Let’s start with oranges. Go to a shop and see how much a single orange is. Then, look at how much a bag of 10 oranges costs. You’ll see that the cost-per-orange is less for the bag than what you’re paying for the individual orange.
Then, go a step further back and find the orange wholesaler who supplies the supermarket and ask them how much it would cost for 20 tonnes of oranges. Do the maths, and you’ll see the cost-per-orange is a tiny fraction of what you’re paying for one on its own.
This is nothing groundbreaking. Things bought in bulk are cheaper per item for many reasons (fewer people in the sales flow, lower transportation and handling costs, incentivising you to purchase more etc).
Currency is exactly the same. If you go to your bank and buy a few hundred Euros of holiday spending money, you’ll pay more than you would as a business buying a few hundred thousand Euros. And the wholesaler (in this case, the bank buying foreign currency from another bank) is moving hundreds of millions, and paying an even lower rate again.
This is the wholesale FX market – where banks and large financial institutions are buying and selling currencies. It’s the starting point for every FX transaction, which then filters down to you buying your holiday spending money.
These large foreign exchange purchases on the wholesale FX market make up the vast majority of the $6.6tr that is traded every day.
How does my business access the wholesale FX market?
This is all down to your FX provider. After all, if you wanted to buy 20 tonnes of oranges in real life, you’d need an intermediary. If the provider, or their banking partners, have access to this market, then your business will have access to wholesale FX pricing, plus any mark-up or charges your provider includes.
Get all the information you can when partnering; certain providers will offer spot pricing, but then charge an extra fee for the service. Others will pad their fees into the price they quote you.
The mid-market rate is the middle point between what currencies are bought and sold for, and is sometimes referred to as the ‘true rate’. The closer you get to this rate, without additional hidden fees, the better price you are getting.
At OpenPayd, our banking partnerships provide access to the wholesale market. We guarantee our rates at the point of purchase and we’re always transparent about how our quotes are marked up from the mid-market rate on the wholesale markets.
What will cause the wholesale FX price to fluctuate?
Currencies will alter in value due to many reasons and the wholesale market is impacted in the same way. In instances such as natural disasters, wars or global recessions, the ‘spread’ between the bid price and the ask price can become larger. This is because these events can be very destabilising to an economy, and therefore the value of holding that currency will often go down.
Any other questions? Reach out to our team and we’ll gladly explain the nuances. It’s slightly more complicated than oranges, but on the whole, it’s pretty simple.