Don't go for "best rates" blindly.
This post is on my observations on the currency exchange rates offered by money changers on both side of the Singapore-Johor border. Yes, I am referring to the Singapore dollar (SGD) to Malaysia ringgit (MYR) conversion — not vice versa.
For readers who have been following all my posts, you will know that I cross the border into Malaysia about 2 times a month for breathers, try the local food there and shopping. Other than observing the traffic conditions on the Singapore-Johor Causeway to find the best times to cross the border and finding ways to reduce queuing time at the immigration customs, I also monitored the SGD-MYR exchange rate on both sides and I am telling you here that there is no such thing as "best-rate" money changers.
I will share my observations and explain how and where to get better SGD to MYR exchange rate before you begin your holiday in Malaysia. This post is particularly useful for SGD-MYR exchange due to the high fluctuations in the exchange rate since 2015. And ever since Donald Trump became U.S. President in 2016, the SGD-MYR exchange rate had gone above 3.15 and back down to 3.00 in December 2017. The fluctuation is as much as 5%.
Note that even though this post is specifically on SGD and MYR from a Singapore perspective, it can be applied anywhere — take this as an example to gain an understanding on how money exchange works.
First, Understand SGD-MYR Exchange Rate
The Singapore dollar to Malaysia ringgit exchange rate is not a single direct conversion rate. It is first converted from SGD to United States dollar (USD) and then from USD to MYR — yes, twice. So, the SGD-MYR exchange rate is also influenced by the United States dollar, which is one of the causes in the depreciation of MYR since 2015.
Once the "official / international / market" rate is determined (this is the "raw" rate that is often published online, I will refer to it as "official rate" for simplicity), it will be marked-up to include the seller's commission before being published as "selling" rate. Travellers will usually see the "selling" rate outside money changers or banks, not the "official" rate.
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Exchange Currency at Money Changers
Why money changers can offer better rates than banks or other financial institutions? There are two ways to look at this.
First, money changers have lower cost overheads so they charged lesser commissions, typically 1% to 1.5%, whereas banks will charge 2% to 3%.
The other way to look at it is that money changers exchange money through their suppliers with a single mark-up on the "official" exchange rate. Banks or financial institutions, having more complex operations by trading or hedging with other financial institutions, will need to convert SGD to USD at a mark-up rate and than convert from USD to MYR with another mark-up rate. In general, the final rate may be marked-up twice and will always include the commissions of all parties involved.
(I used to be in Fintech where money conversions are much more complicated than above. Any costs incurred in the conversion processes will ultimately be borne by consumers.)
Confusion Between BUY Rate and SELL Rate
This is a confusing topic that had once perplexed me too, so I will offer an explanation here.
In Singapore, the trading currency is SGD. So, when exchanging money into MYR, we are actually buying MYR as a product using our home currency. Money changers will show the rate for "MYR" under "(We) Sell" — they will sell MYR to you at the specified rate.
When you go over to Malaysia, the trading currency is MYR. So, when exchanging money from SGD to MYR, the money changer will be buying your SGD as a product with their home currency (MYR). They will show the rate for "SGD" under "(We) Buy" — they will buy your SGD at the specified rate.
Even though the action is to exchange SGD to MYR in both cases, we have to look at different columns when in different countries.
When SGD Rises Against MYR
When the "official" exchange rate from SGD to MYR rises or is better than a week ago, go over the border and exchange your money in Malaysia. One of the better places to exchange money will be in Komtar JBCC, just next to City Square in Johor Bahru.
Why? Assuming money changers in Singapore just buy in some stocks of Malaysia ringgits about a week ago at a poorer rate than the current one, they will not sell their MYR notes at the new rate where they will incur losses. What they will do is to buy in more MYR from their sources and average up with the stocks they bought previously. They will then offer the "averaged" rate — which is still lower than the current rate.
On the other hand, money changers in Malaysia will be buying the SGD notes from individuals standing in front of their counters. They will have to use the "official" rate plus their commissions. Thus, exchanging currency in Malaysia will have better rate than exchanging in Singapore in this case. Even the "best rate" money changers in Singapore may not be better than in Malaysia.
In November 2016, when the "official" SGD-MYR rate shot to 3.15 from 3.06 the day before, most money changers in Singapore are not able to offer MYR at higher rates. They quoted selling rates of at most 3.06 but all MYR notes got sold out that day. The money changers replenished their stocks at the higher rate and were able to offer better rates two days later. If travellers had waited for few more days or gone over to Malaysia to exchange, they would be able to get better rates that day.
When SGD Dropped Against MYR
Inversely to above, this will be the time to exchange for MYR in Singapore.
Again, assuming money changers in Singapore just buy in Malaysia ringgits at a better rate about a week ago, they will be able to sell their MYR notes at a rate that is better than the "official" rate since they will be able to make profits. By offering better rates than the "official" rate, they attract more customers.
On the other hand, money changers in Malaysia will be buying the SGD notes from individuals at their counters regardless of the fluctuation. They will still use the "official" rate plus their commissions. Thus, exchanging currency in Malaysia will be at poorer rate than exchanging in Singapore.
In early-December 2017, when the "official" SGD-MYR rate dropped to 3.01, most money changers in Johor Bahru were buying SGD at around 2.98 but money changers in Singapore were selling MYR above 3.01.
In summary, exchanging for MYR in Singapore is based on the average rates that money changers get from their currency suppliers over a period of time and also their stockpiles of MYR notes. Exchanging in Malaysia is based on the "official" rate of the day.
When Exchange Rate is Relatively Flat
When exchange rate is almost flat for more than, say, 1 week, exchanging currency in either Singapore and Malaysia will not have much difference — the margin will be insignificant. Any leverage in rate difference will be worn out over 1-2 weeks (subjected to how frequent the money changers stock-up their currency notes).
Lastly, Is It Worth Going to a Money Changer with the Best Rate?
Yes, if the money changer is in close proximity to you without having you incurring any transport costs. Or if you happen to pass by it.
Yes, if you need to exchange an amount that is more than SGD 500* — assuming a gain of more than S$5.00 due to rate difference. If you need to travel all the way to a particular money changer by car or public transport and back, the gain may be able to offset your petrol or transport costs.
NO, if you need to take transports and are exchanging less than SGD 500*. The nett effect of transport costs will result in a poorer "effective" exchange rate for you. So, plan your trip and exchange money when you happen to be in the vicinity of the "best rate" money changer, otherwise, a nearby money changer will be better even if it does not have the best rate.
* Note: SGD 500 is just a rough guideline.
Example 1:
1. A money changer "A" near to you offers S$100 for RM300.
2. A "best rate" money changer "B" (not near to you) offers S$100 for RM302.
3. Assume your transport costs to and from money changer "B" is S$4.
If you exchange S$100 at "A", your total expenditure is S$100 and get RM300. The effective rate is 1:3.
If you exchange S$100 at "B", your total expenditure is S$104 and get RM302. The effective rate is 1:2.9 only, which is worst than exchanging at "A".
If you change S$500 at "B", your total expenditure is S$504 and get RM1,510. The effective rate is 1:2.996, which barely breakeven with "A". So, you need to exchange more than S$500 to improve the margin.
In other words, don't blindly go for money changers with the "best" rate if it is not in close proximity to you.
Example 2:
1. A money changer "A" near to you offers S$100 for RM300.
2. A "best rate" money changer "B" also near to you offers S$100 for RM301.
There is a 30-minute queue outside "B" whereas "A" has no queue. If you just want to change S$100 to MYR, which money changer will you go to?
I will opt for "A". I will not queue for 30 minutes just to save S$0.33 (it's thirty-three cents only!).
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Disclaimer: This post is based on my observations as a traveller needing to exchange currency. I have no insights into any financial operations of any money changers. Currency traders will need to take note of the amount of currency that is allowed to be carried across the border.
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