How exchange rates work in international remittance: A beginner’s guide

International remittance is very important in connecting people and businesses across borders. It is through international remittance platforms that transacting across cross border remittance is possible. It enables individuals to send money back home to their families, helps companies and retailers pay for goods and services from foreign suppliers, and supports the global economy. 

Exchange rates determine how much one currency is worth in terms of another. They are crucial in determining the value of a cross-border transfer, as they directly affect the amount of money the recipient will receive in their local currency. 

For example, Azee from India(Rs), wants to send money to his daughter, who is in America ($)

Azee needs to send money based on the current currency rate in America. This process of converting money into dollars is called the exchange rate.

Even a slight change in the exchange rate can reportedly impact the recipient’s payout, which is why understanding how exchange rates work is essential for providing fair and reliable remittance services.

Let’s dig more deeply into how International remittance works along with the pros and cons of it. 

What are exchange rates?

Exchange rates determine the value of one currency compared to another. For example, if 1 USD equals 80 INR, this rate decides how much a recipient in India will receive for every dollar sent. Exchange rates are dynamic and it fluctuates due to several global factors. It could be due to inflation, changes in supply and demand, and economic instability.

Types of exchange rates

Exchange rates are usually of two types.  Each type functions differently and can impact international remittance in various ways. 

Fixed rates

Fixed exchange rates are regulated and maintained by a country's central bank. These rates remain stable and are often tied to a strong currency like the US dollar. Any country that wants to transact from one country to another has to follow the fixed rate.

Floating rates

Floating exchange rates vary based on supply and demand in the global market. They adjust dynamically, which reflects economic conditions, market speculation, and other factors. Most major currencies, such as the USD, EUR, and GBP, follow this system.

Factors influencing exchange rates

Several factors influence exchange rates. You have to understand how the influencing helps your business predict changes in currency values and manage the risks associated with cross-border transactions.

Economic conditions

Strong economic performance strengthens a country’s currency. Factors like GDP and per capita income influence the forex market majorly.

For example, countries with high GDP growth attract more investment, as it boosts demand for their currency.

Interest rates

A country with higher interest rates attracts foreign investors. These investors convert their money into the local currency. This increased demand strengthens the currency's value.

Market speculation

You can monitor investor expectations to predict currency trends. Positive speculation about trade deals or policies boosts the demand for a currency and directly affects your remittance services.

Inflation

Low inflation boosts the currency value, while high inflation weakens it by reducing its purchasing power. Inflation has a direct impact on the exchange rate as it determines the country's financial stability.                                                                                    

Political factors

Political stability attracts investments, it strengthens the currency. Conversely, instability or conflict reduces its value.

How exchange rates affect international remittance

Exchange rates play a crucial role in international remittance, it directly impacts the transaction's value. A better understanding of these effects allows you to optimize remittance services and provide your customers with more value.

Impact on the recipient's amount

Exchange rates directly influence the amount the recipient gets. A weaker sender currency or an unfavorable rate reduces the final amount and may lead to dissatisfaction.

The role of exchange rate fluctuations

Exchange rate fluctuations can directly impact remittances. For instance, if a currency value declines suddenly, recipients may receive less than expected. Providers that adjust rates quickly help minimize losses and maintain customer trust.

Hidden costs in exchange rates

Exchange rates directly influence the amount the recipient gets. A weaker sender currency or an unfavorable rate reduces the final amount and may lead to dissatisfaction.

Hidden charges in exchange rates can significantly impact the final amount that the recipient receives. 

Hidden fees such as;

• Service fees

• Intermediary bank fees

• Dynamic currency conversion (DCC)

• Recipient bank fees

Offering clear breakdowns and competitive rates positions you as a trusted partner for cross-border remittance services.

Effect on customer satisfaction

Unfavorable rates or hidden charges often lead to dissatisfaction. Offering competitive rates and maintaining transparency enhance customer experience and foster loyalty.

How banks and fintech set exchange rates

Banks and fintechs determine exchange rates based on several factors. Here's how they manage this process:

Adding a profit margin

You can add a margin to the interbank rate to cover operational costs and ensure profitability. This helps your business to stay a step ahead of the competition.  For instance, if the interbank rate is 75 INR per USD, the customer rate might be 73 INR per USD.

Operational costs and overheads

Exchange rates cover costs like technology infrastructure for secure systems, salaries for skilled staff, compliance with international regulations, advanced security measures to prevent fraud, and intermediary bank fees. These factors ensure reliable, seamless, and legally compliant cross-border transactions.

Real-time market adjustments

Automated systems allow providers to lock in rates in real-time. This approach ensures accuracy and protects you and your customers from sudden market changes.

Leveraging technology for accuracy

AI and machine learning enhance rate management by analyzing market trends and predicting currency movements. This ensures accurate and competitive rates for customers.

Balancing competitiveness and profitability

Offering competitive rates is essential to attract your customers. At the same time, rates must cover costs and contribute to profitability. Striking this balance keeps you ahead of the competition.

Challenges in managing exchange rates

Managing exchange rates is complex and comes with significant challenges:

Currency volatility

Currency values can change rapidly due to economic or geopolitical events. This rapid fluctuation creates challenges in maintaining consistent rates.

Dynamic exchange rate management can help mitigate such risks by adapting quickly to changes. 

Global economic uncertainty

Events like pandemics or economic crises create instability in currency markets. You must adapt quickly to mitigate risks and maintain stable operations.

Complexity of real-time adjustments

Exchange rates change every second. Keep your systems updated in real-time, which requires advanced tools and expertise. Because delays can lead to discrepancies, this also impacts customer trust.

Conclusion

For any business understanding exchange rates is essential for successful international remittance operations. They influence recipient payouts, customer satisfaction, and provider profitability.

As a business, your role is to simplify cross-border payments for your users. By offering competitive, transparent rates and leveraging technology, you can position yourself as a trusted partner in the remittance industry. Use this knowledge to enhance your international remittance solution and drive growth for your customers.