What is "Spread" on Corporate Foreign Exchange (FX) Transactions?

"Spread" is a fancy word for marking up the rate of exchange on a currency transaction. It's the market (or spot) rate plus the extra mark up or margin added onto the transaction. The higher the spread the more REVENUE for the bank, but the more COST for the corporate client.

Factors influencing spread include (but are not limited to) who the client is, what the size of the transaction is, the time of the transaction, banks FX pricing strategy, and what is happening more broadly in the markets at the time of the transaction.

KEY POINT: Spread is highly variable and opaque by design.  

A simple example illustrates the high costs that spread represents to corporate clients who require FX for their international business:

A corporate client buys $100,000 of EURO. The bank's spread is 2.0% so the client absorbs $2,000 of spread or mark up on the transaction. I.e. $100,000 x 2.0% = $2,000.

A second corporate client, buying the same $100,000, might have a spread applied of 1.0% so in that case the spread costs the client $1,000. I.e. $100,000 x 1.0% = $1,000.

A savvier client might have a lower spread of only 0.5% so their cost is just $500. I.e. $100,000 x 0.5% = $500.

The BANK sets the spread, not the client. There are three points to keep in mind:

1. Spread is variable - so two clients buying the same amount of EURO may easily have a different cost.

   
   

2. Spread is a COST to the corporate client. The higher the spread, the higher the cost.

   
   

3. Banks do NOT disclose their spread - they just quote an exchange rate which has the spread (or cost) baked into the all-in price. It's the corporate client's problem to figure out the spread. As the saying goes "Caveat Emptor" (Buyer Beware)

   
   

Banks take advantage of the opaque nature of spread to increase revenue. Additionally, banks know that many small to mid-sized corporate clients are not overly savvy when it comes to FX and exchange rates. Spread as high as 3% or 4% is possible and even standard for some banks.

KEY POINT: Knowing what spread is applied to your FX transactions is the first step to understanding the cost structure and making sure you get a fair price when buying or selling FX.

DM me if you'd like help understanding what spread is applied on your FX transactions.