It’s crazy to think about how international our lives have become. In many cases, our parents lived most of their lives here in the UK. Their parent’s and grandparent’s generation barely ventured beyond the town or village where they resided.
These days, we think nothing of going to Thailand on holiday. Whilst abroad, we openly muse about buying real estate in sinfully cheap destinations. Our children study in Norway, Australia, Canada, and other countries. We buy things from e-commerce retailers from America, China, and the European Union.
It can be hard to go more than a few days without engaging with the world in some fashion. Inevitably, some of these transactions are financial. Every time we move money abroad, banks are taking us for a ride.
The financial establishment is making a killing off charging obscene fees/margins on currency exchange. When it comes to avoiding unreasonable currency fees, knowledge is your first defense. In this extensive blog, we’ll show you how financial institutions are soaking you, and how to get the best foreign exchange rate.
High Street exchange bureaus are getting away with financial murder
For years, you’ve used them to change leftover foreign currency after your latest overseas adventure. Not once did it occur to you that your favourite exchange bureau was ripping you off.
We hate to be the bearer of bad news, but we’re almost sure they have. It all starts with commission fees. You might have passively accepted it in the past – the poor sod on the other end needed it, right?
Wrong. In many cases, exchange bureaus compensate the employee the same, no matter how many transactions they process. Instead, “commission fees” go straight into the revenue pot. Then, there are the exchange rates themselves.
Suffice to say, the rates at High Street currency exchange bureaus are NOT the real ones. To make money, they charge a less lucrative rate (and keep the difference.) Curious about the “real foreign exchange rate?” We’ll delve deeper into that later.
All in all, you’ll pay a ridiculous amount to change/send small amounts of money. Between wire fees, commissions, and their rate of exchange, you’ll at least 5% of the amount changed/sent. In some cases, their take can be as high as 10%.
Does the thought of paying £50 to send £500 make you mad? It should.
Don’t believe “no-commission” exchange firms
Perhaps, you’re aware that you should avoid certain exchange bureaus. As such, you’ve sought out the business of so-called “no-commission” exchange firms in the past.
We’re sorry to say it, but – you likely haven’t saved any much (if anything.) In fact, you probably paid more. Here’s the truth about no-commission outfits – to make up for “losses” on the front end, they take more significant margins on the back end.
That is, they charge an exchange rate even FURTHER removed from the REAL foreign exchange rate. At the end of the day, these guys prey on those who don’t understand foreign exchange.
We implore you not to be one of them.
Even big-money transfers aren’t safe from excessive exchange costs
In any business, higher volumes equal more significant discounts. This maxim holds in Forex trading, as well. Rates are lower when you move THOUSANDS of pounds rather than hundreds. However, businesses, real estate investors, and expats still pay FAR MORE than they should.
The average retail bank (like Barclay’s) can charge up to 3% of a large transfer in fees/margins. Let’s illustrate how much you could LOSE if you opt into this arrangement. Let’s say you need 20,000 EUR to close on the purchase of a condo in Alicante, Spain.
Currently, Barclay’s are offering a GBP/EUR FX rate of 1.1387. When you add in their £30 wire fee, you’d need £17,594 to cover closing costs. What if you could use the REAL foreign exchange rate? Assuming you could, you’d only have to fork over £17,035 GBP at a GBP/EUR FX rate of 1.1740.
For those keeping score, that’s about £600 less – or enough to throw a cracking housewarming party. At any rate, it’s absurd to have to pay nearly £600 to move money.
The losses only compound as the amount transferred goes up. Let’s say you run a thriving business that moves 100,000 EUR abroad per month to vendors. In this instance, Barclay’s is feeling generous – so, they’ve waived fees. Also, they’re charging rates “only” 2.5% off the original price.
That means you get a GBP/EUR rate of 1.1447. Every month, you pony up £87,359 to pay suppliers, outsourcers, and other accounts payable. However, if you could trade at the real GBP/EUR FX rate of 1.1740, you’ll only have to move 85,179 GBP. That’s £2,000 wasted per month and over £24,000 per YEAR.
Could you explode growth, hire more employees, and cut yourself a fatter paycheque with £24,000? We think you know the answer to that!
What is the interbank rate?
At this point, you’re likely wondering, “What is this mythical REAL currency exchange rate, and why can’t I access it?” Both valid questions, so we’ll take a second to answer both.
The REAL foreign exchange rate is known as the mid-market, or the interbank rate. In short, it is the best foreign exchange rate available. As such, financial institutions and brokers use it to trade currency with each other. Of course, it’s impossible to make money exchanging cash at wholesale rates. So, they charge a markup to you – the consumer.
Banks make most of their Forex profits on margins
This markup, also known as a margin, is how banks and other exchange bureaus make money on Forex. Usually, this deviation averages 2-3% on major currency pairings, like GBP/EUR or GBP/USD.
However, this take can expand considerably on specific pairings, like GBP/INR. Also, in situations where a captive audience is present (like airports or cash pickup transfers to Africa), margins explode.
In either case, the transfer provider has no incentive to cut consumers a deal. And so, you’ll pay 5%-10% (or MORE) of your send amount, directly into their pockets.
How have we not noticed this scam (until recently)?
Given the egregious nature of these pricing practices, it’s shocking we’ve put up it for so long. Why haven’t we risen up and taken our business elsewhere?
Because, until this past decade, most of us didn’t have a choice. Apart from the banks, there was only Western Union or Moneygram. Rather than rock the boat, these two money transfer companies opted to match the bank’s rates.
In effect, the money transfer industry was an oligopoly. With plenty of business to go around, there was no incentive to engage in competition with each other. And so, the financial establishment happily gouged everyday Britons on currency exchange for decades.
However, in recent years, we HAVE begun to notice how bad this arrangement is. Remember how we remarked on how domestic the lives of older generations were? Back then, going abroad was a big deal, as international travel was MUCH more expensive.
As such, people didn’t fuss over the cost of currency exchange – it was an accepted part of the process. However, in recent years, our world has become more interconnected. We travel much more often. Buying a holiday home in Europe is normal. More of us work abroad as expats. And, we run businesses that have suppliers and staff around the world.
As we’ve sent cash abroad more often, we started to question the small amounts received on the other end. And so, on the internet, we searched for and found out the truth – the banks aren’t loyal to us. Their only obligation is to their shareholders. If charging an extra 2% on transfers increases the size of dividends, they’ll do it in a heartbeat.
Online money transfer firms have attacked these gross inefficiencies
The scam that are bank currency transfers have been exposed for all to see. However, unlike ten years ago, we can actually do something about it.
To be fair, before the 2010s, there were money transfer companies apart from the usual suspects. However, the likes of Global Reach, World First, et al. focused their marketing efforts on the B2B market. By 2010, though, travellers, expats, digital nomads, and overseas workers grew increasingly frustrated with high fees.
Fortunately, two Estonians channelled their anger into action. Fed up with having their paycheques and mortgage payments skimmed, they used their finance experience to start Transferwise. Taavet and Kristo knew the banks/Western Union/Moneygram charged ridiculous fees and margins.
So, they undercut them. Completely. Upon launch in 2010, Transferwise announced they were changing money at the interbank rate. To make money, they charged a small fee on the transfer amount. Usually, this rate hovers around 0.5%.
Over the ensuing years, growth exploded, as they easily offered the best foreign exchange rate in the world. By 2018, they were moving four billion GBP per month. This amount made them the world’s largest money transfer companies. Thanks to their extensive ties to tough markets, Western Union remains on top.
Encouraged by Transferwise’s success, scores of online money transfer companies have flooded the market. CurrencyFair, Azimo, and WorldRemit are just three companies that have made their mark this decade.
Thanks to increasing competition, not even Transferwise can’t always claim to have the best foreign exchange rate. To guarantee the best possible price, we advise taking an hour or two to shop around. By visiting sites like MoneyTransferComparison.com, finding the top FX rates is a piece of cake.
Remember: the more you send, the more your savings (or losses) will add up.
Look out for your bottom line
You’re 100% responsible for the state of your finances. Banks will NOT go out of their way to save you money on currency exchange. However, you now can save considerable amounts of cash on money transfer by taking advantage of alternatives.
Weigh up your options, then choose the money transfer companies that best fit your situation. It’s that simple.