# How the big banks are banking off FX stupidity

We all know that the majority of people don’t know FX (Foreign Exchange) so this topic should come as no surprise.  (For those who haven't already, checkout Splitting Pennies for a quick guide on this topic) However, it’s important for traders and investors to understand how the US banks are ripping off their clients, and the only reason they do it is because clients allow them, because they don’t understand how they’re being scammed.  What we are talking about is the retail deliverable foreign exchange market.  Deliverable currencies is FX that is ‘deliverable’ to a foreign recipient, for example if you want to pay up front for a hotel in France you’ve booked in advance for your summer vacation.  It’s not only retail but for the example here it is – someone walking into a branch and asking to make a foreign payment.  We’ll use Bank of America as the example, let’s look at their FX rates from their website, available here:  https://www.bankofamerica.com/foreign-exchange/exchange-rates.go

So here’s the first line of defense to this scam, which it can be fairly called (we will explain).  Only one side of the spread is displayed – this will depend when you are ‘buying’ or ‘selling’ but they will NEVER be displayed on the same time or on the same screen (then, normally intelligent people may be able to deduce they were being fleeced like a sheep).  Let’s calculate the total spread based on the above rates using simple FX math for the 2 currencies chosen for this example, Euro and Yen.

FX is quoted EUR/USD that means 1 EUR = 1.1820 USD – the spot FX spread is about 1.1820 / 1.1822 according to LCG Brokers from Fortress Capital; but the market is closed now (it’s Saturday, day of rest in FX).  Now if we want to calculate the inverse price, for EUR/USD using Bank of America’s tool, we need to use the 1/x (reciprocal) function seen on most common calculators.  So if EUR/USD is 1.12 the inverse (reciprocal) is .89.  If we use the same ‘spread’ to convert 1 USD = x Euro then we subtract 1.1820 – 1.12 = .062 or 620 pips.  .062 doesn’t sound like much of a spread, but if you look in % terms it’s 5.54% of the price.  If we add the same amount of pips (or percent, however you calculate) to the other side of the spread, it would be 1.244 – for a total spread of 1240 pips.  Common spot trading spreads can run as high as 2 or 3 pips for the real shady FX brokers from Asia or aggressive IBs.  1240 pip spread is laughable.  Now of course these customers are PAYING in foreign currency not TRADING foreign currency it would be impossible to trade over 1240 pip spreads – but this is the reality for these poor retail victims.  1240 pips is substantial if you’re sending more than \$50 – so now let’s look at the shocking examples.  At these prices, if you sent 100,000 to Europe, that would be about \$5,540 in spread.  Where does this \$5k magically disappear to?  The markets?  No – it is booked as a profit on the bank’s balance sheet.  Recently we (Elite E Services, Inc.) sent a wire payment like this for \$5,000 and the banker had the audacity to say that if Bank A (not Bank of America, we won’t reveal the name) did the FX conversion we’d save \$10 on the wire payment fee!  We calculated that would have been \$350 in payment to Bank A to save \$10.

Now the critical thing for US readers to understand, this is a uniquely American practice which happens only inside the borders of USA.  If you are in virtually any other country, whether it be UK, New Zealand, Japan, Australia, Switzerland – you’re going to get rates on such transfers which are HIGH but probably something like 50 pips maybe 100 pips in extreme cases.  If you do transfers more than 100,000 that can go down to as low as 25 pips.  So how can the banks get away with it in USA?  They are simply taxing people’s stupidity, because there are alternatives.  Companies like Fortress Capital offer deliverable payment services by using payment processors like Commonwealth Foreign Exchange to get the same foreign rates and save customers up to 90% on transfers.  But they require an application and would not open an account for a single individual customer (it’s mostly for corporates who do regular transfers).  Then of course there’s Currencies Direct who has offices in USA, and a number of other companies.

But the fact is that the banks have people by the short and curlies, there are not really many or any choices when you need to do a single transfer – and banks are making a small fortune from this.  Could this be considered a Monopoly?  Anti-trust issues?

They settled huge claims and have since reduced the spread (whereas now it’s 5.5% it used to be 7% – 8% !!) and companies like American Express (AMEX) no longer charge a ‘foreign exchange fee’ – that’s right, on top of this horrendous spread many providers used to charge a 1% or 2% ‘fee’ on top of this!  Outrageous!

The sad thing is that most in the retail market, even small retail customers with little or no investment accounts understand stock trading.  Forex is not so complex as it is sometimes presented by the banks – I’m sure they do this intentionally, they aren’t stupid.. This profit center is good for them and costs them nothing, it’s a risk-less profit that no one can complain about because ‘hey, it’s Forex.’

This is not the ONLY way the big banks are banking off people’s FX stupidity, but it’s the most petty way, and the most widespread.  Millions and millions of dollars of such transactions take place on a daily basis and the banks are happy to keep things like this.

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Wtf is the point of putting up this extremely badly written, intelligence insulting, piece of advertorial drivel?

FX is run by motorcycle gangs...has been for years....at least that is the way they behave....

Back in 1998, I was able to book a hotel room in Berlin in DMarks using the Internet and my US credit card. The card did not rip me off for an FX 3% conversion and the rate of exchange was close to commercial rates. I was very satisfied with how the transaction went. It pays to shop around. I suspect that these days, far more foreign businesses take Visa or MasterCard and some US financial institutions now reimburse you for ATM charges, even foreign ones. Instead of buying your FX in the US, consider making an ATM withdrawal in the foreign country, especially if your ATM card does not charge fees and reimburses you for fees charged by other banks including foreign ones.

If you are booking a room in a foreign country on AirBnB, be aware that you will be charged an FX conversion fee (probably 3%) even if you want to book the room in the currency of the country you are visiting.

I don't understand non of this stuff.

I suspect that you are not planning a trip to a foreign country any time soon either.

Paypal beats them all, they convert foreign currencies at moon rates.

the writer understates the issue by a massive amount.

by far the largest volume of retail foreign exchange transactions are via hight street banks and cambios spread all over the world that exchange foreign travellers checks and foreign currency for domestic cash.

the cost of processing the foeign exchange is a lot higher for cash and travellers checks than it is for electronic processing of credit card payments but it still no more than it is for processing a check payment through the banking system - it is a few cents, not 10's or 100's of dollars that are being charged - that is why there are dozens of cambios in operation in every tourist capital worldwide.

the spreads are similar, so the author is spot on with the usurous practices of US banks in the US, but the global scale of this usury dwarfs the US only side of the issue.

around 50 times the people travel in the world ex-US than are retail payers or retail receivers of US dollars.

still, the point is well made, every tourist is charged vie their credit cards or directly for exchanging cash, something of the order of 6-10%

as such it dwarfs the LIBOR scandal and the US mortgage scandal since it has been operating for decades.

imagine of your bank only paid you 94 bucks when you cashed a check for a 100 bucks from your own bank - that would be a crime - not so fx.

the criminal activity in retail foreign exchange makes a mockery of the competence of every regulator in every country in the world - they are ignorant of the crimes being committed and probabl don't even blink an eye themselves when they are "mugged" with the same fees when they travel abroad and exchange foreign currency or pay by credit card.

don't get me started on central banks buying government and corporate debt at 3% or less when they turn a complete bllind eye to pay day loand companies and credit card comapnies charging between 15% for credit cards and 1,270% for pay day loans.

nice tip of the iceberg article though.

There are two types of exchange rates, one is the cash exchange rate for foreign notes and coins and the other the exchange rate in non-cash currency exchanges. The spreads on the former are traditionally up to 10 % to carry the cost and risk of handling an unhedged exposure to exchange rate swings by small banks and exchange houses.  Part of the official reasons given for the introduction of the Euro was to free banks from this cumbersome and not really profitable business messing about with all those different currencies at every little branch office.

The usurious spreads asked for converting non-cash currencies where partly justified by the loss making handling of foreign currencies and coins.

But none of this applies to big banks handling foreign currencies  (All one is left now to deal with is big banks ). They have zero or fully hedged risk valued at a few bps in the single digits on those transactions and as what you state as criminal behavior could be viewed as such by currently ripped off consumers and future regulators.

Yet , this is just part of the business model of banks and nothing illegal about it. You entrust them with your money and they try to steal as much of it as the law of the day allows.