If you've never had to transfer money internationally, you might assume you should just head to your local bank for help.
But Daniel Webber, co-founder and managing director for FXCompared.com, says that many banks around the world are choosing not to compete in the international money transfer space.
"Sure, banks will wire money for customers because they are a bank and they are expected to provide various financial services," he says. "But only their biggest clients typically get anything approaching good service."
The total contribution of money transfer services to banks' overall revenue is marginal - much smaller than their core lending and deposit business. And for many banks, lowering costs and becoming more competitive is unlikely to generate more volume.
"This market dynamic has encouraged the emergence of many new players in the money transfer space, at all levels of the market, from remittances all the way up to multi-million dollar transfers," Daniel adds.
We recently checked in with Daniel to learn more about the ins and outs of international money transfers. Here's what he had to say:
Tell us about FXcompared. When and why was your site started?
We started our site in late 2009 to help individuals compare international money transfer products and find the best and simplest ways to send money. We could see the rates and services provided by the banks and some of the more traditional money transfer players were not serving the consumer well, but there were many other non-bank providers in this sector that we wanted to introduce people to.
I am personally passionate about this space, having been through virtually all the pains of international money transfer as an expat from the U.K. now living in the U.S., such as buying property overseas, studying overseas, and living as an expat. I have also run international businesses for which we needed to make and receive payments in many different currencies. I want to help others avoid similar frustrations and costs typically - but unnecessarily - associated with international payments, as well as help other business owners run their international operations better.
We have been trusted by our users to help them send over $1 billion.
Who should be using FXcompared today?
Today, we serve both the individual and small- and medium-sized businesses looking to send or receive foreign currency. For individuals, the story is usually about saving money and receiving a better, faster, more personalized service. We focus on people buying and selling property overseas, the life of the expat, pension transfer and retirees, studying abroad, overseas weddings and buying luxury items.
For businesses, currency is more complex; and we are here to help any small- or medium-sized businesses with international payment needs. For some businesses, it is about saving money; but for many, it is about how you can run your business better. This may mean managing currency risk as goods and services are bought or sold in different currencies, or it could be managing international payroll or foreign subsidiaries.
What are some FX basics anyone who needs to make an international money transfer or payment should know?
Many people do not realize there are alternatives to using their bank. There are many money transfer providers who can offer better, cheaper and faster services than a bank.
Learn more about managing your money on Mint.com.
What do we need to know about finding a reputable, reliable transfer provider?
At FXcompared, we will only work with regulated providers, which for the U.S. for example means they must be registered as a Money Transfer Business with FinCEN, the Financial Crimes Enforcement Network, part of the U.S. Treasury. These Money Transfer Businesses have to be regulated at a state level as well; a resident of a particular state can only send money out of that State with a provider registered within that state.
At FXcompared, we have a very detailed screening process before we work with any money transfer provider. They key criteria we look for, which people should consider when choosing their provider, are:
- Confirmation that the provider is registered as a money transfer business with FinCEN;
- Confirmation that the provider is registered within the state you wish to transfer money from;
- All client accounts are held in protected segregated accounts to ensure that if anything were to happen to the money transfer provider, client funds are still safe;
- At FXcompared, we also review the financial metrics of the company, their credit rating, how long they have been in business for, and what particular client specialties they may have. A company must pass all these tests and fulfill these criteria to be listed on FXcompared.
What are some red flags that a provider might not be credible?
If the provider cannot prove they are registered with FinCEN, either directly or via an affiliate, this would raise a flag for us. You can search the register here.
Why do exchange rates vary by providers?
The price at which very large institutions and central banks can exchange currencies is typically fixed at what is called the interbank rate. Virtually all money transfer providers then have to buy and sell currencies around this rate; the degree of closeness to the interbank rate - also known as the spread or margin - is primarily determined by the size of the clients' trades. Typically, the larger the amount being transferred, the smaller will be the margin charged by a provider above the interbank rate.
Specialist currency brokers will invariably be a better value than banks, but they also have a degree of discretion over the exact rate they can offer based on factors such as whether the client is a large, long-term customer making frequent transfers, or one making a smaller one-off trade. Also, the provider's overall currency requirements can also be a factor in how much buying power they have in the market for any given currency; for major currencies such as the U.S., Canadian, Aussie, New Zealand and Hong Kong dollars, euro, pound, and yen, margins will be universally thin. But for less liquid or more exotic currencies, some providers will be able to get better margins than others and pass these savings on to their clients.
It is important to note that this is separate from the actual fluctuations of exchange rates themselves. Market exchange rate movements are driven by a host of different economic and political factors much bigger than the trading of any one bank or broker.
What do you think are the most common mistakes individuals and businesses make in sending money overseas?
The first mistake is using their bank as a default option thinking it will automatically be the easiest and cheapest method. Quite simply, a bank is unlikely to be the cheapest or fastest way to send money overseas.
The second is to not compare the different options and providers that are out there. Some providers may cater better to lower or higher amounts, to personal or business transfers, or may specialize in particular currencies or destinations or industry sectors. It might seem a lot of work - although at FXcompared we do a lot of it for you - but it will really pay off in terms of cost effectiveness and satisfaction.
This leads in to the third most common mistake, which is to only focus on price and exchange rates. Other important aspects to consider are ease of use - do they have a simple online platform or do they have a mobile platform - and speed of transfer.
Businesses might want to consider what sort of currency products a broker can provide that might simplify international payments or reduce exchange rate uncertainty. And when it comes to larger transfer amounts, one of the most important factors to consider is the development of a good relationship with a broker who understands your needs. Very few people or businesses are comfortable sending large sums of money through an anonymous online platform, so being able to pick up the phone to your own account manager creates a great sense of trust.
What are the major headlines you're following today in the world of international money transfers? How do they affect your readers?
One trend we are following closely is the emergence of online-only and peer-to-peer providers who serve the lower end of the market particularly well, i.e. typically sending up to around $1,000 every month or multiple times a year. They may not always be the fastest, but are much cheaper than banks and offer great user experiences. Three examples of these companies that are growing fast are Transferwise, WorldRemit and Currencyfair.
At the higher-end of the market, for those people sending larger sums and for businesses, the range of products in the U.S. is developing fast. USForex and WorldFirst are two companies leading the charge in the U.S. and are now regulated in virtually every state. For individuals buying property or expats or businesses wanting to improve their international payments, these companies are offering great alternatives to the banks.
There has been plenty of change in the international money transfer space over the last five years, and I expect the sector to continue to develop just as fast over the next five years.
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