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The Pitfalls of International Money Transfer

By Jonathan Potter


Summary: Nowadays everybody offers money transfer "Commission Free" so that means everybody offers the same rates, right? Wrong! Expats have to dig quite a bit deeper to discover the true cost of transferring money to another country. Jonathan Potter explains.

Expat Finance - The Pitfalls of International Money Transfer

Servicing a mortgage or sending money home when working or living overseas can be a time consuming business if you're continually looking to make your hard earned cash go that little bit further.

In the good old days of foreign exchange you'd know how much you were paying in commission, it would be in big letters before you'd even struck a deal with your bank or broker. Nowadays everybody offers money transfer "Commission Free" so that means everybody offers the same rates, right? Wrong! Expats have to dig quite a bit deeper to discover the true cost of transferring money to another country.

When banks trade currency amongst themselves they exchange at a rate known as the "interbank" rate. However this rate is not available to retail customers. Corporates using their banks to manage currency exposure may get a rate close to interbank but they're generally dealing in millions. An expat exchanging €1000 a month to service a mortgage stands no chance of getting access to the interbank rate. That's because the interbank rate is effectively a wholesale price for a currency. Let's say £1 is worth €1.15, that's the wholesale cost of buying £1. But just like a shop adding on a margin to the goods it sells, your bank or broker will add a margin to the currency it sells you. This is called the spread in banking terms but in retail terms it's really the commission.

So now your £1 is going to cost you, say, €1.18. But the amount of spread applied is never obvious when you fix a rate to transfer money. If you phone around various banks and brokers to compare rates and find the best deal you still won't know for sure who's giving you the best deal without doing a bit more work. You see, the interbank rate is constantly fluctuating due to the large amount of money exchanged daily between the banks. So even though one rate looks better than another that may be because the interbank rate has improved, you need to know the interbank rate at the exact moment you received your quote in order to calculate the spread offered by each bank and broker....AND then it gets even more complicated. Some banks will have already included the cost of electronically transferring the money, others will add it on once the exchange rate has been agreed. Only once you've factored in all this can you make a true and fair comparison.

So remember, every time you call your bank or broker to get a comparison rate, ask what the spread is, ask what the interbank rate is and ask what the fee for transferring the money is, and have your calculator handy!

About the Author

Jonathan Potter – Finance Director Jonathan has over 15 years' experience in the Capital Markets and is currently Finance Director for CurrencyFair. He was previously co-founder and CEO of Law Debenture Asset Backed Solutions Limited, a wholly owned subsidiary of the Law Debenture Corporation PLC, specialising in the administration and analysis of structured finance investments. Prior to that he was European Head of Analytics at The Bank of New York Mellon which followed positions at Deutsche Bank and JPMorgan. Jonathan graduated from Cardiff University in 1993 with a BSc in Mathematics.

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Comments about this Article

Jun 20, 2011 22:37

This article seems next to useless, as one can't expect to be in a position to simultaneously know interbank rates, spreads and transfer fees for more than one foreign exchange source. Better to check the general reputation of the exchange source and go with that.

Jun 28, 2011 06:53

I would argue that it is not better to rely on general reputation as significant savings can be made when shopping around. Any reputable broker will be able to confirm the interbank rate when a price is quoted, if not there are numerous free source of up to date interbank information available on the internet. I would also add that you should look for a disclaimer under any website currency calculators that states the rates are indicative only. This invariably means the rate is an interbank rate and that the spread will be added at the quote stage.

Jun 29, 2011 18:50

This is a good post and people who are savvy enough to come across this may well know already about the vast differences in the market rates and what 'spread' or in business terms 'Profit' a fx company makes. Please be aware that every company isnt a charity and you need to find out how exactly they are making their money - is it hidden in the exchange rate or is it in an extra transfer fee? The most important and most often vital point for international money transfers isnt WHO will give you the best rate, as every company will always try to beat one competitor's rate to another, it is the WHEN to make the transfer. Of course, the bigger the amount the more prominent is the right time to book an exchange rate. There is nothing worse thant getting a deal booked right at the last minute when you could have got a much better rate being guided by a a currency broker a week or two before the payment was needed to be made. Find a company you can trust to make a good call for when, unless you feel like sitting on a PC analysing the rates most of the days yourself! Ashley Ingle, Trading Floor Manager, Excel Currencies.

First Published: Jun 11, 2011

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