The role of mid-market rates in international business payments: Importance and its impact

As an Indian exporter, you’d have paid a foreign exchange rate to receive money from your global customer to INR. While paying for FX conversion may seem like a normal setup when receiving international payments, multiple nuances often add to the cost.

In this article, we'll cover the mid-market rate and its impact and benefits on your business.

Understanding the mid-market rate can help Indian businesses involved in cross-border trade minimize unnecessary costs and optimize foreign transactions.

The mid-market rate (MRR) is the midpoint between the buying (bid) and selling (ask) prices of two currencies in the global foreign exchange market. It represents the true, unaltered value of a currency, determined by real-time supply and demand in the forex market. This is the currency's actual value, free from hidden fees, profit margins, or adjustments.

For exporters, the MRR serves as a benchmark to assess the fairness of exchange rates offered by providers. Businesses can identify unnecessary markups or hidden fees by comparing the offered rate to the mid-market rate to make strategic international financial decisions.

While both relate to the value of currency pairs, they serve different purposes:

• Interbank rate: This is the exchange rate at which banks trade currencies with one another, usually in bulk or high-volume transactions. These rates are typically not available to the general public and come without any added markups. In fact, the rates that banks quote to consumers or businesses are typically based on this rate along with a markup or fee. The interbank rate is largely impacted by liquidity and short-term demand for currencies. The rate is also influenced by central bank policies and large-scale economic shifts.

• Mid-market rate (MMR): While the interbank rate is exclusive to financial institutions, the mid-market rate is a benchmark that serves as the public reference for currency exchange for individuals and businesses. It is essentially the market value and is influenced by the supply and demand of currencies in the global financial markets. Basically, the mid-market rate often fluctuates based on the market conditions.

In essence, the mid-market rate is a publicly available benchmark, while the interbank rate is a more specific rate used for wholesale currency transactions between financial institutions.

The calculation of the mid-market rate is straightforward. It is the average of the bid and ask prices for a particular currency pair:

Mid-market rate = (Bid price + Ask price) / 2

For example, let’s say an Indian business is looking to collect export payments in USD and covert into INR. In this case, the bid price is INR 84.20 for USD 1, and the ask price is INR 84.40, the mid-market rate would be:

Mid-market rate = (84.20 + 84.40) / 2 = 84.30 INR/USD

If the exporter in India is receiving USD 10,000 USD from an international customer, the INR equivalent at the mid-market rate of 84.30 INR/USD would be:

Amount in INR = 10,000 USD * 84.30 INR/USD = 843,000 INR

Note: However, businesses should note that the final amount received can differ due to additional fees or charges levied by the bank or payment service provider.

Major currency exchanges like the New York Stock Exchange (NYSE), London Stock Exchange (LSE), and NASDAQ shape global financial markets by facilitating massive transactions. While these exchanges indirectly influence currency trading through liquidity and transparency, the primary currency exchange activity occurs in the decentralized foreign exchange (forex) market.

Operating 24/7, the forex market connects central banks, multinational corporations, and large financial institutions trading enormous volumes of currency.

For instance, the London forex session, which overlaps with Asian and North American hours, accounts for a significant share of global trading. During this session, a business in India might convert Indian Rupees (INR) to US Dollars (USD) to import goods from the US. The high liquidity during this period tightens bid-ask spreads, and the average of these rates determines the mid-market rate.

The forex market's continuous operation ensures that the mid-market rate remains highly dynamic, reflecting real-time supply-demand shifts, geopolitical events, and economic data releases.

Several factors influence the mid-market rate, some of the main ones include:

• Supply and demand of the currencies: The value of a currency depends on how much it is being bought or sold. When demand for a currency rises, its value increases, leading to a higher mid-market rate. While higher demand raises the value, excess supply can lower the mid-market rate.

• Economic indicators: Strong economic performance, such as rising GDP or low inflation, often boosts demand for a country's currency, increasing its value.

• Market sentiment: The overall trading sentiment, or the collective mood of market participants, can heavily influence currency values. Positive sentiment, driven by confidence in a currency or economy, can lead to increased demand and a stronger currency. On the flip side, negative sentiment and fear of uncertainty often lead to currency depreciation.

• Geopolitical events: Elections, trade agreements, and political instability can cause significant fluctuations in currency value, influencing the mid-market rate.

• Favorable trade scenarios: Amicable and friendly agreements between countries can enhance economic integration, boosting trade and investment, which increases demand for the currency and raises its value. On the other hand, trade conflicts or uncertainties can harm a currency, as they discourage foreign investment and disrupt the flow of capital.

For Indian businesses servicing global customers, the mid-market rate helps determine the actual value of international payments. By tracking the mid-market rate or working with platforms like Xflow that offer MMR, exporters can:

• Maximize conversion value: Exporters can be sure that they’re getting a fair exchange rate. A better rate translates to more INR for each unit of foreign currency.

• Improve cash flow management: Since exchange rates can fluctuate, being in the know of the mid-market rate helps exporters plan more accurately, ensuring they receive the best possible value for their foreign currency transactions. For instance, Xflow offers a guaranteed live FX rate linked to MMR that’s held for a three-hour window, allowing exporters to withdraw with complete transparency.

• Reduce currency conversion costs: Many traditional banks and money transfer services add a markup to the exchange rate for gains. By using the mid-market rate as a reference point, businesses can identify whether these fees are reasonable or excessive. The mid-market rate offers a transparent, unaltered value of a currency pair. It provides clear insight into the actual value of their currency exchanges, minimizing the risk of overpaying. Leveraging mid-market rates, especially with currency exchange services that offer low or no markup, can significantly reduce the hidden costs in international payments.

• Improve profit margins: With access to mid-market rates, businesses can maximize their profit margins by ensuring they are receiving the best possible exchange rate.

• Increase financial predictability: The mid-market rate helps businesses reduce the uncertainty associated with fluctuating exchange rates. By tracking real-time data and forecasting future trends, companies can time their transactions to capitalize on favorable rate movements, reducing the risk of financial losses.

Adopting mid-market rates provides a competitive advantage that can help your international business thrive. From smarter financial planning to minimizing hidden costs, it can help your business thrive. 

Start comparing rates: Monitoring economic indicators, and using strategic tools to ensure you're making the most of every currency exchange. Use reliable tools, insights and rate alerts to stay updated on rates and make informed decisions. Platforms like XE, OANDA, and Bloomberg provide real-time, accurate mid-market rates, allowing you to track the best exchange rates across multiple providers.

Time the transactions: Exchange rates fluctuate throughout the day due to factors like economic data releases or geopolitical events. Currency values fluctuate throughout the day. Businesses can time their transactions to secure more favorable rates by monitoring real-time mid-market rates and anticipating market movements.

Choose providers that offer zero markup and transparent rates: Many services offer mid-market rates without added commissions or markups. Using such providers can help businesses save money compared to traditional services.

Financial news: Yes, the hygiene check. Keep an eye on financial news and central bank announcements for updates on global economic trends and political events that may affect exchange rates or currency values.

The mid-market rate provides businesses with the opportunity to save substantial amounts on foreign currency transactions. By using the mid-market rate as a benchmark, businesses can avoid hidden markups, transaction fees, and poor exchange rates that eat into their earnings.

Additionally, businesses can improve financial planning, maximize the value of international business payments, and safeguard against volatile currency markets. Whether you're an Indian exporter receiving payments in USD to INR or any other currency, understanding mid-market rates can help boost international payments and drive long-term financial success.