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Technology is Changing the Way Canadians are Converting USD to CAD

The foreign exchange market is the largest and most liquid in the world.  One of the most heavily traded currency pairs in that market is USD to CAD.  Not only do these two currencies represent two of the world’s largest economies but they also involve two neighboring countries with very long borders whose economies are heavily integrated.  As a result, Canadians convert USD to CAD (and conversely CAD to USD) on a regular basis.  The volume of these transactions amounts to tens of billions of dollars a day.  Yet, there is little analysis and discussion of the cost of these transactions to businesses and consumers.  In this article, we consider some of the traditional methods for doing USD to Canadian dollar conversions as well as some newer offerings.

Canadians and the US Dollar

As the world’s reserve currency, the US dollar is dominant for global trade and Canadians interacting in any way with the US, find it necessary to do so in US dollars.  A significant proportion of Canadian banking clients hold both Canadian and US dollar accounts.  This is not surprising given the long historical, economic, cultural, and familial ties between the two countries.  Indeed, many Canadians hold a significant portion of their savings in US dollars or get paid in US dollars.  In short, the US dollar is Canada’s unofficial second currency.

Sending Money to the USA

It is often noted that 90% of Canada’s population lives within 100 miles of the US border.  This is yet another proxy for the level of integration between the two countries, especially economically.  The demand for USD to CAD conversions (or conversely) is therefore often combined with the need to transfer the funds held in a Canadian bank to a bank in the US (or vice versa).  That is, the conversion of the USD to CAD requires not just that the currency be converted but also that it be sent across the US/Canada border from a Canadian bank to a bank account based in the US.  This becomes necessary when Canadians are buying property or anything else south of the border.  So called “Snowbirds” who are Canadians who spend the summer in the south of the US often transfer money to their US bank accounts before travelling.  Canadian businesses often purchase merchandise or equipment that requires payment in US dollars.

Traditional USD to CAD Conversion Options

The vasty majority of Canadians convert USD to CAD at their banks.  The Canadian banking industry is highly concentrated.  Not surprisingly, pricing in most banking products in inefficient.  Canada’s large banks like TD, CIBC, RBC and Scotiabank provide convenient methods for transferring USD to CAD in your own accounts or transferring money to the US.  But because they dominate the market, their exchange rates are often inefficient.  When converting at their bank (online or in person) Canadians will find that they are not getting the best exchange rate possible at any given point in time.  Indeed, on average, the banks charge a price that is somewhere between 2% to 4% more than the prevailing USD to CAD exchange rate at any given time.  In industry lingo, this is known as the “spread”.  In effect, the bank will charge clients somewhere between 2% to 4% to simply convert your own funds from one currency to another.  They do not call it a fee but the “spread” is the fee.  If you are converting 10,000 USD to CAD, the bank “spread” means that you are paying 200 to 400 USD simply for converting your money to the local currency.

New Competition for the Banks

Fortunately, technological innovation is providing new ways for Canadians to convert their USD to CAD at much more favorable exchange rates.  Canadian businesses and consumers can now securely convert USD to CAD at rates that are much closer to the actual exchange rate at any given point in time.  Consider Interchange Financial, the largest privately-owned full service foreign exchange company in Canada.  It now offers a service that allows Canadians to link their bank accounts to its foreign exchange system and convert USD to CAD within their own bank accounts at an average spread of just 0.5%.  Interchange Financial, as well as other companies, now allow their clients to convert USD to CAD online and in their own bank accounts at much better exchange rates than banks.  Clients can choose to transfer the USD to CAD into their own accounts or to transfer it across the border to a US-based accounts.

Identifying Viable Alternatives to Banks

By incorporating the latest in technology and financial innovation, these innovative companies allow their clients to effectively disaggregate banking services.  Clients continue to use their banks and need not hold funds at these “fintechs” in order to use their services.  The new competitors in the space are integrated into the banking system and focus just on the foreign exchange services, and in particular USD to CAD conversions.  In Canada, these companies are regulated by the federal government through an entity called FINTRAC.  The best of these companies will have a long history in foreign exchange.  Also, it is important that these companies provide live transparent pricing for their services on their website.  That way, you can instantaneously compare their rates to bank rates.  Consumers should be on the lookout for any company that simply provides indicative rates.  Also, if a company does not provide the ability to its clients to instantaneously book rates at the prices shown, it is probably not credible.

A New World

Technology is changing the world of USD to CAD conversions.  This business has historically been a “cash cow” for the big Canadian banks which charge upwards of 4% for a simple conversion.  Now, new agile competitors are offering businesses and consumers alternatives that are priced at less than 1% for the same USD to CAD conversions and challenging the big banks on their own turf.  If you identify the appropriate alternative service provider, you can save significantly on USD to CAD conversions.