What Is an Interbank Rate? Everything You Need to Know

Have you ever wondered why exchange rates differ between online sources and your bank? The answer lies in the interbank market, where banks trade currencies with each other at special rates called interbank rates.

This article will explain everything you need to know about interbank rates, from what they are to how they impact your day-to-day international wire transfers.

Without further ado, let’s get started.

Think of it like buying in bulk. When you purchase office supplies in large quantities, you typically get a discount per item. The same principle applies to currencies in the interbank market.

Basically, the interbank foreign exchange rate is the wholesale price at which major financial institutions trade foreign currencies directly with each other. It's the most accurate reflection of a currency's true value at any given time.

The mid-market rate is derived from the interbank rate. It is the average of the buy (bid) and sell (ask) prices for a currency pair in the interbank market.

You can find the mid-market rate on many financial websites and currency converters. For example, typing "EUR/USD" into Google will display the current euro to US dollar rate. Other sources include:

• Investing.com
• Yahoo Finance
• Bloomberg
• XE.com

The mid-market rate is often used as a benchmark to compare against the rates offered by different currency exchange providers.

The interbank market operates as a closed network where major financial institutions trade currencies with each other directly or through electronic brokering platforms. It's a decentralized, over-the-counter (OTC) market, meaning there is no central exchange or clearinghouse.

There are 2 primary platforms for interbank trading:

• EBS BrokerTec: Dominant in North America and Europe
• Refinitiv: Holds a strong position in Asia

The interbank market is dominated by a few key players:

• Major International Banks: Citigroup, JP Morgan Chase, HSBC, and Deutsche Bank are a few notable names.
• Central Banks: The Federal Reserve (U.S.) and the European Central Bank (ECB) also participate in the interbank market to manage their currency's value and implement monetary policy.

These institutions handle very large forex transactions, often in billions of units. These transactions are the primary drivers of short-term price fluctuations in this decentralized financial market.

Unfortunately, this preferential rate is usually reserved for large-volume transactions between financial giants. This means that everyday consumers and small businesses don't have direct access to it.

Instead, they're offered a “retail rate,” which is typically the interbank rate plus a markup to include a profit margin for banks, brokers, and other foreign exchange providers. The size of this markup can vary significantly, so it's important to shop around for the best deal.

For businesses with international dealings or having cross-border operations, the exchange rate you get can make a big difference to your costs and profits.

Here's how understanding interbank rates can benefit your business:

• Negotiate Better Rates: If you're making a large international money transfer, you can use the interbank rate as leverage to negotiate a better deal with your bank or provider.
• Choose the Right Provider: Compare the rates offered by different providers against the interbank rate to see who's offering the most competitive deal.
• Track Market Trends: Monitoring the interbank rate can help you spot trends and potentially time your currency exchanges for maximum benefit.
• Save Money: Ultimately, the closer your exchange rate is to the interbank rate, the less you'll pay in hidden fees and markups, directly benefiting your profit margins.

Understanding interbank exchange rates is crucial for optimizing your cross-border payments. If you're looking for a payment partner in Asia to help you save more on your currency conversions, consider Statrys. Our FX rate is based on the real-time mid-market rate, and we charge a nominal conversion fee, making your international transactions simpler and more cost-effective.