The mobile wallet Revolut is known for its highly competitive exchange rate. Let's look at how the exchange rate is calculated and how it differs from the traditional exchange office.
A dishonest 0% fee
The standard scenario of every European metropolis that attracts tourists: currency exchanges claim 0% fee on every corner and create the false perception that people will receive an exchange rate without a fee. Usually, this is far from true. Exchange offices may not charge directly for the exchange, but they may have their own rate where real costs are very well hidden.
It's a smart way to manipulate people. You know that 1,0 GBP for 1,3 EUR is better than 1,0 GBP for 1,4 EUR, but still, you do not know whether the exchange rate is reasonable, you just know it is lower. And here we get to the point.
To tell if the exchange rate is reasonable, we need to know the real exchange rate – the interbank mid-market rate.
The interbank mid-market rate is the fairest exchange rate since it is an average of ask/bid price for a given currency in the global network used by financial institutions to trade currencies. But even banks do not get interbank median market rates; they get an ask or bid price based on the fact that they sell and buy.
So whenever you would like to know the real exchange rate – the interbank mid-market rate is the one.
A honest 0% fee
The exciting thing about Revolut is that it offers its users the exchange of their currency for the interbank bid rate (or interbank ask rate based), which means you will be trading your 10 Euro at the same exchanges rate that a big bank exchanges 10 000 000 EURO (see Revolut's rates). This way, you can save about 3-6% compared with exchanging your money at the bank and even more with offices. This is really revolutionary, and hopefully, it makes dishonest exchange companies go out of business.
As always, there are some exceptions. The first is that during the weekend (Friday 23:59 - Sunday 23:59), when currency markets are closed, Revolut charges 0.5% to major currencies like USD, GBP, EUR, AUD, CAD... (full list here) and 1% for others. This is understandable because you will get your money immediately, but Revolut cannot until Monday, and if something significant happens, they can lose out on the exchange. One advice is to exchange money during the week to avoid this small fee.
Wait, but where is the catch, how does Revolut make money?
Good question, sir! Given that Revolut does not charge the exchange, it is living off a card fee because, as an issuer, it is allowed to hold 0.2% of each transaction within the EU. They have some other services such as insurance or paid membership. Not to mention that there are limits on how much you can exchange without a fee, currently, for a standard membership, this is 5 000 GBP / 5 000 EUR per month. After exceeding the limit then you will be charged additional 0,5%.
To sum it up, Revolut is a nomen omen for its offering of interbank rates for individuals and, in my view, will help to make currency exchange more transparent and better.
Note from the author
In my opinion, the best way to make exchange offices more transparent would not be to promote their exchange rate, but rather how different they are from the interbank mid-market rate (e.g. "We offer 93% of the interbank mid-market rate"). So you would not only compare prices but also find out how expensive the exchange offices are. Unfortunately, this is unlikely because this transparency would increase the competitiveness of the market and would probably lead to lower fees. This is something you do not want if you are an exchange office.