Despite globalisation, banks are not the best cross-border transfer agents

The era of globalisation is upon us, and the world is quickly becoming a smaller place. Tourism also continues to escalate, and with these trends in place, the need to move money across a national border is becoming more common than ever before for all of us.

Exports as a percent of global GDP have tripled to 30% in the past fifty years. Over 3% of the global population, some 220 million people, work in another country and remit money home, totaling more than $400 billion in 2012 alone.

If you are planning a trip to some far off destination, your best method for obtaining the foreign exchange you need is by using a credit or debit card at the point-of-sale, or at an ATM, but fees vary. You might have to check the small print in your cardholder agreement to find which card is best, but the time to do that task is before you begin your excursion.

If you need to send funds to family or a friend overseas, or to pay an invoice from a foreign supplier, then in most cases, believe it or not, your bank may not be your best friend for this situation. One of the largest profit centres within a bank, especially for a global bank, has been its foreign exchange department. Most operations focus on corporate clients, providing international transfer support for transactions that average over $5 million apiece. The system was not designed for the consumer trade, but was adapted over the years, as long as healthy fees and forex spreads could be maintained.

As a result, it is quite difficult to get a fix on what your cost might be for a simple cross-border payment transaction. There will be a hefty origination fee on the front end to cover direct labour costs. Intermediaries of the bank may also reach in and deduct fees along the way, and then the receiving bank will deduct a fee for itself, as well. At this point, we have not even discussed conversion rates or spreads.

Foreign exchange rates can be viewed as just another price for a commodity or service, but in the market, there is always a “Bid/Ask” spread, where buyers and sellers define what they are willing to exchange one currency for another. Unfortunately, if you try to compare rates in the paper or online, the rate quotes are usually for what is called an “Interbank” transaction, i.e. one of those that exceeds $1 million or more. Depending on the distribution outlet used, a sizable markup, anywhere from 1% to over 10%, will be added to the interbank rate to arrive at a consumer-based rate. The most expensive rates are for moneychangers, who have street offices and overheads to recover.

What can a consumer do in this situation? Large banks have been slow to address consumer needs in this forex arena, but the market will be served. Smaller firms, like 1st Contact Forex, have entered the market by focusing only on foreign exchange payments and attacking the high fees and markups that banks routinely pass along to the public, due to their size and immense presence.

How do these firms do what banks are unwilling to do? The process is easier than you might guess, but it does require investment, regulatory approval, and effort. These firms leverage electronic systems, networks, and a host of “best-of-breed” suppliers in the industry to bypass the general morass of what constitutes global banking infrastructure.

Not all cross-border transfer agents, however, are the same. Comparison-shopping is a must, along with due diligence. 1st Contact Forex is a good place to begin.

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Contrary to popular belief, transferring money through a forex provider is far cheaper than through an international bank. photo credit: Mukumbura via photopin cc

Contrary to popular belief, transferring money through a forex provider is far cheaper than through an international bank. photo credit: Mukumbura via photopin cc