The first thing many Canadians do before crossing the border is visit the local bank and exchange their hard-earned loonies for a handful of US greenbacks. While this method of converting currency comes with the advantage of convenience, it certainly doesn't come free. Canadians actually pay a hefty premium for the privilege of doing business with a financial institution every time they need to exchange Canadian dollars for U.S. funds.
When it comes to local currency exchange, it's important to recognize there are two sets of exchange rates. There is the Bank of Canada published rates that you can find online and in the newspaper, then there are the exchange rates your bank actually uses when you buy U.S. cash with Canadian currency. One of these things is definitely not like the other.
The lower published rates reflect what banks use when they exchange enormous sums of money amongst themselves, the rates they charge us are typically as much as 3% higher. That's because they add in what's known as an exchange or conversion fee, that we don't see. This billed to cover the cost of doing business at the retail level.
Exchange rates fluctuate from one financial institution to the next and are typically set by the individual banks themselves, because the fees included in these rates are intended to offset everything from the initial expense of buying foreign currency, to the administrative costs involved in making that currency available to us through bank branches and ATMs. Banks have a lot of administrative costs.
What many Canadians don't realize is there's a convenient way to get their U.S. dollars for less. If you only make the occasional cross-border shopping trip, an alternative foreign exchange option might not benefit you all that much. But for anyone who frequents the States on a regular basis, or who spends a significant amount of time there when they do go, the savings potential offered by taking advantage of a foreign currency exchange service can be significant.
Foreign exchange companies, like Knightsbridge Foreign Exchange Inc., offer lump sum online exchanges at rates that are significantly less than what the big banks charge. This is great news if you exchange your Canadian funds on a regular basis, or if you exchange large amounts of money at a time: think anyone who covers their child's American tuition, pays the mortgage on a U.S. vacation property, or is one of the millions of Canadians who travel to Florida each winter.
In the case of a company like Knightsbridge, effectively competing with the big boys means combating the banks' huge, hidden fees with exchange rates that are as much as 1.5% to 2.5% lower - even after the firm's low commission fee is tacked on.
"The banks have an oligopoly and don't compete on price, we are keeping them honest and helping Canadians save," according to Rahim Madhavji, president of Toronto's Knightsbridge Foreign Exchange, a firm he co-founded after quitting his job at the Royal Bank of Canada in 2009.
The entire premise is based on an ability to buy foreign currency in bulk, just like the banks do. Regardless of your bank's rate, Knightsbridge guarantees they will beat it, and they will do it while offering same-day delivery of funds through bank transfers or online bill payments.
The basic process for working with Knightsbridge involves setting up a free online account, receiving written confirmation of your exchange rate before funds are transferred, then having the converted funds sent to the desired destination. Knightsbridge is also integrated with all Canadian banks, meaning that account-to-account transfers are free. According to Madhavji, the average customer can expect to save anywhere from a couple of hundred to several thousand dollars, depending on the amount of money exchanged.
The Canadian Snowbirds Association is another service that offers better-than-bank rates through online transfers. Much like Knightsbridge, the Snowbirds buy currency in bulk, but they do it by pooling their participants' resources each month to get better exchange rates. The Association's monthly transfer program involves moving money from your Canadian bank account to your U.S. bank account. They then charge members and non-members alike a transaction fee to facilitate this, as well as a fee to enroll in their program.
Knightsbridge offers a monthly currency buying program too, but the firm also gives customers the flexibility to purchase U.S. dollars any day of the week. For added convenience, you can register to be notified remotely whenever the dollar reaches a more favorable level.
It may be true that the ball is firmly in the banks' court when it comes to the setting of U.S. exchange rates, but companies like Knightsbridge are putting the power of bulk buying into the hands of the individual, and in doing so, are giving Canadians the opportunity to beat the banks at their own game.