In the context of the payments world, I don’t think anyone in the industry will argue the notion that banks have been screwing companies forever: charging high fees to wire money whether domestically or overseas, but especially when they send overseas. Traditionally there was very little choice in cross border payments other than wiring money using a bank so banks took full advantage of this, combined with the opaque foreign exchange markets and the complexity of the process in order to maximize their fees and subsidize other less profitable services to small businesses.
In this two part blog, we look at three elements which make up the cost of sending money internationally, in the first part and in part two, we look at some of the legacy systems which will help shed some light on why it costs so much to send money overseas and why it’s all such a ball ache for companies doing it.
Only in America…in the UK and Europe businesses are charged a nominal fee (40 cents) to send money domestically, and a larger fee to send internationally. In the US the banks stiff you to send money – on average it costs $15 to send via the domestic ACH payments system in the US, which to me is full blown profiteering…Think of the cost, the drag on business at a national level of this money being sucked out of productive companies and being transferred to banks…for doing what? Unbelievably, small businesses are paying an estimated $50 B in bank fees in the US.
For international wires, on average, companies are being charged $40 to pay suppliers internationally and $20 to receive their money from customers.
This is a painful enough pill to swallow, but I am convinced it’s a ploy, you get so worked up about the wire fee, you forget about the real culprit – the Foreign Exchange cost:
Foreign Exchange rates
This is where the banks make the real money. In addition to the wire fee (which stings enough), there is a foreign exchange fee which banks try not to disclose. Exchange costs can vary hugely from one, up to five percent – even higher in some cases, especially for unsuspecting customers. A foreign exchange rate is like a ratio, the price of one currency is quoted in another currency, there are always two sides. I have US Dollars and I need Mexican Peso’s – what’s the rate? Good question, today if you look at Google it is 16.73 but if I go to my bank website it is 16.256 and Western Union: 16.3075 So there is a huge variation in rates, these will vary again depending on whether you are seeing the ‘mid-market’ rate, the buy rate the sell rate, or even the ‘teaser’ rate as it is known in the industry. They tease you in with a very competitive rate, then make it much worse once you’ve gone through the trouble to register and get ready to make a payment… FX will warrant a blog post all of its own it is such a complex and opaque market. (Watch this space)
Meet the Voldemort of correspondent banking. Correspondent banks take their fees and these are predetermined based on correspondent agreements put in place between each bank. When there is no correspondent agreement in place…then there is Benededuct – JPMorgan describes it very well “To illustrate how this works, let’s assume a U.S. firm is purchasing a product for $10,000 from a German company. Before the goods are sent, the seller agrees to absorb the wire transfer charges. When sending the wire on behalf of the American buyer for US $10,000, Chase deducts a $20 fee, and the beneficiary receives $9,980. The deduction is based on the transaction’s dollar value. The fee would rise progressively with the size of the transaction. Tier groups are established with flat fees applied for different transaction sizes”. (This example assumes the German company wants to be paid in USD…which they probably don’t, so let’s not forget that additional $400-$500 (4-5%) in FX conversion. Or the $40 wire initiation fee. Or the 20 Euro international incoming wire transfer fee…) After all the deductions, the Overseas transaction winds up costing $460-$560 on top of the amount originally charged.
So there you have it: opaque markets, multiple middlemen, complex pricing, people and companies far removed from the end customer. Primetime for overcharging and a bad experience for those footing the bill.