis tools as well as measures to ensure adverse conditions within any of the above do not affect an individual’s currency portfolio.
As earlier stated, unlike banks and other financial institutions which offer the above service, currency brokers specialize in this. Their teams provide advisory services to individuals wishing to exchange and/or transfer currency either locally or internationally. Also, their rates are usually much lower than of other financial institutions which offer a wide range of services such as banks. Moreover, more established currency brokers provide a wide range of currencies, allowing for their clients to transact on a more global front. All this is achieved at much quicker turnaround times than is the case for banks and other currency exchange service providers.
Given their specialized nature, currency brokers offer a strong value proposition to their clients – as stated above. This piece will take a closer look at the above and evaluating how these brokers affect the aforementioned value proposition. Moreover, we will be looking at the significant benefits of using currency brokers, analyzing the different ways in which one can grade them. We will eventually conclude by providing a conclusive outlook towards this business and how it has shaped the international trade platform as well as how it is expected to develop tomorrow’s trade.
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Benefits of Choosing a Currency Broker
When one seeks to transfer money between countries or exchange different currencies, there are many factors which they look at such as the exchange rate, the speed of transaction, associated risks, customer service, and advisory as well as the specific fees and charges. While these are associated with any currency transfer, they are dealt with when one trades with the best currency brokers.
Better Exchange Rates
In the currency exchange system, an even small variation in the exchange rate margin may mean the difference between a few hundred and thousands of dollars in variations. As such, the ability of a firm to secure the best exchange rates means a lot to clients, especially so for individuals and corporations exchanging high sums of money.
Currency exchange institutions peg their receipts/revenues on margins. This means that for an exchange rate between the US dollar and the euro for example, while the actual rate is about $1.1/0.91 for buying and selling respectively, the firm will place the above rates at $1.15/0.85 for buying and selling, a higher than market buying and selling figure, therefore making a kill on the above margins. These margins act both as profit-making options while also serving as safeguards for the financial institution to ensure that it doesn’t suffer losses in case of shocks in the currency markets.
Institutions such as banks are especially averse to risk especially so for currency movement risk. Given especially the size of a portfolio which banks have concerning currency assets on behalf of their clients, shocks within the currency market can leave them counting their losses. In a bid to mitigate against this, therefore, banks have some of the highest margins among currency provides – pushing the associated risks and costs to the customers – which in turn means that they make significant returns during periods of regular trading activity. It also mitigates their downsides during periods of an abnormal event such as in case of a financial crisis leading to a decline in the performance of a specific currency.
While this remains the case, currency brokers take a different approach. In their view, serving the customer by offering them the best margins is usually preferable. First, their teams analyze the market on a continuous basis; therefore, allowing for them to forecasts expected movements in the market. Moreover, these firms can negotiate for much better exchange rates which will enable them to lower the margins charged to customers – this is by not pushing the associated costs to the customers unlike institutions such as banks.
Given the above, currency exchange brokers can provide much better rates to their clients. In doing so, one can receive a substantially higher pay off that would have been collected in banks and other such institutions. The difference may not necessarily be felt for small transactions; however, when the amount being exchanged is high, the exchange rate is the difference between a few hundred dollars and thousands of dollars.
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Just like in the case of depositing a cheque, currencies take some time to exchange especially when they are to be transferred between countries. While in-country remittances take a short period to be actualized, for most financial institutions, the number of days taken to ensure that international currency exchange and fund transfer is achieved is usually between 1 and three days. It therefore means that for individuals wishing to transact currencies over a short timeframe, banks tend not to be the best solution.
Currency exchange brokers have a solution to this as they achieve the above within 1 to 2 days. It is as a result of much more robust systems and security systems built to ensure such cross-country repatriations are executed quickly. Moreover, this is also in a bid to secure that they do not hold on to large sums of foreign currency aren’t held during periods of turbulence in the market, safeguarding the brokers from volatility risk. While the above is partly driven by the need to hedge against risk to the firm, it presents the client with an opportunity to receive their funds much faster, a significant advantage to the clients.
It is also essential to note that while most brokers will execute such transactions within the number mentioned above of days, some country laws may limit the above leading to more days taken to transact currency. It is, however, specific to the above countries. Before exchanging currencies, therefore, one will need to review the different options of currency brokers and the terms and conditions in different countries to ensure that the 1 to 2-day exchange policy works in that specific country.
As previously mentioned, the risks associated with currency movements are numerous. First are market shifts which are then driven by changes in macroeconomic conditions, political conditions and country-specific policies, turbulence in the financial markets as well as different investment policies specific to certain countries such as foreign direct investments. While all these are random events, their repercussions can be tremendous on the economy of a nation and therefore on the performance of its currency. Currency brokers, therefore, need to find ways to ensure their clients can hedge against the above.
With the advancement in hedging strategies, currency brokers have continued to offer better services to their clients regarding hedging against risk. Their options continue to grow by the day as they continue to research new ways to safeguard against loss from exchange fluctuations.
Presently, the methods employed by these institutions include forwards, limit orders and stop loss orders options. For forwards, clients are allowed to enter into contracts which see them lock in a specific exchange rate in future – the calculation for this, which technical, is based merely on the current exchange rate and expected interest rates. This option ensures that the client does not have to suffer from movements in the market rate as the associated exchange rate specific to the transaction is secured. Moreover, limit orders see clients target a specific exchange rate and ensure transactions are executed only when such an exchange rate is met while stop-loss orders curtail losses by providing that transactions are immediately stopped once a specific rate is hit – this rate is otherwise known as the floor or ceiling.
While these are but some of the options given to clients by currency brokers, they offer the clients different packages which enable them to the ability to avoid risk. In general, currency brokers make it their business to ensure that their clients have the best services and the widest variety regarding products to choose from.
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Customer Service and Advisory
One of the newest items brought to market by technology is the ability to trade online. Through this, individuals and corporations alike were able to exchange different currencies online. With this, however, came a new problem, how to handle the numerous calls and emails sent to varying firms by clients who were or seemed dissatisfied with the service. Moreover, how to provide advisory services to the same clients about the product range and the different risk mechanisms based on the new products created was also a new problem.
Currency brokers, therefore, set up different teams to ensure that they could achieve this. Their team of currency experts as well as customer care team are brought in to ensure that the client’s needs are always met. In doing so, they not only ensure that clients needs are taken care of but also that they are educated on new products and ways of ensuring that they can make the best out of the services provided by the firm. Furthermore, the advisory teams provide continuous updates on technical and macroeconomic movements in the market; information which can be crucial to a client’s trades for the day.
Through this, currency brokers ensure that they can meet all the needs of their clients and therefore continue to provide them with the highest value for their money, a significant part of their value proposition.
Fees and Charges
Going back to the case of banks, when transferring money abroad, banks tend to charge certain fees – dubbed international money transfer fees – as this is customary for their service line. It is in addition to the margins charged during the transfer of funds.
Currency brokers created a system in where the above fees are mitigated and such institutions may end up saving the client up to 90% of the amount of fees and charges which would otherwise have been spent had they sent the money through a bank.
These firms typically offer free accounts with no opening charges and employ a fee-free basis for international transfers. Through this, the client is not only able to save on much better margins but also the lower fees charged.
While banks may provide a service similar to currency brokers, the specialization of these brokers presents a significant benefit and strengthens their value proposition.
With these firms being regulated by different authorities, their operations seek mainly to benefit the clients. The low margins, fees, and charges, as well as the advisory service, provided ensure that they can secure the clients receive the best value for their money.
As such, currency brokers present the best option for people wanting to exchange one currency for another.