Question regarding international payments and exchange rate calculations

[joecascio]

Bitcoin has great promise as a mechanism for making international payments because it's direct. It's my understanding that traditional international payments usually require multiple middlemen to accomplish and can take several days or even weeks to fully consummate. This exposes the payer and payee to currency rate fluctuation risk.

Bitcoin, on the other hand, can effectively make the core transfer of value almost instantaneously directly between the payer and payee. Until we start dealing with everyone in bitcoin (ie, a bitcoin-based economy), however, this payment method will entail the payer buying bitcoin in her local currency and the payee selling the transferred bitcoin in his local currency.

This raises the question of how one goes about computing the amount of bitcoin to send. Let's say I'm in the US and want to make a payment to someone in the UK. Now, at the moment I'm writing this the direct exchange rate of dollars to pounds is 1.56156. The rate of dollars to bitcoin is 10.79169 and the rate of bitcoin to pounds is 1/6.93245 or .1442491.

So, using those rates, what I'll call the "effective exchange rate" of dollars to pounds, going thru a bitcoin intermediary is

10.79169 * .1442491 or 1.5566916 which is a 0.31% difference. On a purchase of $10,000 that amounts to a $31 difference on the payer end. In other words, I actually pay $31 more than I would have had I paid at the direct dollar to pound rate of 1.56156 or conversely, the payee in the UK receives 20 pounds more than they would have at the direct rate.

Now, such multiple rate differences occur between all other currencies as well so the financial community must have a way of dealing with it. Do the parties split the difference? If not, who eats the difference, the payer or the payee?

[Meni Rosenfeld]

I think it makes sense that the customer will pay the difference. A business owner knows how much he needs to receive; the customer chooses his preferred payment method and pays whatever extra it costs.

Anyway, hopefully in the future the differences will shrink as the market becomes large enough to attract triangle arbitrage bots.

[Stephen Gornick]

Now, such multiple rate differences occur between all other currencies as well so the financial community must have a way of dealing with it. Do the parties split the difference? If not, who eats the difference, the payer or the payee?

Even with organizations like PayPal who do huge volumes of these "cross-border" transactions, the rate they will charge for foreign currency conversions will change based on current conditions at the time and the rate may or may not necessarily align with the official exchange spot rates (e.g., those published on http://www.ecb.int/stats/exchange/eurofxref/html/index.en.html ).

With bitcoin not being terribly liquid, order size is a big factor as well.

I think at this early point in the bitcoin economy, most services have taken the route of assessing a slightly larger than necessary premium against spot and/or have made the fee big enough to accommodate market inefficiencies where the bitcoin markets don't closely match forex spot rates.  

A service that is doing fiat on both ends probably should consider bitcoin only as one of the possible routes.  If a funds transfer route that travels through a pair of bitcoin currency markets offers the least expensive path (fees inclusive) then it goes through bitcoin otherwise it routes through other foreign currency markets.  Unfortunately, the point at which the banking system intersects with the Bitcoin exchanges is something that differs so wildly from not just one exchange to the next but one bank to the next (e.g., Intersango UK bank might be slow or down, whereas Intersango's SEPA is functioning normal).  This means each route has wildly varying fees, speed,  volume limits, etc., that automating the routing process is harder than it would seem necessary.

But the consideration of bitcoin's exhange rate versus forex spot is something happening already on an individual level by consumers.  Last month when the Euro buyers were rushing into bitcoin, there was frequently a 3% or more premium by selling your BTCs for EUR instead of USDs (after factoring for the EUR/USD exchange rate).  So if a consumer found purchases that could be paid for using a SEPA transfer, the consumer chooses that route and as a result all the gain from routing the transfer through BTC was enjoyed by the consumer and not the seller.  

There was some article about one of the P2P forex services, either CurrencyFair or TransferWise, I forget, where users of the service were praising it for helping them avoid the exchange rate gouging they previously had been paying for settling with a foreign creditor.  

So it sounds less like there are actually businesses worrying about trying to be fair in offering exchange "at cost" but instead they are worrying about earning maximum profit from these international payments.
 
What would be nice to see start happening is some companies further up the supply chain start to accept bitcoins.  That way if a company has let's say 2% of their revenues come from bitcoins, they simply route those proceeds towards their accounts payable with vendors who accept bitcoins and entirely avoid then having to convert revenues made with bitcoins into fiat each time.

[sunnankar]

A service that is doing fiat on both ends probably should consider bitcoin only as one of the possible routes.

Well, I suppose it depends on fiat, where.

For example, many Chinese exporters get wires in to China only to try and figure out how to get the wealth out of China. Many use multiple personal accounts, which are limited to about $50k/year total, in order to avoid the taxes, currency controls and other requirements. By accepting bitcoins they are able to get around all those hoops. Then they can move into fiat, in Vancouver BC, and buy their real estate which is what they want to do with the manufacturing profits anyway because with the recent change in assembly and differences in 5 year plan implementation there is a lot of political uncertainty in China right now which is casting a pall over the business climate.

So for many Chinese it makes sense to accept bitcoins even if the spread is 7-12%.

[Blinken]

You are reading too much into published rates. Published rates are just synopses of individual deals, each of which is different.

When you deal with your counterparty the market maker offers and you accept it or decline it. There is no such thing as an "official" rate.

When big dealers trade dollars or pounds they set their rate to whatever they want.

In the case you cite, someone is buying something with BTC, the seller should set the price in BTC and that is what you send. It is wholly up to the seller to make prices. Now, you might say this could result in the pound price having a different value than the BTC price. Of course, but the processing costs of the two are different currencies are different as well. There is nothing wrong with a seller offering different prices in different currencies for the same good. In fact, throughout Europe you can find lots of goods that have a Euro price and a Dollar price, or a Euro price and a Kuna price or whatever. In Mostar everything has three prices: a Euro price, a Kuna price and Convertible Marks (BAM) price, and all three prices have different values.