“Living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt.” That’s what former Prime Minister Pierre Trudeau once said to an American audience. And it is true that Canadians are very much more impacted what happens south of the border than Americans are by what happens in Canada. One way that the unequal relationship manifests itself is in the relative importance of each country’s currency to the other.
To Americans, the Canadian dollar is a novelty, much like any other of the over 100 currencies in the world. But to Canadians, what happens to the US dollar matters a lot. In fact, Canadians convert USD to CAD (and conversely) on such a regular basis that the Greenback is in some ways Canada’s unofficial second currency, second only to the Loonie. Despite the importance of the US dollar to Canadians and the fact that so many Canadians have a US dollar account right here in Canada, there is rarely much discussion of the best way to convert USD to CAD and the cost of doing so.
The Big Bank Offering
Canadians are a conservative bunch when it comes to banking. A few large banks dominate the financial services industry here in Canada. And because the banks do not have much competition for most of their banking products, pricing in banking products tends to be higher than it needs to be. This is certainly the case in the foreign exchange market where it costs upwards of 5% to convert USD to CAD. That’s right, if you go to your online banking account and attempt to transfer some money from your US dollar account to your Canadian dollar account, you will find that the rate you receive is different from the market exchange rate at that point by somewhere between 2% to 5%.
Charging some amount over the exchange rate for consumers or businesses is standard in the currency exchange markets. But charging 2 or 3 or 4 percent when you are transferring money between your own accounts in different currencies is unnecessary and pretty much unique to the Canadian market. The banks have been historically been able to charge these “spreads” over market rates because they “own” the customer. That is, they rely on the fact that the customer is holding his or her accounts at the bank and is most likely to conduct all transactions with the bank for ease of use.
The Challengers in USD to CAD Conversion Market
Given the broad need for USD to CAD conversions in Canada, it is no wonder that new entrants in the market place are challenging the big bank monopoly. As part of a larger trend of disaggregation of banking products, companies like Interchange Financial have started offering products that allow users to do USD to CAD conversions in their own bank accounts at less than 1% and sometimes as low as 0.3% difference with market rates at any given time.
Technology and Foreign Exchange
These companies are often foreign exchange specialists who have incorporated the latest technology into their offering. In doing so, they have removed the bank’s advantage in holding client accounts. For example, whereas previously, a bank might have relied on the fact that both the USD and CAD accounts of a client were held at one bank and therefore doing exchanges between two accounts was seamless, that advantage no longer exists. This is because services like those of Interchange Financial allow users to link any bank account to their service when they are registering for the service. Once linked, transfers can take place between any two accounts in different currencies at an average of 0.5% difference to live rates with the same ease as if the accounts were at the same bank.
Innovative companies in this market have also introduced transparency into the marketplace. Clients no longer have to compare the live market exchange rate to the rate that they are getting from the bank. These companies show the exact rate at which you can convert at any given time on their websites.
Ease of Use
These new services are often available much longer than just bank hours and one can convert from anywhere online without having to make a phone call. In short, they are as easy, if not easier to use than bank offerings. Also, registering with these companies usually takes a few minutes and is often done online. The best of these companies will not charge registration or monthly fees of any kind so that you can sign up easily and use the service when necessary and forget about it otherwise.
Application to the Money Transfer Market
The new offerings in the USD to CAD conversion market are broader in scope than just transfers between accounts in Canada. Many users in Canada are using these same services to transfer money to the US or to pay for USD purchases directly in the US from their Canadian dollar accounts here in Canada. Paying a US dollar bill or transferring money in any way from your Canadian dollar account in Canada to a US dollar account in the US usually receives even worse rates than domestic transfers. As such, the new offerings by companies like Interchange Financial are often used to send money to the USA without incurring bank exchange rates.
A Brave New World in USD to CAD Conversions
Technological innovations and competitive pressures are driving down the percentages charged in USD to CAD conversions as well as in the currency exchange market in general. The Canadian banks will continue to charge higher than efficient rates for these conversions because for their average customer, pricing is not an important issue. But as more people become used to the idea of not doing all of their banking at the same company, it will become increasingly prevalent for consumers and businesses to have bank accounts at one company but receive services from multiple financial services companies, each competing against the bank for better pricing and service.