If you haven't been on top of the news surrounding the remittance market in the past couple of years, it has been an eventful ride. For many decades now, we've had to endure transactions that are closer to one week than being instant, as well as flat fees, wire fees, exchange fees - the lot.
The huge industry of traditional banks is keen to stifle recent developments of money transfers. And if they’re not actively stifling it - they certainly aren’t the biggest fans of current developments. They've had it so easy for so long, but challenger banks and fintech startups are starting to shine a light on their medieval money practices.
International money transfers with UK banks
The UK is in an interesting spot right now. London has become a hub for hipster startups looking to challenge the status quo. If you look at Revolut, TransferWise and many other new remittance companies, they're all either founded or have head offices in London.
A few minutes’ walk towards canary wharf though, and you're met with powerhouse banks and historically significant financial corporations. It should be no easy feat taking them on, but through offering a significantly better service - banks have made it easy for them.
The true cost of international money transfers
So, just how bad are the banks? First, let’s look at charges for sending money outside of the UK - we’ll get to the other fees after.
Royal Bank of Scotland charge £9.50 for payments to an account outside of the UK, with a £12 corresponding bank charge for zone 1 (USA, Canada and Europe) and a £20 fee for the rest of the world. International drafts will cost you £20.
NatWest on the other hand will send your transfer the next day for £10, but will ask for £30 if you want it processed on the same day. That is to be sent to another EU country in euros. To send not in euros (or to send to a country outside of the EU), the fees are: £22 to send in 2 to 4 working days, and £30 to send within 1 to 2 working days.
What about the exchange rate?
Royal Bank of Scotland will charge up to a 3.20% spread on payments up to £25,000 (the difference between their rate and the wholesale “real” rate). For a £25,000 international transfer, you could be looking at £800 disappearing into their pockets, and that’s not including the transfer fee. Banks have been known to charge up to 5% in currency exchange markups.
Why the fees they charge are exorbitant
We have accepted this as the norm for many years, but recently Fintechs are proving that you can sustainably offer a currency exchange service with very little (and sometimes zero) markup. With their focused digital infrastructure and hedged currency holdings, startups are charging often around 0.5% fees and no currency markups to customers.
The amount of money this is saving expats, travellers and businesses is astounding. The 3%+ losses in their revenue has finally been restored, which in many cases is thousands of dollars for SMEs and even expats.
TransferWise is perhaps the best example of filling this remittance void the banks have left. TransferWise essentially took the service that foreign exchange specialists have been offering for a few years (which have previously been fairly inaccessible to ordinary people) and have combined it with the business model of challenger banks.
The main reason why this has been so successful is because currency specialists in the past have been awkward to use. You often had to phone or visit a branch, and still depend on a separate bank to send and receive the money into. TransferWise centralised this issue by making it a bank account. This means that we can literally get two brilliant (specialist) services from the same company: remittance and a debit card. But not just any debit card - a borderless one.
This is an incredible product for them to sell from a marketing perspective - a dream. The idea of not having to go to Asda or the post office to exchange your money before going on holiday, but instead literally just using your existing bank account card abroad. Not only is this more convenient, but it’s a better exchange rate than those previous options offered, too.
And that was the cherry on top for Brits. Most already hate their UK online banking app. Most of apps from traditional banks are not up to date with current trends and are lacking in efficiency. TransferWise come along with a challenger bank kind of service, similar to Starling, but has proven reliably to offer the best exchange rate on the market (apart from perhaps Revolut - another genius London-based fintech).
How does TransferWise shape up to its competitors?
TransferWise offers the real market currency exchange rate (no explicit markup), but take a 0.5% fixed fee on the value of the transfer. The finite money transfer company list keeps getting stronger, with many competitors fighting for some of TransferWise’s customers.
Most notably, World First is arguably the most impressive when it comes to currency support. They offer 121 currencies that you can exchange in, all with very transparent exchange rates.
A slight drawback of TransferWise is that they do not offer discounts for high volume transfers. After all, these middleman companies make more money when we transfer bigger sums, so it seems offering a discount would be appropriate like some others do. Nevertheless, the cheapness of sending small amounts is very impressive.
TransferWise also do not offer Options and some other derivatives. This would be the cherry on top, as it would fulfil all their currency related duties (offering a good spot rate is nice, but what if we want to hedge and mitigate risk?)
Some other companies such as Torfx may be better if you’re after a real specialist service - they will provide better fx expertise and guidance. On the whole, for the average person, TransferWise has understandably won their hearts for its simplicity, fairness and the convenience of the borderless debit card.
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