So, you have US dollars and want to convert to Canadian dollars.  Or maybe you have Canadian dollars and want to convert it to US dollars.  Maybe you are not even converting but just wondering what something is worth in US dollars or the other way around.  You would be one of the millions of Canadians who deal with this issue on a daily basis.  There is surprisingly little discussion of the topic in Canada despite its importance to the daily lives of so many people.  In this article we deal with what you need to do and what the best way to convert USD to CAD is in Canada.

The Quoted Exchange Rate

You need to know what the exchange rate is between the two currencies.  This is the number that is quoted on tv, radio, websites and so on.  It is a number that changes from minute to minute.  On a typical day, the exchange rate between USD to CAD might change by about 0.4%.  While it doesn’t move by a huge amount on a daily basis, over time it can change by significant amounts.  It would not be unusual to find that the Canadian dollar is higher or lower against USD by 10% from the beginning of the month to the end of the month.  The quoted exchange rate is often called the “spot rate”.  The spot rate moves in response to lots of different economic factors such as interest rates, GDP numbers, employment figures, oil prices, and so on.

The Exchange You Will Receive

Most people are surprised to hear that the spot rate is actually not available to them when doing USD to CAD conversions, or any other type of currency exchange in Canada.  Spot rates are generally only available to the largest central and commercial banks when trading amongst each other.  In fact, they are often called intrabank rates.  When a business or individual consumer looks to do currency exchange, they will not receive the intrabank rate that is quoted at that time.  Rather, they will receive an exchange rate that is a little less advantageous than whatever the exchange rate is at that point in time.  This difference between the spot or intrabank rate and the rate that a bank customer will receive is called a “spread”.  The spread (or margin) is how banks and foreign exchange dealers make money on USD to CAD conversions.

Margins on USD to CAD Conversions in Canada

The Canadian banks typically charge something between 2% to 5% on foreign exchange transactions.  That is, whatever the spot or intrabank rate, they will slap an additional 2% to 5% on it before giving you the rate at which you can convert USD to CAD.  The exact number often depends on whether you are a business or consumer and on how large your transaction is, as well as various other factors like your bank’s competitiveness.  These margins can add upto a lot.  If a bank is charging you a 5% margin, it means that on a 10,000 dollar transaction, you are receiving 500 less than you should be.

New Competitors

As with other areas of banking in Canada, new competitors are encroaching on the big banks’ traditional grounds and price-conscious consumers and businesses are flocking to these big bank alternatives.  A good example is Interchange Financial, Canada’s largest independently-held full-service foreign exchange business, headquartered in Toronto.  The business has been around for 20 years but has only begun to threaten the big banks in the last few years as technological innovation has permitted it to offer new services that compete directly with bank services on USD to CAD conversions.

New Ways of Converting USD to CAD

Using companies like Interchange Financial, Canadians can now link their existing bank accounts to new services that allow them to convert USD to CAD online at exchange rates that are much closer to spot or intrabank rates.  For example, a 10,000 USD conversion might incur a margin of only 0.4%.  These new services do not require that the user hold fund with the company.  Rather, they use open banking concepts and integration into the banking system to allow Canadians to convert USD to CAD (or vice versa) in their existing accounts without paying the unnecessarily high bank margins on exchange rates.  The best of these services combine the ability to sign up easily online or on the phone as well as the ability to book transfers at any time online or on the phone with low margins.

Comparing Exchange Rates

Comparing exchange rates at a given point in time is actually easy if you are using the right companies.  First, log into your bank account and see what it would cost you to convert USD to CAD in your bank accounts.  Remember that you should not be looking at an indicative rate or a spot rate or an intrabank rate.  What will the bank charge you if you were to convert right at that moment in time.  After you have that number, visit the website of one of the new competitors in the space.  Again, many of these companies will show you intrabank rates on their websites.  Those are not helpful as they will not tell you what you will be charged when you do the exchange rate.  The more credible service providers will tell you how much you can book for at that exact time.  Once you find the right number compare it to your bank exchange rate.  That is how you know how much you will save by using a credible alternative for convert USD to CAD services.