Understanding the interbank exchange rate 💸

One of the things we’re most proud of at Revolut is the ability for you to exchange currencies at the interbank rate. But what is the interbank rate? And who decides what it is? This short blog aims to answer the most common questions we receive about the interbank rate, so that you’re clear on how your money goes from one currency to another.

What is the interbank exchange rate?

In the simplest terms, the interbank exchange rate is the rate at which banks transfer money between themselves. In other words, when Bank A exchanges money with Bank B, they do so at a rate not normally accessible to you or I.

When you as a customer make an exchange, for example from GBP to USD, the bank usually charges you a fee in addition to the rate they use to transfer between themselves. Your exchange might go through multiple banks, too, with each one charging a fee.

By using the interbank exchange rate, you avoid fees, if you exchange on a weekday (more on that in a moment).

When does Revolut apply the interbank exchange rate?

Currency markets operate on a 24/5 basis, meaning they’re closed at the weekend. Revolut allows you to exchange currencies at the interbank rate Monday-Friday. Exchange at the weekend, and we charge a small markup fee. This is to cover ourselves against any changes in the currency market over the weekend, when it’s closed.

Understanding ‘bid’ and ‘ask’ prices

The price at which banks sell currencies (to other banks and you or I) is called the ask. The price at which banks buy those currencies is called the bid. The difference between those prices is called the bid/ask spread, and there are many factors which can influence it, including: politics, major news events, and supply and demand between businesses.

One of the most influential factors to determine the interbank exchange rate, is the size of the bid/ask spread. That size is determined largely by how much liquidity —or currencies available— is available in that particular market.

For developed currency markets such as GBP, USD, EUR, AUD, SGD, PLN, etc., the spread is typically low, or close to zero, most of the time.

For less developed currency markets —typically called emerging markets— such as MXN, ZAR, TRY, etc.— the bid/ask spread is wider, and may fluctuate throughout the day. It is typically smallest/narrowest during daytime working hours, when local banks provide liquidity to the international market.

The third group is the group with the least liquid currency. Countries or areas here have either small currency markets or may have currency exchange restrictions imposed by governments or central banks. Some of them might not even physically trade in the international currency market. Examples here would be CRC, MUR and SCR. These currencies typically have wider bid/ask spreads reflecting the liquidity premium for trading in these currencies.

Currency exchange can be a tricky business, which prices fluctuating all the time due to a whole variety of events. What we aim to do at Revolut, is to give you the fairest, most accurate exchange rates possible.