The ever-growing foreign exchange market, with a daily trading volume surpassing $5.5 bn in 2014, comprises an opportunity for profit for banks, international payment providers, brokerages, and other liquidity providers.
The way these financial institutions profit from foreign exchange is via taking a certain markup off the mid-market rates. Their fees alone accumulate to billions of dollars in revenues costing end-clients billions of dollars.
What is an FX markup?
If the current interbank exchange rate for EURUSD is 1.112, and a certain bank has a bid price of US $1.082 for 1 Euro, the markup which is charged stands at $0.03 per Euro.
It is synonymous to say that for each EURUSD transaction conducted through this facility, the direct currency exchange costs would be 2.69%. That's $269 of each $10,000 sent, before service fees, and additional commissions.
How much does it really cost?
When sending currency abroad or receiving international payments, larger high-profile corporates, conducting high-volume payments frequently, could be paying several pips of each exchange in mark-ups, while small-volume international remittance transfers to certain locations could cost immigrants 30%, according to World Bank.
These charges vary to a large degree in different situations. According to the top money transfer companies, making educated choices on international payments could save clients 80% of the cost.
Banks or commercial foreign exchange?
Globally banks still dominates foreign currency transfer market. In the UK, over 80% of private clients use banks for international wires. Elsewhere even more people rely solely on banks as the default option.
With lucrative status, combined with the lack of awareness, banks' default rates are not inline with the client's interest. They often advertise a "no commission" policy, but charge $25-50 or equivalent as fixed transfer fees, and an additional 2.5-4.5% in markups. If American client buying an overseas property in the UK, which costing about $300,000 or £200,000, could be paying more than $10,000 in transfer fees.
Banks are large and complex organizations, offering multidisciplinary financial services. It's unreasonable to believe a client (not representing a large corporate or owning a HNWI account) would be able to negotiate much better terms.
In contrast to banks, commercial foreign exchange firms are more personalized, more approachable with tighter margins.
With smaller personal transfers clients can use services like Transferwise, Azimo, Worldremit, or CurrencyFair, for best rates. The markups they take are fixed, and almost always below the 1% mark. Potential clients can visit any of the websites mentioned in this article to get a live quote, even without signing up.
With larger transfers (property, large payments, immigration, or business transactions), or frequent ones (remittances, pensions or mortgages), clients can sign up with traditional foreign exchange firms to get a quote. Companies like World First, Moneycorp, HiFX, Currencies Direct, TorFX, or Afex offer a different type of service authorizing dedicated currency consultancy.
Personal guidance enables the client to transact at the most favorable time (using tools like Rate Watch), (SEPA payments are sent in tranches of EUR 50,000 introducing lower fees from recipient banks in the EU). These two benefits represent a hard to amount savings, but in current volatile economy have the ability to save dollars when conducting high-volume transfers.
The actual markups used by these companies are not pre-set, and could range anywhere between 0.1% and 2%. Unlike banks, most of these companies will not charge upfront wire fees above a certain threshold. The markups they will depend on the volumes the client will be transferring, the currencies exchanged, and the type of contract required (spot or forward).
A payment for a UK property of $300,000, which can cost US 10,000 using banks, is likely to cost no more than $2,000, representing a cost reduction of 80% in comparison.
Alternative transfer methods and their fees
Companies like Moneygram, Western Union and Xoom have dozens of offices and agents all around. Their biggest advantage is cash to cash payments is developing economies where banking system is inefficient, expensive or corrupt. The biggest disadvantage is often poor exchange rates, representing a markup of up to 10%.
Another option is to carry cash with you across the border. With risk and complicacy (travelers in or out of the USA carrying more than $10,000 in cash must report so to FinCen), it's also costly. Exchange money through a high-street foreign exchange office could cost 8% in various fees.
A third option is to use an eWallet, like Paypal or Skrill., but fees are extreme. Paypal charges 2.5% for the currency exchange, and an additional 2.9%-7.4%, and Skrill charges 2.5%-4.5% on the currency exchange and 1.9% on the payment, according to this comparison. If a client would transfer an average payment of US 3,000 through these channels he could end up paying $200 to $300 in fees.
A newly introduced option is move Bitcoin between wallets. The biggest advantage is that it doesn't cost anything to send bitcoins to another account (though exchanging them with USD does cost 0.25%-1%). The biggest concern is the high volatility of this currency.It could depreciate by dozens of percents by the time it is exchanged to a non-crypto currency.
Awareness, research and comparison can help clients save up to 80% in foreign exchange. For clients sending more than 10,000$ abroad, it's recommended to seek for expert guidance which ensures payment is made at the right time to maximize saving.