foreign currency exchange and international money transfers

Can You Make Foreign Currency Exchange & Money Transfers Frugal? 

Banking Finance

Last Updated on 19/05/2020 by NM Staff

Foreign currency exchange (FX) is never cheap per se. However, being a frugal-minded person, you can find ways to cut the costs of this financial operation. To do this, you’ll need to start by researching your options and comparing traditional and alternative financial institutions.Banks are the most traditional and, quite often, the most expensive as well. However, today there are many digital services that make international money transfers and currency exchange both simpler and cheaper.  But those require careful research as well because not all of them can be equally trusted.

Why Is Foreign Currency Exchange Expensive?

To understand why currency exchange is expensive you need to know what a margin rate is. This rate is what banks or any other financial institutions that conduct the exchange charge over the rates on the Interbank market.

Simply put, banks doing exchange directly use one rate. However, the rate they quote to you when you want to use their services for exchange is different. The margin rate is that difference. And charged by banks, this rate can be very high. Hence, the high cost of foreign currency exchange and international money transfers, which involve this exchange.

However, the worst thing about this is that you don’t even know about this margin rate. The majority of banks maintain it at about the same level. Therefore, as a customer, you just see minimal differences in FX rates offered by banks. But as you are unaware of the mid-market rates that they truly use when exchanging funds, you don’t know exactly how much money you are overpaying for every transaction.

How Much Does Foreign Currency Exchange in Banks Cost?

The exact amount of money you are overcharged for foreign currency exchange by banks varies. It depends on the bank as well as currencies involved. But those rates can be easily as high as 1.3 or even higher for exotic currencies.

When making international transfers, you’ll need to add to those high margins some additional expenses, such as transfer fees. Every bank charges them, and when you transfer money abroad, you pay to both yours and the recipient bank.

All things considered, the cost of a single transfer will be 5-7% of the transfer amount, on average. For some currency corridors to developing countries, these costs can go over 15%! Therefore, finding a cheaper alternative should be your priority.

How Much Do International Money Transfer Cost with PayPal?

PayPal, and similar money transfer services seem like a great alternative to bank wire transfers. And in some way they are. At the least, they make the process of international payments simpler. This is a great advantage for many merchants. Small businesses today widely use PayPal as a payment option because of how widespread its coverage is.

However, while PayPal is the best within its category of businesses, it definitely isn’t cheap. International money transfers, which involve currency exchange, will cost 5-7% of the transfer amount.  The destination of the transfer and its size are the most important factors. PayPal will also charge different fees depending on whether you transfer money from your debit bank account or a debit/credit card. The latter will cost a 2.9% funding fee as well as a set fee, which is different for every supported country and currency.

How Much Does It Cost to Transfer Money Through Online Money Transfer Companies?

At the moment, online money transfer companies and FX brokers are the cheapest option for foreign currency exchange and international transfers. The main advantage offered by these companies is a very low currency exchange margin rate. They also rarely charge any transfer fees. Therefore, the cost of the transfer can go below 1%.

However, these companies are numerous and the industry is poorly-regulated. This means that you should start choosing an online money transfer platform by conducting a thorough comparison. These companies differ in coverage greatly, so find out what options you actually have available first.

As a rule, using the services of the leading companies is the best choice. Not only do they offer the best rates. They also are the safest.

TransferWise is the definitive leader n the online money transfer industry today. The company is valued at $3.5 billion and it keeps growing. It has also recently partnered up with Alipay, another fintech giant. This gives the company access to China, which is a huge market for its services.

One of the biggest benefits offered by TransferWise is the fixed margin rate, which depends on the volume of your transfers. However, today TransferWise isn’t the only company offering this kind of perk. World First, which Alipay bought last year, now gives customers the same terms. Moreover, its margin rates are actually lower than TransferWise. Depending on your annual transfer volume, you can get margin as low as 0.15%.

What Other Online Money Transfer Options Should You Consider?

TransferWise is, no doubt, an exceptional company that can meet the demands of many customers perfectly. However, it doesn’t necessarily offer the ultimate FX money transfer method on the market. That company is excellent for small frequent transfers. However, if you plan to sell something globally online, World First might be a much better choice.

Moneycorp is good for larger business transfers. It has no fees and offers some great rates overall. There’s also Currencies Direct, which has zero fees by default. It’s also one of the oldest and biggest companies in the market with widespread coverage.

There’s OFX, one of the industry veterans on par with TransferWise. It offers rates that can be even better and a very high level of transparency. Its services also extend to Singapore and Hong Kong.

As you can see, there is no shortage of online money transfer companies. And each of the options has some unique advantages. Therefore, when choosing which company’s service to use, you need to understand exactly what you need. Look beyond the rates and FX margins when comparing the options. You should consider additional perks ever company offers. Some of them might be so beneficial that even paying a slightly higher FX margin can be worth it.

Also, remember to check the company’s trustworthiness and reviews. Choosing industry veterans is always the safest route.