The Importance of Mid-Market Rates in international business

Written by
Zachary Pestana
Last Modified on
December 19, 2023

Mid-Market Exchange Rates can sometimes feel overwhelming for business owners. With so much on your plate already, focusing on your industry and making things happen, we understand the need to simplify things. That's why we're here to break it down in simple terms and show you how fluctuations in mid-market rates can impact your international business.

In the article "Decoding Mid-Market Rates in Foreign Currency Exchange," we discussed what mid-market rates are & how they are calculated. 

Now, let's dive deeper into the benefits of mid-market rates for your business.

What Is the Importance of Mid-Market Rates in Conducting International Business and Cross-Border Transactions?

Whether you have a globally-distributed workforce, a global supply chain, or need to send or receive funds to/from foreign partners or investors, navigating international transactions requires careful consideration. 

Mid-market, here, is like a skilled referee officiating a fair game in the global currency arena. Just as a referee ensures fair play and enforces the rules in a sports match, the mid-market rate aims to provide fairness and transparency in currency conversions and facilitate global commerce.

Here’s how:

  1. Fairness and Transparency: Mid-market rates represent the midpoint between buy and sell prices, providing a fair and transparent exchange rate for currencies. They are free from markups, commissions, or hidden fees commonly imposed by financial institutions. This fairness ensures that businesses get the most accurate value for their transactions.
  2. Facilitating Global Commerce: Mid-market rates facilitate smooth cross-border transactions. By providing a standardised reference point, businesses can conduct transactions with partners and customers in different countries, reducing complexities and uncertainties associated with currency conversions.

How Do Mid-Market Rates Ensure Fairness and Transparency?

Mid-market rates provide fairness and transparency in several ways:

Publicly Available

Mid-market rates are readily available to you through various financial platforms, websites, and currency converters. This accessibility empowers you to verify and compare rates offered by different providers, ensuring transparency in the currency exchange process and giving you the freedom to make informed choices.

Transparent and Free from Hidden Fees

Mid-market rates are free from markups, commissions, or hidden fees imposed by financial institutions. This transparency ensures that the conversion process is fair and eliminates any surprises. 

Up-to-Date Information

Mid-market rates are updated in real-time, reflecting the dynamic nature of the global currency market. This ensures access to the most current and accurate rates, promoting fairness and accuracy in currency conversions. You can rely on real-time updates to prevent outdated rates from causing discrepancies.

Impartial and Unbiased

Mid-market rates are not influenced by any specific financial institution or entity. They are derived from the collective activity of the global currency market, providing a neutral and unbiased view of the exchange rates. This impartiality ensures fairness in your currency conversions, eliminating biases or unfair advantages associated with rates provided by specific institutions.

What Is the Role of Mid-Market Rates in International Businesses?

Imagine you own a small export business called SG Traders in Singapore. Your business frequently receives payments from international clients in various currencies, and you need to convert those funds into Singapore dollars (SGD) to operate locally. You want to understand how mid-market rates can help you avoid unnecessary fees and save on currency conversions.

Here's the scenario:

You want to pay your client in the United Kingdom for an order worth 1,000 SGD. You need to convert this amount into British Pound. To determine the cost in GBP, you need to consider the exchange rate.

You find that the mid-market rate for SGD to GBP is 1 SGD = 0.584 GBP. If you calculate the conversion based on the mid-market rate, you'll find that it converts to 1000 SGD x £0.584 =£584.

However, when you go to your bank to convert the funds, they provide an exchange rate of 1 SGD = £0.59, indicating that the bank is profiting £0.006 for each pound you convert. 

Now, let's examine the actual exchange in detail.

1000 SGD x £0.59 = £590.

The difference between the mid-market rate and what the bank charges in this example is £6.

So, here, the bank is imposing a fee of approximately 10 SGD on you.

By understanding the mid-market rate and the bank's offered rate, you can see that the bank is making a good margin on the conversion. This margin represents additional fees that are not transparent to the customer, leading to unexpected costs.

To prevent incurring unnecessary fees and save on currency conversions, you can explore alternatives like online currency exchange platforms or fintech companies like Aspire. These alternatives often provide more competitive rates and charge lower fees.

By being aware of mid-market rates and comparing them to those offered by financial institutions, businesses like SG Traders can make informed decisions and choose the most cost-effective options for currency conversions, thus maximising their profits and avoiding unexpected fees.

Implementing this process can bring numerous benefits to businesses.

How can businesses can utilise the knowledge of the mid-market rates

Transparent Rate Comparison

Knowing the mid-market rate empowers you to compare exchange rates offered by different providers. This way, you can assess whether the rates offered by banks or currency service providers are fair and competitive, ensuring you get the best deal.

Cost Saving in Currency Conversions

Utilising the mid-market rate prevents unnecessary fees or markups. It represents currencies' actual value without additional charges, helping you save money on international transactions and optimise your financial resources.

Enhanced Budgeting and Planning

Accurate knowledge of the mid-market rate enables you to estimate the costs involved in cross-border payments and manage currency exchange risks, ensuring your financial planning is on track. You can also assess the impact of currency fluctuations on your profitability, evaluate the feasibility of international expansion, and devise effective strategies to manage currency risks, enabling you to make sound financial choices for the success of your business.

Negotiating Advantage

Armed with the knowledge of the mid-market rate, you have the upper hand in negotiations. You can use the mid-market rate as a benchmark to negotiate better rates with banks or currency service providers, ensuring you receive competitive exchange rates for your international transactions.

So, by considering the various advantages of using mid-market rates, it becomes evident that businesses can reap several additional benefits.

But what if you're not familiar with how mid-market rates work? How does that affect your business?

The Costs and Consequences of Inaccurate Exchange Rates for Businesses

Inaccurate or unfavourable exchange rates can have various potential consequences and costs for businesses. These include-

Financial Loss

Inaccurate or unfavourable exchange rates can lead to financial losses. When the rate used for currency conversion is higher or lower than the actual mid-market rate, you end up paying more for converted currency or receiving less value than expected. These losses can accumulate over time, impacting your overall financial health.

Additional Hidden Fees and Markups

Some currency exchange providers may offer seemingly competitive rates but hide additional fees or markups. These extra costs can significantly affect the total transaction value, leading to unexpected expenses and reducing profitability.

Unreliable Financial Decisions

Without access to accurate rates, making informed decisions or assessing the actual value of your transactions becomes challenging. This lack of transparency increases the risk of unforeseen costs and can lead to disputes or disagreements.

Profit Erosion

Unfavorable exchange rates can directly impact your profitability, especially if your business involves international trade or cross-border transactions. Higher costs for acquiring foreign currency or receiving less value in the local currency can erode profit margins and hinder your competitiveness.

Reputational Damage

When businesses are unaware of mid-market rates, they may end up charging their customers unfair exchange rates or imposing excessive fees for currency conversions. This can lead to customer dissatisfaction and a perception that the business is taking advantage of its customers. Additionally, in today's interconnected world, customers have access to information and can easily compare rates and fees across different providers. If a business offers unfavourable rates compared to competitors or the prevailing mid-market rates, it can damage the business's reputation and erode trust among customers.

To reduce the risks and costs involved, it's essential for you as a business owner to take specific steps. First, choose reliable currency exchange providers known for their good reputation. Next, ensure that the fees charged are clear and transparent so that you know exactly what you're paying for. Stay informed about accurate mid-market rates by keeping up with reliable sources. Lastly, consider using services that offer fair and competitive rates for your currency conversions. 

Get the mid-market rate advantage with Aspire

At Aspire, we have introduced a solution designed to help businesses save money on global transfers and vendor payments. You can effortlessly make global payments and international transfers at incredibly low fees, providing a cost advantage up to three times lesser than traditional banks with Aspire. We prioritise transparency and affordability, offering clear and competitive fees for converting and making payments in over 30+ currencies. 

You can expand your business horizons by leveraging the power of multi-currency accounts. Seamlessly receive, hold, and send money in different currencies, all integrated with your existing workflows. This allows you to unlock new markets and easily manage international transactions.

Empower your team by issuing unlimited corporate cards, providing one for each member. With these cards, you can ensure your team spends responsibly while maintaining control. Set spend limits and merchant locks on the corporate cards, allowing you to monitor and manage expenses effectively.

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About the author
Zachary Pestana
is a seasoned writer in market trends and business thought leadership. With a writing history at Incorp Global, MOQdigital, and AIESEC Australia, Zachary leverages his broad range of experiences to stimulate industry conversations and engage audiences.
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