Understanding the basics of foreign exchange rate

If you receive international payments, you might be aware of the foreign exchange rate. However, what you may find surprising is that the exchange rate you see online is not the one being applied when you receive international payments. The reason behind this lies in hidden charges your bank or payment processor may be adding in the form of forex markup fees.

Forex markup fee is the additional charge levied by banks and payment platforms. For example, if the exchange rate online for 1 USD is 85, a 2% forex markup fee reduces it to 83.3, effectively lowering the final amount you receive in INR.

Indian overseas spending reached an all-time high of $31.7 billion in the financial year 2024. The implication of this is that more Indians than ever before are earning in foreign currencies via salaries or export payments. Hence, understanding hidden charges that can affect your international payment and taking steps to minimize them is of paramount significance. These seemingly low forex markup fees (1% to 3.5%) can significantly reduce your international earnings over time. Are you ready to take that risk?

In this article, we break down forex markup fee, understand how it works, why it is charged and what steps you can take to minimize it.

The foreign exchange markup fee (also known as a foreign transaction fee or foreign currency markup fee) is an additional charge levied by banks, credit card service providers, and payment processors on the exchange rate when dealing with foreign currency transactions.

The first thing that comes to your mind when you hear the word international transactions is the exchange rate. You can check this exchange rate on Google or various financial news websites. It represents the actual exchange value between two currencies. However, when you receive an international payment via a bank, an extra fee in the range of 1% to 3.5% is levied over and above the exchange rate. This is the forex markup fee.

This small fee can have a significant impact on your earnings. Let's understand this via an example:

Let's assume you are an exporter who receives $10,000 from a US client. You check the exchange rate on Google on that day, which turns out to be 85, i.e., $1= Rs. 85. However, when your bank applies a 3% forex markup fee, here's what happens:

• The bank adjusts the mid-market exchange rate you see on Google by 3%
• The new exchange rate is now 1$= Rs. 82.45
• At this reduced rate, $10,000 converts to approximately Rs
• 824,500. Without this fee, the total amount would have been Rs. 850,000
• This means you lose Rs. 25,500 on this transaction due to the forex markup fee

Suppose the same exchange rate exists for a year, and the bank levies a 3% forex markup fee consistently. Over the course of a year, you lose Rs. 306,000. It doesn't seem insignificant now, does it? 

The amount of money lost per transaction increases with the transaction amount. For example, a business receiving $100,000 loses Rs. 255,000 per transaction to this hidden fee.

So why exactly do banks charge this hidden fee on international transactions, you might wonder? Here are the key reasons why:

1. Cover Risks: Banks often incur losses on these transactions due to various reasons, including fluctuating exchange rates and other related risks. The foreign currency markup fee is an outlet for banks to cover these costs and also generate a profit. 

2. Provide Currency Conversion Service: Another reason banks charge forex markup fees is as compensation for providing currency conversion services to their customers. 

3. Cover Operational and Infrastructure Costs: Foreign currency conversion requires a dedicated staff and associated infrastructure. Hence, banks charge a forex markup to cover the operational and infrastructure costs related to foreign currency conversion. 

4. Generate Revenue: International transactions are a huge source of revenue for banks, financial institutions, or payment service providers. Hence, the forex markup fee on international transactions also serves a profit-generating motive. 

One important point to note is that the forex markup fee is not universal and varies among different banks. Hence, it is essential to be aware of the various fees levied by your bank or financial institution before engaging in international transactions to avoid being caught unawares when you receive the final amount.

If you're a new business owner, what particularly irks you is not the fact that there is a forex markup fee but rather how traditional banks and financial institutions embed it secretly into the exchange rate instead of explicitly mentioning it. Due to this lack of transparency, you might assume that the amount that you are receiving is correct without realizing that a significant portion has been taken out in the form of a hidden fee.

To determine the forex markup fee levied by your bank, you can follow these steps:

• Check the Foreign Inward Remittance Advice (FIRA) document provided by your bank for international transactions. 
• Note down the exchange rate mentioned in FIRA for the currency of the country from which you are receiving the money.
• Check the mid-market exchange value for that currency online.
• The difference in the exchange rate gives you the forex markup fee levied by your bank without explicit mention anywhere.

Since the forex markup fee is not explicitly mentioned, many business owners and exporters only find out about this fee after they've lost a significant chunk of money. Since the fees range from 1.5% to 3%, your international earnings can be significantly reduced.

The next step is to understand where the forex markup fee is actually levied.

Banks levy the forex markup fee in various financial transactions involving foreign currencies. If you receive payments from abroad, you must understand where the foreign currency markup fee is hidden. Here are some common international financial transactions that involve forex markup fees:

1. Credit Card Transactions

Forex markup fees appear in two types of credit card transactions: 

• Purchasing Items in Foreign Currency: When you buy items in a foreign currency, whether abroad or online, using your credit card, your bank levies a foreign exchange (forex) markup fee. This leads to the item or service you are paying for becoming more expensive than the mentioned rate. 
• Receiving Credit Card Payments in Home Country: The above principle applies in reverse here. When your client abroad pays you via their credit card for services billed in rupees, the credit card provider levies the forex markup fees, reducing the amount of money you receive. 

2. Currency Conversion by Banks

Whenever banks convert currency, they apply forex markup fees. This happens while:

• Receiving wire transfers from abroad.
• Depositing foreign checks.
• Receiving money from clients to your Indian account from their foreign account.

For example, suppose your German exporting client deposits 5000 Euros via bank transfer with a mid-market Euro rate of Rs. 92. The bank applies a 2% forex markup fee, reducing the exchange rate to Rs. 90.16. The final amount you receive becomes Rs. 45,080 instead of Rs. 46,000.

3. Online Payment Platforms

Popular online payment platforms, such as Stripe or PayPal, provide convenience for cross-border money transfers, but at steep markup fees that are usually higher than those of traditional banks. 

For example, an e-commerce seller receiving international payments via these online payment platforms faces two separate fees:

• Transaction fee (1-3% of the total transaction amount)
• Forex markup fee (2-3.5% typically built into the exchange rate offered)

Hence, with these payment service providers, the final amount you receive is reduced further compared with traditional banks.

Some platforms are more transparent about the different fees, clearly breaking down their conversions and markups, while others bundle them all into a single "international transaction fee." The lack of transparency makes it difficult for you to understand the actual cost of currency conversion. 

Knowing where the forex markup fee is deducted helps you decide which payment methods you can accept and which financial services to utilize when receiving international payments.

When receiving international payments, you can minimize or sometimes completely avoid the forex markup fees by following the strategies given here:

1. Compare Markup Rate Before Choosing a Payment Platform

Before choosing a payment platform for receiving money from abroad, compare the foreign exchange (Forex) markup and other fees charged by different platforms. You can achieve this by following the steps below:

• Ask the bank or payment provider specifically about the exchange rate applied to your international transactions.
• Request for written confirmation of their markup percentage over the mid-market exchange rate.
• Compare their quoted rate with the actual mid-market rate you can obtain online. 

Making this simple inquiry before choosing a payment provider can potentially save you thousands of rupees per transaction.

2. Check FIRA to Determine the Forex Markup Fees Offered

FIRA is a document issued by banks or payment providers as proof of receipt of an international payment. It includes:

• Original amount sent
• Exchange rate applied
• Fees deducted
• Final amount credited

For every international transaction, review the FIRA document carefully and compare the exchange rate applied with the mid-market exchange rates to determine how much money is being lost to forex markup over time and whether you need to challenge the current forex rate or change payment providers.

3. Choose a Platform with Live Forex Rates

Some payment providers like Xflow offer currency conversion at live exchange rates with a very small transaction fee. This provides complete visibility into the charges and the final receivable amount. Furthermore, without a markup fee, you incur less financial loss over time. 

4. Consolidate Payment Frequency

If you're not using payment providers like Xflow that don't charge markup over the FX rate, consolidating your payments into a single, larger payment can help you avoid the foreign currency markup fee for every transaction. 

By following these strategies and being proactive about the exchange rates provided to you (and not just accepting the rate quoted by the payment provider or bank), you can save hundreds of thousands to lakhs of rupees over time.

Before choosing a payment platform for your international payments, you must look for any hidden forex markup fee. Here’s how Xflow compares to other payment platforms when it comes to forex markup:

Do you want to save up to 50% of Forex costs? Are you wondering if there's a payment platform that doesn't charge forex markup and lets you keep your hard-earned money? Consider Xflow.

Xflow is a leading cross-border payments platform offering fast, reliable, and digital-first cross-border settlements. Xflow, designed for the modern business environment, helps businesses navigate the vagaries of global payments by combining cutting-edge technology with a customer-centric experience.

Xflow provides live exchange rates with zero markup and no hidden fees, saving users up to 50% on FX costs compared to banks and payment platforms, which often add a 3-4% markup. Moreover, with Xflow, there is no transaction limit per invoice. You can also settle your funds into your INR accounts within just one business day. 

So, what are you waiting for? Sign up now and see how Xflow can transform your international money transfers, making them faster, smarter, and more transparent.