Guest Post from Monika Kania, CEO of Xchanger
Monika Kania is the CEO of xchanger.io, a UK and Poland based FinTech startup that offers its customers with a white label currency transfer comparison widget and enables them to increase revenues from new tools. She is passionate about the cheapest, fastest and most convenient money transfers for individuals and SMEs. You can reach out to her at [email protected].
Many online users still use traditional transfers to transfer money abroad or make cross-border payments. Unfortunately these come with hidden costs that are sneakily included in. Many newcomers have risen to solve these problems, and we want to educate people on how they can avoid these hefty banking fees.
Picture the scene – you’re a third year engineering student from Bristol about to start her semester abroad in Barcelona. Your grades have been excellent and now it’s time to add international experience to your resume and have some fun as well. You’ve just signed your apartment lease and you’re already on your way to having a great three months.
Now, the problem is that in order to move in, you need to pay the deposit to the landlord up front. But paying this deposit requires sending money from your British bank account to your landlord’s Spanish account. Eureka! You’ve just realised that:
a) To make your stay in Barcelona affordable, you need to find a way to send money quickly and at a low cost
b) You’re officially becoming an international nomad and that’s all well and good, but going overseas usually means higher overheads. The transfer fees, exchange rates, hidden costs… the list goes on!
By now, you’re probably considering some money transfer services for your stay abroad, which could skim quite a bit of money from you – until now!
You see, in the last five years, there has been a surge in alternative money transfer services to reduce costs and remove the hidden costs that banks sneakily include. The problem is that people have not begun using these services, because they are still unaware that banks are skimming way too much money from them. How so?
Here are some examples of how you might be paying too much:
1. “Indicative exchange rates” or Rates from Wonderland
See, banks still use old school means to deal with their customers. When you make a foreign transaction, the bank sells you the foreign currency with an added fee embedded into the price. That’s why you’ll see tags like ‘zero commission’ or ‘best exchange rates’ across their ads.
That is not the real exchange rate.
The banks call it an “indicative exchange rate” which is their own exchange rate that comes from the same world as Middle Earth, Narnia, and other fictional places.
Many of us have never even realised this before, since most people assume that exchange rates are roughly the same between most banks, but sadly, this isn’t the case – banks can add up to 3% on top of the regular mid-market rate, for most currency pairs.
You would think that the “indicative live rate” refers to the real exchange rate, but it’s actually just a sleight of hand. Their rate is exactly what it claims to be – it’s simply ‘indicative’, not real.
Even worse, they derive this indicative live rate from a reference rate – which is also set by the bank. Yes, it is as bad as it sounds.
Let’s get back to the example of you as a student from Bristol living in Barcelona.
You check Google for market exchange rates, and realize you can pay the €500 deposit with a £440 transfer. Not so fast! The bank has made up their own “indicative rate” that is 2.5% higher. Then they marked up this exchange rate by another 2.5%. So when you make the €500 payment, you are shocked to find that the bank expects you to fork up £465. An extra 25 quid just because they said so!
2. Unnecessary surcharges
If you thought your problems ended at the matter of marked up exchange rates alone, you forgot to read the fine print:
Additional payment fees may apply.
The banks have tortured you enough with their appalling exchange rates. Now come all the fees you have to pay just to send money between the banks. Here is the catch – there is actually no need for these costs, because these banks share the same payments infrastructure anyway.
Back to the previous example – You send money from your bank in the UK to a bank in Spain. Both these banks are 100% going to be part of the same payments networks used all over Europe. All the banks do is send a message to them, and at the end of every month, the net amount owed between everyone is settled. Despite this, banks will say they want £10 to £25 as an interbank payments charge. So your £465 payment now rises to £490.
So a full 50 quid extra just to send money to move into your new apartment. And now this will sum up for future transfers as well.
The good news is that smaller players have come up who’ve adopted the latest technology reduced the fees drastically. We want to educate you on the options available, so you can avoid such costs.
Retail FX brokers – Travelex, World First
These are the prepaid card providers who allow you to top up a card with foreign currency. They have access to the wholesale markets and let you skip the 3-6% margin from banks. Best of all, they are good option for countries with capital controls that don’t let money leave their borders easily. However, you may still pay the fixed surcharges for topping these cards up.
Peer to peer – CurrencyFair
These are online marketplaces for buying currencies directly and live. They let you skip all middlemen and get the best market rates. However, they can be expensive when transferring from countries with capital controls.
Online payments – Transferwise, Azimo
These are online payments platforms that maintain a bank account in each country. Since they just and receive money from their own accounts in each country, the money never leaves borders. A lot of surcharges and excessive exchange rates are avoided this way. However, it works best for countries where there is an equal flow of currencies in both directions. Which is why you can use Transferwise to send money to India, but not receive money from it.
What is best for me?
Just like with flight tickets, prices from different providers change all the time. All these providers use different reference rates, and the sum of the surcharges and exchange rates vary. To know what is the most economical option, you must take the advantage of the most powerful regulator in the market. Who is this regulator?
You, the consumer!
You need to be diligent and study each option carefully. And elect the provider who serves your best interests. That is the first major step to creating a banking and financial services market which works for all.