So, you’re sending cash abroad for the first time. Whether you’re sending it to your college-attending son in Canada or buying a Costa Rican beach house, the process can be intimidating. When you have to supply banking details and pay fees you don’t understand, it’s easy to feel vulnerable.
We don’t mean to scare you, but your hesitance is warranted. The banks haven’t become the wealthiest entities on the planet by accident. They’ve made money for eons – even when the economy is down, they still earn profits.
However, by educating yourself, you can get the best deal possible. Obey a few simple rules, and you can save hundreds or even THOUSANDS of dollars.
Let’s get started.
What fees do banks and other financial institutions charge?
There are no free lunches in life, nor banking. Without financial institutions, you’d have to transfer cash yourself. You’d have to spend weeks paddling across the ocean, or walking across the desert.
Now, that sounds ridiculous, because it is. It’s a better use of your capital to hire a money transfer provider to do the work for you. In return for providing a service, they get to charge fees. Sounds like a fair trade, right?
On one hand, it is. But, for decades, banks and transfer providers had a monopoly on international cash transfers. And unsurprisingly, they’ve abused that privilege.
Let us show you what we mean by that. While you may not have wired money internationally before, surely you’ve gone on vacation to places like Mexico. When you have, you likely ordered Mexican Pesos beforehand (MXN).
The Bank of America sells foreign currency to its customers for holiday spending. You’re heading down to Puerto Vallarta, and you want to have a great time. So, you decide to change 2,000 USD to MXN.
BoA gives you a USD/MXN rate of 18.6, which yields 37,200 MXN. So, you got 2,000 USD worth of Pesos, right? Well… not exactly. To make money (and lots of it), Bank of America charges their own USD/MXN exchange rate. One that’s 5.5% off the official interbank rate, to be exact.
What’s the actual exchange rate? According to XE.com, the official USD/MXN rate was 19.7 as of September 30th. That means your 37,200 MXN is actually worth 1,888 USD – more than 110 USD less than you put in.
They don’t offer free travel cash delivery out of the goodness of their own heart. Banks do it because they’ve already made a killing.
It gets worse if you’re sending a wire transfer out of the country. So, you are about to send a wire transfer to your son, who is attending McGill in Montreal, Canada. He needs 500 CAD for books, so you call up BoA. They quote a rate of 1.2895 – that means you’ll need to pull together 388.74 USD.
But, wait – they charge an outgoing fee on international wire transfers. They charge 45 USD if you send the amount in US dollars, and 35 USD if you send in CAD. Either amount is outrageous, but don’t be fooled by the smaller amount. That means you’ll change your money in-branch – which exposes you to worse exchange rates than usual.
The interbank rate for USD/CAD is 1.3239 – about a 2.5% difference. You give up 11 USD to Bank of America on the exchange rate, and more than four times as much in fees.
Why is it hard to find foreign exchange rates for banks online?
As we’ve shown you, the banks aren’t looking out for your financial best interests. As such, it is not shocking in the slightest that exchange rate information is tough to find in America. To learn your bank’s rate, you have to call them – which makes you feel obligated to use their services.
They do this for a self-serving reason – they don’t want you to comparison shop. They know that in 2019, you have much better options at your disposal. Below, we’ll talk about the three golden rules of finding the best money transfer companies online.
Rule #1: Know the interbank rate
Think the actual cost of a Big Mac is the $3 you paid for it at McDonald’s? Think again. That price represents the cost of labor, operational expenses, and corporate profits. When you tally the wholesale cost of ground beef, buns, lettuce, and tomatoes, it comes to well under a dollar.
Similarly, the exchange rate that a bank (or any money transfer provider) gives you is NOT the real exchange rate. The “wholesale exchange rate” is known as the interbank rate. To turn a profit, financial institutions charge a rate apart from it – this difference is known as the margin.
In general, the tinier the margin, the better deal you are getting. This rule isn’t always valid – for instance, Transferwise gives customers the ACTUAL interbank rate. However, they charge a fee of 0.5% or higher on the entire transfer amount. In some markets, this fact allows some providers to offer a better deal.
Rule #2: The more transparency, the better
As we illustrated above, it’s not easy to learn about the fees that banks charge. Aside from its fabulous rates, Transferwise made waves by showing the public how it made its sausage.
That is, they were completely transparent about the fees they charged to make money. Any time you make a transfer on Transferwise, you can click on a button that shows their math. Other sites, like CurrencyFair, have followed suit.
In finance, there should be nothing to hide regarding transaction fees. Those raised in the Information Age view those who withhold information with suspicion. When a bank (or any other financial institution) does it, you SHOULD be nervous.
Rule #3: Always comparison shop before choosing a money transfer provider
Nine years ago, Transferwise demonstrated that they could reliably transfer money cheaper than the banks. As their market share mushroomed, other fintech startups got in on the action.
Today, you have a wealth of international money transfer options at your fingertips. WorldRemit makes it cheap and easy to send money to “exotic” markets. So has Azimo. And small businesses enjoy affordable rates and access to advanced Forex tools through OFX.
Which one is best? It depends on your needs. To best determine this, check out a quality FX money exchange comparison site. They break down each provider by the services they offer. This way, you’ll find a provider that serves you best.
Be smart when sending money internationally
It’s a jungle out there. When it comes to money, predators lurk in the weeds, waiting to take what they can get off you. Fortunately, it’s never been easier to stay informed. By educating yourself, you can hunt down a great deal, rather than being a great deal for a bank.
No Comments