What is a spot contract? How to exchange currency at the spot rate

A spot contract. It really doesn’t get much more straightforward in the world of international money transfer. So is it easy to arrange? Well, not exactly. First, it depends on what you’re after. And second, how do you choose a service to use when there are hundreds soliciting your business?

It’s a good question and not necessarily a simple one to answer. The reality is that each money transfer service is slightly different, and the performance of each varies when compared against a standardised benchmark.

In this post, we’ll explain the concept of the spot contract and let you know who offers them. This way, you can differentiate each service from its competitors and select the right one for you.

What is a spot contract? A definition

A spot contract is a single foreign exchange transaction at the current available rate. It is the most basic and common form of payment there is. It involves the purchase of currency for settlement on the spot date, which is technically two business days later. However, most services insist on immediate settlement, so practically speaking, it is a buy now, pay now arrangement.

If you’d like to make an international payment right away or with very little notice, then a spot contract is the one for you. Many modern money transfer services allow you to complete these transactions through their online platforms, or if you are dealing with particularly large values, a foreign exchange dealer may be able to help assist you with the process personally.

From sending small amounts to friends and family overseas, to large commercial purchases of plant and machinery, a spot contract is suitable for all single currency transfers. If your requirements are simple and you’re not concerned with the volatility of exchange rates over time, a spot contract is adequate for exchanging one currency into another and sending these funds to your desired recipient.

Examples of exchanging currency at the spot rate

Below, let’s take a look at how a spot contract can be used to accomplish a money transfer. I’ll provide three quick examples; one each for small, medium and large amounts.

£1,000. Your teenage son has gone on an international backpacking adventure. He gives you a call from his hotel and lets you know that his wallet has just been stolen. As a result, he has no money and asks you to make an emergency transfer. You sign up with money transfer app and send funds to him that are available for cash pick-up at a local kiosk within a matter of minutes.

£10,000. You are working abroad as an expat and want to send some of your savings back to your home country. You sign up with a money transfer service and use their online platform to arrange a spot contract at today’s exchange rate. After making the money transfer request, the funds arrive into your bank account at home three days later.

£100,000. Your business just opened a small office in a nearby country. Once the company’s new subsidiary has been established, it awaits an injection of capital to begin trading. You open a business account with an international payment specialist, and ask that one of their foreign exchange dealers guide you through the process of arranging a spot contract at a competitive rate.

What to consider when looking for a spot transfer service

So, now that you have a general idea of what a spot contract is, and have seen some examples of how they operate, what should you be looking for when it comes to selecting a service? Basically, every service out there offers spot contract functionality, therefore, it’s a good idea to think about what exactly you’re after before signing up.

Here are four things worth considering:

1. How would you like your funds delivered to the recipient?

Depending on the value and purpose of your spot contract, you may have a preference of how the funds are actually delivered to your recipient. Most transfer services that deal with medium to large values will usually only deliver funds to another bank account. However, many low-value remittance services can offer a variety of flexible delivery methods, such as:

• Cash pick-up
• Door to door delivery
• Mobile money
• Airtime top-up

2. How quickly do you need the transfer to be made?

The time required for each service to complete your spot contract will vary, and most provide an indication of this on their website. If you need a fast exchange, you may need to forego a better rate. On the other hand, if you are prepared to wait a few days you can reduce your overall costs by a percent or two. Many services allow payment by debit or credit card for low values, which can speed up the process for urgent transfers.

3. How does the cost of a service compare to other options?

Before committing to using a money transfer service, it’s important to understand what charges you’ll incur by using it. First, it may charge a transaction fee for executing each transfer. Second, it may also take a margin on the exchange rate provided to its customers, also known as the “spread”; which is the difference between the rate of the wholesale market and the rate offered to the customer.

Considering this, what types of expenses should you keep your eye on? Both. In my opinion, you should try not to focus on either in isolation. Instead, try to compare the quotations of a spot contract based on the overall cost of each service when compared to our benchmark; the interbank mid-market rate. To find out the mid-market rate of any currency pairing, use this tool over at xe.com.

4. Do you need professional advice or advanced tools?

If you’re confident that all you’re going to need is a basic spot contract, that’s fine. But before you go through the process of signing up with a service, first make sure it has the all the features you’ll need. A simple service may not do everything you want, while more specialised payment services can provide currency advice, as well as a range of advanced foreign exchange tools, such as:

• Regular payments
• Currency forward contract
• Foreign currency options
• Market order
• Multi-currency account

Want to read more about how to compare services?

If you’d like to know more about how to complete a comprehensive review of the options available, I suggest that you take a look at our post on how to compare money transfer services. If you have specific queries about personal money transfer, I’d recommend taking a look at our article on how to send money online. While those with commercial interests should take a look at our post on business money transfer.

What services can exchange currency at the spot rate?

Now that you’ve thought about what you’re after in a spot contract, we can begin to narrow down the range of services that will be most suitable. Generally speaking, services can be placed into three broad categories; remittance services, peer to peer services, and international payment specialists.

Remittance services

A remittance service is probably what first comes to mind when you want to arrange a spot contract. They can be exceptionally fast, with many providing instant delivery. Most are part of a large retail delivery network, with some networks being larger than others. These services are mainly suitable for low transfer values and allow you to fund transactions by a variety of means, such as debit or credit card.

For all their benefits, however, there are limitations. They can be quite expensive, as it takes a lot of resources to grow a network and pay commissions to retailers. Also, as many older services have modified their technologies over time, their systems have become inefficient when compared to their modern competitors. The often results in a cumbersome experience from a usability standpoint.

Peer to peer services

Peer to peer services are those that have been created to solve a very specific problem. Instead of entering the foreign exchange market, where possible, they aim to use their customer’s own funds to satisfy the currency requirements of other customers. Typically consisting of an online platform, a peer to peer service is usually a cheap, clean and functional way of arranging a spot contract.

Of course, there are a few downsides. They are often limited in respect to what countries they can accept customers from, and what countries they can deliver funds to. Because these services achieve most of their efficiencies from establishing their own payment infrastructure, it leads them to focus only on popular corridors, at least in their formative years.

International payment specialists

International payment specialists are effectively foreign exchange brokers who aim to provide a broad suite of money transfer products, in addition to the basic spot contract. They can advise on a range of advanced tools, such as forward contracts, options and market orders. Their services are perfect for high-net-worth individuals and businesses conducting large or complex transfers.

However, for all the products provided by these services, there also comes an additional cost. When compared with peer to peer services, you’ll find that international payment specialists are slightly more expensive. This is partly due to the advanced products they offer, their customized advice, and also due to their use of the SWIFT payment network.

Conclusion

In this post, we’ve outlined that a spot contract is a single foreign exchange transaction at the current available rate. Your choice of money transfer service will generally rely on a number of factors such as the way in which you want to currency delivered, your timeframe, the total cost involved, and if you require any advanced features. While there is an abundance of services that can help, I hope that this post has narrowed down the list of potential suitors.