One of the most common questions we are asked on a daily basis is, “Is the exchange rate you use the Sha’ar Yatzig?” The short answer is "no,” and in this post, we will clarify what the Sha’ar Yatzig actually is, what the mid-market (or interbank) rate is, and how IsraTransfer determines the exchange rate for our client's currency conversions.
What is the Sha'ar Yatzig and how is it determined?
The Sha’ar Yatzig (שער יציג) is the representative rate that the Bank of Israel sets Monday-Thursday at 3:30pm and on Fridays at 12:30pm. Any day on which a foreign currency is not trading, the rate for that currency is not updated. Many business transactions are made using this as the rate agreed upon for their dealings as it provides a single rate that can easily be provided and utilized. This representative rate is also used as a basis for calculating investments that are linked to foreign currencies. You can find the rates at any time at this link.
The key point about the Sha’ar Yatzig, in terms of the foreign exchange business, is that this rate does not reflect current market prices. It may be close, but it will, in almost all cases, be different. The reason for this is that the actual buying and selling of currencies is happening almost non-stop in different markets around the world at all times.
What do I mean by non-stop? Well, let’s say it is 4am Israel time, which would make it 11am in Japan. Let’s also assume that there are some Israeli traders that happen to live in Japan, or Israeli businesses that need to trade Shekels. The banks in Israel are closed, yet these people and businesses can still trade the Shekel. The foreign exchange market is open 24 hours a day. You will simply see less trading happening when a particular market is not open.
How Do Israel's Money Changers Determine Their Exchange Rates?
Every market-maker (i.e. banks, many forex brokers) sets their own trading rates based on their own proprietary systems. The buy and sell rates are the rates the bank, or change place, will buy or sell a particular currency at (depending on what currency you are exchanging with them). Buy and sell rates are exchange rates that factor in a percentage above or below the actual interbank rate which is how they make money on the conversion.
So what is the interbank rate? The interbank rate for foreign exchange is the rate at which banks trade currency between themselves. Because they trade such large amounts, they often get the best possible rate, which would be the mid-market rate, directly between the buy and sell prices we would see at a bank or money changer. This is a rate none of us would ever get or even be offered unless we were working at a bank or for a firm that might be converting hundreds of millions of dollars on a consistent basis. A great primer on the foreign exchange interbank market can be found here.
How Does IsraTransfer Determine Its Exchange Rates
Now back to IsraTransfer. As I noted above, the interbank rate is usually the mid-market exchange rate – the exact middle point between the buy and sell prices. As a reminder, buy and sell prices take the mid-market rate plus a percentage in order to make some money from the transaction. So, IsraTransfer uses the actual mid-market rate, according to www.xe.com, as the starting point for your conversion. Keep in mind that sites like xe.com do show the interbank rate, but can be lagging behind by a minute or two. As the actual interbank rate is changing every 3 seconds, it can from time to time be a little bit of a difference between what is being displayed on these sites and what the actual interbank rate is.
Here is how it works for someone sending USD to convert into NIS: The exchange rate showing on XE, as of this blog post, is 3.494 for the USD vs NIS. Assuming you are a SmartPay client, the rate you take off is fixed at 1.25% of the mid-market rate. To calculate your real exchange rate, simply take the rate on XE.com (3.494) and multiply it by 0.9875 (this is for 1.25% only – for 0.75% it would be 0.9925 and for 0.5% it would be 0.995). This gives you a real exchange rate of 3.4503. Multiply that by the amount you are transferring, let’s say $5000, and you would get 17,251.50 Shekels into your Israeli bank account.
So, as you can see, IsraTransfer only charges a percentage amount below or above the mid-market (not buy or sell) rate in order to make money. We do not charge any other fees. Many money changers are quoting between 1-5% if they are able to cash checks, plus the exchange rate spread.