The Mid-Market Rate, What The Heck Is This Thing Anyway?
Updated: Dec 23, 2020
Answer: The mid-market rate is simply the only fair exchange rate available in the market. You see, it's not that complicated.
The mid-market rate is the only rate that you should be concerned with when it comes to sending money online.
How is the exchange rate determined?
Have you ever asked yourself, how many euros go into a US dollar, how many US dollars go into a yen, or how many British pounds go into a US dollar? The answer is simply 'the currency exchange rate' is what determines that rate.
Good job! So you are on the right track. How about who in the market sets the exchange rate? Hmmm.
Simply the exchange rate is determined by institutional large banks and other market-making providers set their prices based on what an entity or individual requests. In essence, it will vary bank by bank, money provider by money provider so it can be quite exhaustive to determine the exact exchange rate. Fortunately, technology helps provide transparency to the market in what is the 'real' rate for a particular currency exchange rate. This article will focus on what the market determines the mid-market rate.
The ‘real’ rate
Institutional banks and entities based on supply and demand market conditions will pay a specific price to buy the specific currency and will offer a specific price to sell the specific currency. The difference or the midpoint of these prices(Buy Price/ Offer Price) is what is called the mid-market rate. You see it's getting easier. As the market buys and sells off the price will vary and adjust accordingly similarly if you were to buy a car, it's based on a supply and demand model - currency exchange rates work no different, but the key is to make sure you are aware of the midpoint price which is considered to be the 'fairest' rate in the market because it is the real market without any added charges or markups.
To provide some context, look at the following example to the right. Let's assume you walk into your Bank with 1 British Pound and you want to convert it to Euros. You look at the digital counter behind the bank teller and it displays the Sell Rate and the Buy Rate for the Euro. So for this example, the Sell Rate is 1.10 Euros (the amount the bank is willing to sell you Euros per 1 British Pound) and the Buy Rate is 1.30 Euros (the amount the bank is willing to buy Euros per 1 British Pound) - the mid-point or the mid-market rate, in this example, is 1.20 Euros. Hence the fairest or 'real' exchange rate is the mid-market rate of 1.20 Euros for a British Pound. Keep in mind that the bank does not have to give you the mid-point rate when they conduct a currency exchange, but this is to provide you with a baseline price point so you understand what you are paying and/or selling rate when a transaction is conducted online for an overseas transfer. There is a multitude of ways to calculate this mid-point price and different organizations may calculate it differently, but the mid-price should not vary too much.
TransferWise uses an extensive array of real-time pricing sources directly from Thomson Reuters to provide the most transparent mid-point price for your currency exchange. Besides TransferWise offers a very easy calculator and rate-tracker to provide you with easy to use tools to help with any calculation.
One item to be aware of when you are converting money either in person or online is to look out for the following:
Misleading pricing — Many locations will offer or give you a special deal such as '0% fee', 'special free rates', 'today's zero to low commission', or 'commission waived today'.
A 'day rate' position — Here is where organizations use the mid-market rate, and tag a hidden markup on top of the rate. In this case, you would never know how much you are overpaying for the transaction. So you have no idea how much they're overcharging you by.
Small Print - If you see loads of small print, it is best to conduct the transfer somewhere else otherwise you stand to be over charged and provide more money into the provider's pocket. Please be aware.
Be aware of hidden charges or markups
In fairness financial institutions, money transfer services, and banks use the mid-market rate to conduct business between themselves but do not always pass on the 'fair' or mid-market point price to you. Markups and hidden charges are baked in the exchange rate as a means to make more money.
Be vigilant when you see a sign or an ad from a transfer service that guarantees a 0% fee, or no commission; likely hidden charges and costs being marked up in their exchange rate. Therefore, it is best to go with a trusted firm that has nothing to hide and provides the most transparent exchange rates available on the market.
Think and verify before you send any money overseas
The best consumer is the most informed consumer.
You should always stay informed on what the current mid-market rate, and compare it to other sources. Your money is at stake so it is vital to understand how this process is done and you will benefit by saving more money and keeping it in your pocket, not theirs.
Conduct a comparison test and see which provider has the best rates. Wouldn't you want to know the costs that your local bank, online bank, local or online money transfer service charges? Go with the provider that provides you with the best rates and service. Whether or not it is with TransferWise or some other service - you win!