How Bank Foreign Exchange Works: Fees, Limits & Alternatives

The foreign exchange (FX) market is the world’s largest financial marketplace. Thousands of businesses, individuals, banks, companies, and traders take part in it, exchanging currencies and making international transactions.

Banks are the most common channel for handling foreign exchange. But their services are riddled with additional markups, fees, slow settlement times, and payment limits. If you’re regularly making cross-border payments, it can be helpful to understand how bank foreign exchange works, its fees, limitations, and what alternatives you can explore instead.

Let’s begin by breaking down how bank foreign exchange works in international trade.

Bank foreign exchange (FX) is the process of converting one currency into another through a bank. The foreign exchange market handles these currency conversions in international trade.

For all international financial activities, currencies have to be exchanged, which creates a demand for foreign exchange. Banks handle foreign exchange or “Forex” on a global scale. Many banks, companies, and traders participate in currency trading. These values fluctuate depending on supply and demand and economic conditions across the world.

When exchanging currency through a bank, you pay surcharges for the bank’s profit, service fees, transaction costs, and taxes. Banks and regulatory bodies also set limits on how much currency you can exchange on the foreign market. 

While banks remain the most popular foreign exchange medium, alternatives like money changers and online Forex platforms are also being used today.

Banks typically handle two broad categories of foreign exchange transactions: the spot and the forward contract. Swap and future transactions are also used, but in more specialized use cases.

Spot transactions

Spot transactions are made in the spot market. These transactions trade one currency for another on the current exchange rate, and tend to be finalized within a few business days. Because the spot rates are immediate, spot transactions are subject to fluctuations in currency values.

Forward contract transactions

Forward contract transactions, like spot transactions, trade one currency for another. The exchange rate is decided beforehand, and the trade is executed on a pre-decided date. Forward trades typically mature in less than a year.

Future transactions

Future Forex transactions, similar to forward contracts, execute the trade on a pre-decided date and agreed-upon price. These transactions occur on an established exchange and tend to be used by companies with a lot of international business.

Swap transactions

These transactions trade loans made in one currency, with their principal and interest payments, for loans made in another currency.

After setting up an account with a bank, businesses can request to make payments in a foreign currency. The bank sets an exchange rate at which the currency is converted. The bank adds markup and transaction fees on top and settles the transaction. The business is then informed and allowed to review its transaction history.

Bank foreign exchange (FX) typically involves the following steps:

1. A business opens an account with a bank that offers foreign currency exchange services.
2. The business provides transaction details to the bank, requesting to make a payment in a defined currency pair.
3. The bank offers an exchange rate for the currency conversion.
4. If the business agrees, the currency conversion is executed at the buy rate/sell rate.
5. The bank levies markup, transaction, and service fees on top of the exchange rate and settles the transaction.
6. The bank gives the business confirmation of the transaction.
7. The business can now go back and review the transaction details, its account balances, and financial reports.

Foreign exchange banks let both businesses and individuals enjoy some advantages, like trading currencies, making international transactions, hedging, and investing. Let’s look at the benefits for both types of Forex participants.

For businesses:

• Bank foreign exchange (FX) lets businesses trade currencies and make international transactions. In turn, these transactions support the growth of the business on a global scale.

• Foreign exchange markets can be used by businesses to protect themselves against currency fluctuations. They can use forward or future contracts to achieve this.

• Bank foreign exchange also invites investment from a broad, global audience, which can fuel business operations.

For individuals:

• With the doors to international transactions open, individuals can use bank foreign exchange for their educational, travel, and transactional needs.

• Individuals can use bank foreign exchange to make investments across global markets and diversify their portfolios.

Bank foreign exchange is useful in each industry that needs currency conversion. These typically include import-export, tourism, and remittances. Bank FX ensures that funds move seamlessly across borders, whether for goods, services, or personal transfers.

Import-export

Every transaction in international trade is subject to bank foreign exchange rates. Rapid currency fluctuations and changing regulations can affect import and export activities, impacting trade profitability. Traders need to be well-informed and stay up-to-date with the latest market trends to manage import-export transaction risks.

Travel

The tourism industry makes use of bank foreign exchange in many places – food, transport, hospitality, and more. Travelers can buy foreign currency from banks before their trips, and use cash or prepaid Forex cards for international payments. Another option is to use Dynamic Currency Conversion (DCC) when travelers need to make a payment in their domestic currency. However, this option comes with a stack of extra charges and fees.

Remittances

Remittances are exchanges of money in and out of domestic accounts, that is, both inward and outward. All international remittances need to factor in bank foreign exchange rates while complying with FEMA guidelines for currency exchange. As per the Liberalized Remittance Scheme (LRS), Indian residents can remit up to $250,000 per financial year.

These remittances allow fund transfer across countries, which can improve the economic health and trade relations of the domestic country.

When exchanging currencies through a bank, you’ll come across the retail exchange rate, which the bank uses for individual customers. Among themselves, banks use the interbank rate for currency trading. Here’s how the two differ:

Interbank rate/mid-market rates are not provided to the average customer. Different providers charge fees to make their own revenue and cover their expenses. Banks charge a spread and multiple additional fees. An alternative is to use online Forex providers, but these can also charge platform or convenience fees.

Let’s look at the key differences here:

Banks offer a range of features and components to provide foreign exchange services. These include market access, currency pairs, pricing, compliance, and customer service.

Market access

Bank foreign exchange services open up the global market to individuals and businesses. With FX markets, they can trade currencies, travel freely, expand business operations, and make diverse investments.

Currency pairs

Banks offer major and minor currency pairs (USD/INR, EUR/USD), which are the exchange rates between two currencies. Currency pairs are the foundation of foreign exchange markets.

Pricing mechanisms

Banks use bid-ask spreads and markups to determine the retail exchange rate. Other than this markup, banks offer spot rate & forward rate for different types of currency exchanges.

Compliance

Banks have to stay in compliance with global and domestic Forex market regulations. KYC/AML guidelines, sanction rules, and domestic RBI rules need to be followed for safe and secure exchange transactions.

Customer service

Banks provide customer service and support to their customers. Different banks can offer different tools, like Forex cards, online banking platforms, and advisory services to help both businesses and individuals navigate the Forex market.

Indian businesses that work with banks for their foreign exchange requirements tend to run into a few roadblocks. Banks charge high markup and transaction fees. Plus, the exchange process can be lengthy and riddled with paperwork, making business operations inefficient.

High transaction costs

Foreign exchange banks charge a high bid-ask spread over the interbank rate/mid-market rate. Businesses can also run into transaction fees and service charges, which cut into their profit margins.

Lengthy processes

Even after paying the high transaction costs, the exchange process can be slow and lengthy. Managing relevant documentation while staying compliant with FEMA and RBI guidelines can delay transactions. Payments take a while to settle, and banks don’t always send confirmations immediately.

Operational inefficiencies

Slow settlement cycles, manual paperwork, and keeping track of all the moving parts can drag down business operations. Without an efficient payment provider, businesses can experience a lot of friction in their operational efficiency.

To get around these challenges of dealing with bank foreign exchange, businesses and individuals should keep a closer eye on exchange rates and market trends, use tools like forward contracts and invest in multiple currencies, and consider seeking advice from Forex management experts.

Monitor trends

The most important step is to stay informed. Staying updated about the forex market, currency trends, and global economic changes can provide a clearer understanding of foreign exchange.

Use exchange rate tools and strategies

There are many tools and strategies at your disposal for dealing with foreign exchange. Currency alerts can inform you about major changes in the Forex market, and using forward contracts can give you more certainty about future foreign exchange transactions. Additionally, implementing a Forex policy can streamline how you generally deal with Forex risk.

Diversify

Diversify your business operations and individual portfolio by investing in multiple currencies. This helps you spread out some risk, without over-relying on a single currency.

Consult professionals

Forex experts and management services can provide personalized advice on managing foreign exchange, helping you achieve your business objectives.

It can often be challenging to manage foreign exchange transactions in India and beyond. Businesses that operate across borders need to tackle fluctuating currency valuations and pick the right strategy to even turn a profit. In such a volatile scenario, having a reliable payment partner can help.

Xflow is a digital payment solution designed to simplify your international payments. Here are its key offerings:

• Transparent pricing and low FX rates with no hidden or marked-up charges.
• Fast settlements within 1-2 days, set up with in-built invoice generation.
• No transaction limits.
• One-click eFIRA, with ISO 27001 and SOC 2-backed transactions for complete compliance and security.

Foreign exchange markets are regulated very tightly. Central banks and regulatory authorities have frameworks and guidelines in place to make the exchange process more secure. Banks need to conduct KYC/AML checks, consider international restrictions, protect customer data, and report transparently.

KYC/AML

To meet Know Your Customer (KYC) requirements, all customers and businesses need to be screened for identity verification, which includes checking IDs and financial records. After verification, banks monitor their transactions closely, checking for suspicious activity, as per Anti-Money Laundering (AML) guidelines.

International sanctions

Banks need to keep a check on international sanction lists, making sure that they don’t process foreign exchange payments to restricted businesses or individuals.

Data protection

Banks need to take multiple steps to ensure the security of their customer data. For example, compliance with the GDPR for data protection is a must-have.

Reporting

Banks must keep clear and accurate records of FX transactions, especially large ones, to meet regulatory requirements and pass audits.

In 2025, the global economy is fluctuating, and financial operations are increasingly being digitized. In this landscape, bank foreign exchange services are relying on digital currency integrations and artificial intelligence, and are experiencing newer regulatory pressures.

Digital currency

Digital currencies – including regulated cryptocurrencies and Central Bank Digital Currencies (CBDCs) – have become part of foreign exchange (FX) markets. Shifting from traditional bank foreign exchange to these digital tools can lead to faster settlement times and lower transaction costs. Whether this technology holds up at scale is yet to be seen.

Artificial intelligence

Artificial intelligence and machine learning-based tools are automating a lot of the manual processes in Forex. AI analytics and predictive algorithms are being used to forecast currency movements. Both individuals and businesses could use these tools in the future to time their currency exchange better.

Regulatory shifts

With these technological trends in the Forex market, governments and regulatory bodies are developing new rules and regulations. Compliance with these regulations will soon make the FX market more transparent, secure, and accountable.

Traditional bank foreign exchange can be slow and expensive. If you’re looking for alternatives, consider using Xflow. It combines fast settlement times with transparent pricing structures, ensuring data security and simplifying regulatory compliance. You can check out our currency converter to compare the bank forex rate with Xflow's rate and see the difference in savings for yourself.

Thousands of customers around the world rely on Xflow for their cross-border payment needs. Make the switch to Xflow today. Sign up now!