You find yourself needing to convert US dollars to Canadian dollars (or vice versa). Perhaps, you are a freelancer and get paid in US dollars. Maybe, you are buying a car in the US. Maybe you are a company purchasing equipment from Michigan. Or maybe you are a social media star and your YouTube advertising revenues are in US dollars. Maybe you are a “snowbird” and spend your winters in Arizona. Or maybe you are an American ex-pat living in Canada. Whatever the reason, you are one of the millions of Canadians who need to convert USD to CAD every day. What is the best way to go about it and what do you need to know before converting?
The Exchange Rate
The exchange rate is always your starting point. The exchange rate is the rate at which your USD will be converted to CAD. So, if the exchange rate is 1.30, you will receive 1.30 Canadian dollars for every USD. A variety of factors go into determining any exchange rate such as the interest rate environment and economic conditions in each country, global trade flows, prices of commodities such as oil, and many other factors. Ultimately, at any given time the exchange rate is a reflection of the demand and supply for each currency around the world. The exchange rate is changing every minute and you have no control over it. You can certainly watch the rate and look to do your conversion at the right time but forecasting exchange rates is very difficult. What you can control is making sure that when you are doing the conversion you get a rate that is as close as possible to the live exchange rate at that time. That’s where “spreads” and “fees” come in.
The Spread and Fees
As a business owner or consumer converting USD to CAD, you do not get the spot rate (sometimes known as the interbank rate). That rate is the rate at which central banks and very large banks trade amongst each other. Instead, your bank or service provider will increase or decrease the spot exchange rate by a percentage amount before offering it to you. They often call this charge a “spread”. This is how banks and forex companies make money on foreign exchange transactions with their customers. While you can’t control the exchange rate at any given point in time, you can control what percentage (or spread) the bank or forex company charges you above the exchange rate at any given point in time by selecting the right service provider.
Choosing the Right Service Provider for USD to CAD Conversions
Most banks and forex companies do not tell you directly what spread they are charging at any given point in time. Instead, they incorporate their spread into the exchange rate that they quote you at any point in time. In Canada, banks generally charge somewhere between 2% to 5% on top of the exchange rate for USD to CAD conversions. That is, if you log in to your TD, or RBC, or whatever else big bank, the rate at which you can convert from your USD account to your Canadian dollar account is generally 2% to 4% worse than the exchange rate at that point. Even worse, some Forex companies will post the interbank (or spot) rate on their websites but charge you a different exchange rate when you actually convert.
Technology-enabled Competition to the Rescue
Fortunately, things are changing quickly as technology has enabled new competition in the USD to CAD conversion market. Innovative companies like Interchange Financial have recently introduced new technologies that allow you to connect your USD and CAD bank accounts with their forex systems. Once you have done that, you can simply use their USD to CAD conversions to convert online, on the phone, or in person at one of their locations. These conversions happen at below 1% compared to the 2% to 5% bank rates. You do not need to hold funds with these companies as their service simply convert the funds in your existing bank accounts. This is all part of a larger trend of disaggregation of banking services in Canada. Whereas, before you held your money at Bank X and did all your financial services there too. These days, because of the advent of technology, each of the bank’s services are being vigorously competed for by new entrants. This greatly benefits financial services clients by driving down prices and improving services.
Selecting the Right Forex Service Provider
Of course, it is incumbent upon you to choose the right service provider amongst these new entrants. Here are some things to look for when doing USD to CAD conversions with one of the new competitors. First, make sure they are transparent with their pricing. Are they posting the exchange rates at which you can book rates instantaneously on their websites? Or, are they providing “indicative” rates and “interbank” rates and offer you a different rate when you go to actually trade? If they are not fully transparent with their pricing on their website, don’t use them. Second, do they allow you book rates online without calling or visiting? If they require you to call or email or visit, they are generally not very tech-savvy or they are looking to quote you a different exchange rate when you call. If they don’t allow you to book rates instantaneously at any point in time, avoid them. Finally, are they a credible company? Look for companies with a history in the forex market. Also, make sure they are regulated by FINTRAC.
A Better Deal for USD to CAD Conversions
Traditionally, the foreign exchange market has been inefficient in the Canadian consumer market place. Technology has allowed new competitors to offer better pricing and services in the foreign exchange market and upend the bank monopoly in the space. In particular, in the last few years in Canada, several innovative fintech companies have begun pressuring the traditional service providers on foreign exchange fees, especially in USD to CAD conversions. This benefits all users of that services as it makes conversions possible at closer to actual exchange rates. As with all other financial decisions, it is important that users choose the right service provider.
