Do I understand currency exchange rates and bank buy/sell rates?

Question

Preface: I've just run into a bit of an issue with a bank, regarding an international money transfer that I made from the UK (with Lloyds TSB) to Australia (St. George).

The transfer was sent on the 18th May 2012 and was returned to my account (as apparently the account I sent it to is closed - even though it isn't) on the 28th May 2012. However, the amount returned is far less than the amount sent, and from what I understand, the bank (Lloyds TSB) has bought back the AUD for a rate far below market value.

--

My understanding:

I chose to send money out in AUD to ensure the correct amount was sent, so my 317.90 GBP was converted to 500 AUD and transferred (this pre-transfer exchange I was told was to guarantee that I would only pay 317.90 GBP for 500 AUD rather than sending a fixed sum in GBP to be exchanged when it was received in Australia).

The XE.com historical mid-market rate for the 18th May 2012 for buying AUD with GBP is 1.608. On the receipt from Lloyds TSB, they've marked they're buying at 1.5728, a small 11 AUD difference for the total sum sent, which I'm fine with.

However, the sum received when the money was sent back is only 276.58 GBP which is a vast difference from the 317.90 GBP I transferred. I was told by Lloyds TSB that St. Georges wouldn't levy any charges, as they would be paid a separate "agent's fee".

With that in mind, it seems like they've bought back the 500 AUD being returned at a rate far below market value - the XE.com mid-market rate for the 28th May 2012 is 1.592, BUT 500 AUD to 276.58 GBP is a rate of 1.809.

--

Question: Is my understanding of currency exchange rates correct, in that there is what's considered a "market rate" and when buying currency from your local bank or bureau de change they buy/sell at a rate slightly below/above market value so as to make money on the margin?

--

Also, can anyone tell me if this is the norm for banks to make such a large margin on converting an international currency back into a local one?

Any help would be greatly appreciated :)!!

Answer 1

Your bank Lloyds sent the Australian bank $500 AUD, having converted $317.90 GBP at a rate of 1.5728 AUD per GBP which was slightly less than the published rate which normally applies to transfers measured in hundred thousands if not millions of pounds. Using the published rate amounts to an unstated fee of 11 AUD which you are not complaining about. You also paid a fee to Lloyds of 20 GBP which you disclosed after I had posted this answer.

The Australian bank refused to accept the payment because the account to which the money had to be deposited was closed. Perhaps, instead of just sending back $500 AUD, it converted the amount to GBP (less its fee of what I suspect is $60 AUD) and sent it back. Notice that the bank rate of 1.592 AUD per GBP says that 276.58 GBP is what you get from a tad over $440 AUD, and so perhaps St George's charged you a $60 AUD fee for the conversion while converting the rest ($440 AUD) to GBP. Or maybe Lloyds got $500 AUD from St Georges and charged you a $60 AUD fee for converting it to GBP. Regardless of who did the conversion, it is also possible that the rate you got (not quite as good as the published rate) corresponds to $450 AUD converting to 276.58 GBP and a $50 AUD fee for the conversion.

You said

I was told by Lloyds TSB that St. Georges wouldn't levy any charges, as they would be paid a separate "agent's fee".

This might have been told to you as "St. Georges will not be levying any charges if you send $500 AUD for deposit to the account in Australia and your payee will get exactly $500 AUD if you pay us 317.90 GBP plus 20 GBP as our conversion fee today. If you want to send GBP instead, we cannot tell you how much to send because St. George's will levy a charge for conversion to AUD, and the conversion will be at the rate then prevailing. So your payee may receive more or less than $500 AUD." Perhaps, wanting to send exactly $500 AUD, you chose to pay Lloyds TSB and send AUD. But, since the account was closed, the money came back, and so you ended up paying yet another conversion fee. The questions are, who charged the second fee? As Muro said in a comment, it should be listed somewhere on the itemized statement. and is it a reasonable charge? I think $50 or $60 AUD is excessive but, then, I am not a bank, and maybe that is what their standard (minimum) charge is. As I said in my comment, the charge is usually a percentage of the amount transferred subject to a minimum levy that the bank sets.

Answer 2

In international transfers there are quite a few charges that come into picture.
1. Your Bank's charges, you mentioned its GBP 20.
2. The Fx conversion margin. So your GBP 317.90 became 500 AUD
3. The Charges of St. George's. Normally it is recovered from Beneficiary. Typically it would show up as 2 entries, one credit for AUD 500 and second a debit. Typically in the range of AUD 10 to 25.

However incaes of return, St George will deduct 2 charges from AUD 500;
- The Original Charges for transfer that it would have recovered from Beneficiary. - Additional Return charges, again in the range of AUD 10 to 20.

Thus the amount they would have sent back to your Bank would be less than AUD 500.
Your Bank would have converted and possibly again charged you a return fee.

Since these are cross border payments there is no regulation and Bank are free to charge as they please and at time do charge excess.

What you can do is disptue with the Bank on the points that;
- The Beneficiary account was not closed, and its a deficiency of service.
- Request for an itemized statement as to what was the amount returned by St George.