If you've ever sent money internationally, you've encountered exchange rates. But what exactly are they, and why do they matter so much when sending money abroad? This guide breaks down everything you need to know about exchange rates in simple terms.
What Is an Exchange Rate?
An exchange rate is simply the price of one currency expressed in terms of another. For example, if the USD/NGN rate is 1,500, it means 1 US Dollar equals 1,500 Nigerian Naira.
Exchange rates tell you how much of one currency you'll get when you convert another. When you send $100 to Nigeria at a rate of 1,500, your recipient gets 150,000 Naira.
Why Do Exchange Rates Change?
Exchange rates fluctuate constantly based on several factors:
1. Supply and Demand Like any market, currencies are traded. When demand for a currency increases, its value rises. When demand decreases, its value falls.
2. Interest Rates Countries with higher interest rates tend to have stronger currencies because they attract foreign investment.
3. Inflation Countries with lower inflation rates generally see their currency appreciate over time compared to countries with higher inflation.
4. Economic Performance Strong economic growth, low unemployment, and political stability tend to strengthen a currency.
5. Government Intervention Central banks can influence exchange rates through monetary policy and direct intervention in currency markets.
Types of Exchange Rates
Mid-Market Rate Also called the "interbank rate" or "real" exchange rate, this is the rate banks use when trading currencies with each other. It's the most accurate representation of a currency's value—you can find it on Google or XE.com.
Provider Rate This is the rate money transfer services actually offer you. It's always less favorable than the mid-market rate because providers add a margin (also called "spread") to make money.
Cash Rate The rate you get when exchanging physical currency at airports, hotels, or exchange bureaus. This is typically the worst rate available.
The Hidden Cost: The Exchange Rate Margin
Here's something many people don't realize: even if a service advertises "zero fees," they might still be making money on the exchange rate.
- Mid-market rate: $1 = 1,580 NGN
- Provider's rate: $1 = 1,500 NGN
- Margin: 5%
- At mid-market rate: Your recipient would get 1,580,000 NGN
- At provider's rate: Your recipient gets 1,500,000 NGN
- Hidden cost: 80,000 NGN (about $50)
That's why it's crucial to compare the total amount your recipient will receive, not just the fees.
How to Get the Best Exchange Rate
1. Compare Total Received Amount Instead of comparing fees, compare how much your recipient will actually receive. This accounts for both fees and exchange rate margins.
2. Use Transparent Services Look for services like Stratum Remit that clearly show their exchange rate margin. We don't hide costs in the rate—you always see exactly what you're paying.
3. Avoid Banks and Airports Traditional banks and airport exchanges typically offer the worst rates. Modern remittance apps usually offer significantly better rates.
4. Set Rate Alerts Currency rates change daily. If you have flexibility on when to send, setting alerts can help you catch favorable rates. Stratum Remit's AI assistant Kora can automatically notify you when rates are good.
5. Consider Timing Rates can vary throughout the day and week. Major economic announcements can cause significant movements.
How Stratum Remit Handles Exchange Rates
At Stratum Remit, we believe in transparency. Here's how we handle exchange rates:
- Zero transfer fees: We never charge a separate fee to send money
- Clear rate display: We always show you the exact exchange rate
- Transparent margin: We make money on a small margin in the rate—and we tell you exactly what it is
- No surprises: The amount we show you is exactly what your recipient receives
- Ask "What's the rate to Nigeria today?" for instant rate checks
- Say "Alert me when the rate is good" to get notifications
- Ask "Is now a good time to send to India?" for smart recommendations
Common Exchange Rate Mistakes to Avoid
Mistake 1: Focusing Only on Fees A service with "zero fees" but a bad exchange rate can cost you more than one with a small fee but excellent rate.
Mistake 2: Waiting for the "Perfect" Rate Trying to time the market perfectly is nearly impossible. If the current rate is reasonable and you need to send money, don't wait indefinitely.
Mistake 3: Not Comparing Many people use the first service they find out of convenience. Spending 5 minutes comparing can save you significant money.
Mistake 4: Converting Cash at Airports Airport exchange rates are notoriously poor. Use apps to send money directly or withdraw from ATMs abroad instead.
Conclusion
Understanding exchange rates is essential for anyone sending money internationally. The key takeaways:
- Always compare the total amount your recipient will receive
- Be aware of hidden margins in exchange rates
- Use transparent services that show you exactly what you're paying
- Set alerts to catch favorable rates
- Don't wait forever—rates fluctuate, but sending sooner rather than later is usually fine
With Stratum Remit, you get transparency, great rates, and an AI assistant who can help you navigate exchange rates with just a conversation. Ready to try a smarter way to send money?