Depending on where you live on this planet of ours, you may or may not have had to routinely exchange your local currency for that of another jurisdiction. Europeans have dealt with this issue for centuries, but citizens in the United States may rarely venture outside of their national borders, except for possible side trips to Canada, Mexico or the Caribbean. A trip to Bermuda, however, would introduce the American traveller to the British Pound and make him question whether his exchange rate was favourable or not.
Globalization, however, is swiftly making the world a smaller place. Cross-border commerce has become second nature to most business executives, and the situation where one works in a foreign land, but sends money regularly back home, is also becoming more prevalent. To accommodate the needs of these various factions of the global scene, banks and money-transfer agents have been slow to change their ways. The simple reason for this intransigence is self-evident – there has always been a tremendous amount of profit in the foreign exchange transfer business.
When there is a high degree of profit in any commoditized industry, providers tend to get creative. Pricing mechanisms soon become a confusing array of fees, margins, and charges meant to confuse and prevent buyers from comparing various distributors in order to make a well-informed decision. The introduction of the Euro before the millennium crossover only served to embolden the financial establishment in this regard. Profit margins in foreign exchange in Europe have traditionally been the highest. Many had hoped that the Euro would reduce costs and reward consumers in the long run.
Instead of cross-border transfers becoming easier and cheaper in Europe, roadblocks and delays were the rule. As a result many websites, newsletters, and well-intentioned organizations sprang forth to inform consumers on how to find the best rate and most consumer-friendly money transfer agents. Fxcompared.com opened its doors in 2005. These services are invaluable in cutting through the marketing claims that often accompany a very expensive and low-quality cross-border transfer service. As with all other products and services, the buyer must beware.
Why are cross-border money transfers so expensive? Yes, globalization has increased the level of traffic, which by any logic should lower the price from scale alone, but the spotlight has also revealed many criminal and terror-related activities that thrive by passing capital across our national borders, using whatever cloaks their transaction in secrecy and anonymity. A mountain of international legislation has evolved to enforce KYC (“Know Your Customer”) rules to prevent illegal drug running, arms dealing, and money laundering schemes from gaining traction.
These laws look to wire transfers as the only way to ensure propriety when moving funds across a border, but the costs inherent in this type of service are both labour intensive and unfit for transfers of a small amount, anything under $5,000. An originating bank will charge anywhere from $25 to $50 to take and process an order. Intermediaries may reach in and take another $10 to $20, while the receiving bank may charge a fee for posting the funds to your account, another $15 to $25. Add to this a percentage mark-up on the currency exchange, and you have a very expensive transaction.
The best and cheapest systems today utilize the railroads built by the credit card companies, years back to support ATM withdrawals for both debit and credit cards. These approaches avoid the labour-intensive processes of the traditional methods and prevent your having to stand in front of an ATM with handfuls of cash in a foreign country.
Comparison-shopping is worth the effort for cross-border transfers. Caveat emptor!
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Forextraders.com offers many insights to the foreign exchange market and the topic of cross-border money transfers. More information about Tom Cleveland can be found here