This has been a pretty confusing topic that had once perplexed me and I believe many people as well. When both "We Buy" and "We Sell" rates are shown side by side outside money changers or banks, we tend to assume that it will be the higher one among the two rates that we will be getting, but it usually turns out otherwise.
Why are we always getting the lower rate? I will offer an explanation here with a couple of scenarios.
Scenario 1:
When in Singapore, the trading currency is the Singapore Dollar (SGD). It is the default currency that is used to buy things in the country.
So, when exchanging money from SGD to a foreign currency (say, Malaysia's ringgit or MYR), we are actually buying the ringgit as a product using our home currency. Standing outside a money changer or bank (I will term them as "changers" for short) and looking at the display board of currency rates, the rate for exchanging to "MYR" will be displayed under "(We) Sell" — "We" is referring to the changer and they will sell MYR to us at the specified selling rate.
On the other hand, if you are exchanging from MYR to SGD. You are selling the MYR as a product to the changer. In this case, since they will be buying the MYR from you using the Singapore dollar, the exchange rate will be listed as "(We) Buy".
Why do I type "We" in brackets? That's because some money changers and banks may just use "Sell" and "Buy". To make it easier to understand, just insert the "We" and the context will be clearer.
Scenario 2:
When we go over to Malaysia, the trading currency is the Malaysia ringgit (MYR). So, when exchanging money from Singapore dollar to ringgit, the money changer or bank in Malaysia will be buying our SGD as a product using their home currency. They will display the rate for "SGD" under "(We) Buy" — they will be buying our SGD at the specified buying rate.
So, even though the action is to exchange SGD to MYR in both cases, we have to look at different columns when in different countries.
Now, why are we always getting the lowest rate?
Assuming the "official" exchange rate is 1 SGD : 3 MYR or 1 MYR : 0.33 SGD — the rate that is usually published online or on forex trading platforms.
Any changers will want to earn some profits from exchanging money — that's what they setup their business for — so they will apply some markup rate on the official rate. Let's say, a changer in Singapore earns 2% from each exchange, the published selling rate for MYR will be 1 SGD : 2.94 MYR. And the buying rate for MYR will be 1 SGD : 3.06 MYR (or 1 MYR : 0.327 SGD). The changer will earn S$2.00 (or RM6.00) per transaction of S$100 either way.
This means that we will get lesser ringgits when buying MYR from the changer as compared to the official rate. If using MYR to exchange for SGD, it will cost 6 ringgits more. If we take S$100 to convert to MYR and then, without using the money, convert them back to SGD again at the same rate, we will incur a lost of S$4 (or RM12)!
And that is the reason why we are always getting the lower rates. The official rates are for reference only, we will only get the "buy/sell" rates after applicable fees and charges.
"IPT Currency" App
To make life easier for us, we developed this handy app called "IPT Currency" for browsing currency rates and do currency conversions. In addition, it has a nice function to factor in a money changer's commission rates. Do try it.
Download IPT Currency. It's free!