How are money transfers priced across pegged currencies?

How are money transfers priced across pegged currencies?

Money transfer providers can have different approaches to FX margins and markups across pegged currencies (which are tied to other currencies at a fixed exchange rate). This piece tracks the different types of pegged currencies worldwide and explores how money transfer providers apply pricing to them.

Currency pegs are government policies that create a fixed exchange rate between two different currencies. A large number of countries have pegged currencies, usually as a means of gaining trade advantages and protecting their economies in the event of a downturn. The mechanism has also garnered interest in the crypto world, where stablecoins – crypto assets pegged to fiat currencies – are gaining popularity, particularly in countries exploring the potential of CBDCs for cross-border payments

When it comes to money transfers, pegged currencies can be treated very differently by providers, as FXC Intelligence data shows. However, to understand how providers differ, it’s important to note that not all currency pegs are the same.

Exploring the different exchange systems worldwide
IMF pegged currency classifications and countries that use them

Different types of currency peg

Fixed or pegged exchange rates tie one currency’s value to another, while a floating exchange rate is set by the foreign exchange market based on supply and demand relative to other currencies. Within these two categories, however, the International Monetary Fund highlights that there are actually several exchange systems, with some being stricter than others.

Some countries, such as Ecuador, El Salvador and Andorra, have the currencies of other countries circulating as the only legal tender. Others have a fixed exchange rate, meaning that their currency can be exchanged for a specified foreign currency at a specific rate every time. For example, across the East Caribbean islands (e.g. Dominica, Grenada or Saint Kitts and Nevis) the East Caribbean dollar has been fixed at an exchange rate of XCD 2.70 to USD 1 since July 1976. 

Countries might want to fix their exchange rates with other countries to make trade easier and guarantee stability for importing/exporting businesses. However, countries require high amounts of foreign reserves in order to maintain their peg, which is achieved by buying and selling currencies to keep supply and demand at the right level.

To avoid the disadvantages of a fixed system, some countries opt for a ‘softer’, or less strict, pegged exchange system. For example, they may keep their currency from rising or decreasing in value within a certain band. Denmark, for example, aims to keep the Danish krone within a corridor of 2.25% either side of a central rate of EUR 1 to DKK 7.46. This is because the country is part of the Exchange Rate Mechanism, which was set up after the launch of the Euro to try and reduce the impact of exchange rate fluctuations in Europe.

Other countries have crawling pegs that move up and down in response to macroeconomic conditions, such as inflation, while some choose to peg their currencies not to one other currency, but to a basket of currencies with which they have trade ties.

Aside from different exchange systems, it’s important to remember that the interbank rate – i.e. the FX rate used by banks – may end up being different from the pegged rate. Just because governments set an official fixed exchange rate does not necessarily mean that the actual interbank rate will be the same as the pegged exchange rate. When countries lose their currency peg, this can have severe consequences for the local economy, as Nigeria saw in 2016 when it removed its peg to alleviate the country’s foreign reserve shortages

Countries with currencies pegged to the US dollar
Countries with currencies officially pegged to USD, ratio and year introduced

How money transfer providers respond to currency pegs

Pegged currencies are something of an edge case for money transfers. It’s easy to assume that because exchange rates are fixed, markups applied on money transfers will be less common, or at the very least that markups will stay relatively stable, as any money taken off the top would be obvious to the consumer and therefore make a transfer less attractive. 

However, our data shows that this isn’t always the case. Even when the exchange rate is strictly fixed, major money transfer providers in our dataset often have variations in the margins they provide.

Different rates for pegged currency money transfer (EUR to DKK)
EUR to DKK: Transfer FX markups across four major transfer providers

To return to Denmark as an example, the country’s exchange rate is pegged to a certain value, as shown in the graphic. However, when sending to Denmark from a Euro-using country (e.g. France), it’s clear that major providers included on the graphic are still providing an amount lower than the official pegged rate (EUR 1 to DKK 7.46) and the interbank rate over the period (around EUR 1 to DKK 7.44), indicating that different FX margins are being added. 

Interestingly, a few of the providers maintained a stable rate across the currency as the days went on in January, showing that they still offer a level of predictability across their pricing for pegged currency transfers. However, one of the providers shown did see their rate change over the period, which demonstrates that not all providers treat pegged currencies the same way. It should be noted that the rate being shown is for a specific amount, payment method and payout method, so this rate may vary across the providers’ offerings.

Eritrean nafka to US dollar: Comparing rates across providers
USD to ERN: Media rates across key transfer companies

If the pegged exchange rate is fixed to a complete integer (for example 1:1, or 1:2), some major providers tend to just use the same exchange rate without adding a margin (and would likely add a fee to the transfer instead). However, this isn’t always the case. For example, the Eritrean nakfa (ERN) is pegged to the USD at an exchange rate of USD 1 to ERN 15. While one of the major providers we track doesn’t apply an FX margin to the money sent, the money sent through another major provider will be ERN 14.97 for every USD 1, showing the margin being taken off the top.

The bottom line is that when it comes to money transfers, providers may have different approaches depending on how currencies are pegged. As FXC’s data shows, just because an exchange rate is fixed doesn’t necessarily mean that money transferred through a certain provider won’t vary over time.

Read More About
Stablecoins

Exploring global payroll trends in 2024

April 12th, 2024

Can PayPal grow Xoom with stablecoins? Inside the fee-free PYUSD remittances play

March 14th, 2024

PayPal’s AI project: Inside the First Look strategy

February 1st, 2024

+
Sign In
+
Account Registration
By creating an account, you agree to our
Terms and Conditions
+
Please enter your email address
We'll send you instructions on how to reset your password.
+