Friday, 11 April 2008

Moving Money Around the World: Fees and the Exchange Rate

Many people are unaware that there are two elements that affect how much arrives at destination when doing an international transfer and exchange of one currency for another.

Fees and Charges
The first is fees, which can be numerous and complicated. Generally, fees are quite visible, though not always, as in the case of charges for moving funds through an intermediary bank, which happens without the advance knowledge or request of the person effecting the transfer.

Exchange Rate
The second element that affects the end amount received is the exchange rate, the number of units of foreign currency obtained in exchange for the origin currency. FX dealers or banks make profit on the difference between their buying and selling rates for a currency, termed the spread, so their profit goals affect how much you are offered. Whether you obtained a favourable rate on a transaction may not be so obvious since the rates change constantly in market trading.

Charges from Origin to Destination
The attached chart shows how charges may arise at different points along the way from the origin bank account to the destination. Banks always wire transfers while FX dealers may offer several options for uploading funds from the bank account or delivering them to the final destination that may provide cost savings. If one is doing a lot of transfers or transferring large amounts of money, the savings may be considerable, as I will show in succeeding posts.

Intermediary bank charges are especially annoying. One FX dealer has this to say: "Some banks may use an intermediary bank to process their incoming international transfers. Again, charges vary from country to country. Transfers to Russia and India for example are routed through New York, often through a preferred partner or an intermediary. In the USA, the average charge is $23.00. In the USA, as a rule of thumb, Credit Union or Mutual banks use intermediaries. If the amount to be sent is critical e.g. invoice settlement, property deposit etc, please check with the recipient as these costs may or may not be included in the amount you have been asked to send. Onlinefx cannot accept any responsibility for these charges." from OnlineFX Ltd

In some countries, it may not be possible to avoid the receiving bank charge
. "Most overseas banks make a charge to receive foreign exchange transfers. These vary from bank to bank and country to country. Some banks notably in Spain, Portugal and Italy also charge a commission of between 0.1% and 0.35% for both incoming and outgoing transfers." from OnlineFX Ltd

It is thus a very good idea to examine in detail what possibilities an FX dealer offers and what charges they will levy. In my case I discovered that with a couple of dealers I could move funds from a Canadian bank account to dealer easily and electronically at no originating bank cost. Other dealers did not offer that possibility. Moving funds from a UK bank account to a UK-based dealer could in every case I found, be done electronically and at no cost through BACS.

Fluctuating Exchange Rates
A great part of the difficulty for a person to figure out if the exchange rate they have obtained is competitive or not is the ceaseless market fluctuation of rates. If you go to a bank branch get a rate and then go home to check the rate online, e.g. at Yahoo Finance, the rate will have moved up or down in market trading. In addition, the Yahoo rates are not even trading rates, merely representative rates (it doesn't say so explicitly on the Yahoo site but I think the Yahoo rate is likely the mid-point between the buy and the sell rates for very large inter-bank transactions).


1) Yahoo online rate for CAD/GBP - 0.4995; that means 1$CAD buys £0.4995
CanadianForex (an FX dealer) live inter-bank rate at same time (more or less, within a few seconds it took me to tab to another window and hit return, so it should be pretty close) - Bid 0.4993, Ask 0.4998; Note that Yahoo's rate is more or less at the mid-point between the rate you can buy GBP with CAD and or sell GBP for CAD; the spread is 0.4998 - 0.4993 = 0.0005.

2) A few minutes later, the Yahoo rate is 0.4993 and the CanadianForex Bid is 0.4991 vs Ask 0.4996 - market prices are constantly shifting.

3) At the same moment, CanadianForex live quotes are for the Bid (the amount to buy GBP with CAD):
0.4943 for $10,000
0.4952 for $25,000
For smaller amounts, you get a lower rate - fewer GBP per CAD. The best rate is that for very large inter-bank transactions - that's the 0.4991 rate in example 2.

The Bottom Line - A Live Quote Example: these are quotes I obtained on-line or over the phone more or less simultaneously (within a few minutes) on April 7 to buy GBP using $10,000 CAD:
Multiply the rate by 10,000 and the gain on the exchange rate is £4931- £4855 = £76 or about $154 for CanadianForex and £4907 - £4855 = £52 or $105 for CustomHouse over the Bank of Montreal (BMO) at that moment.

Add in the other fees:
  • £7 that CanadianForex charges for delivering by Wire to the UK bank, and $0 for EFT uploading from the Canadian bank account, vs
  • $18.85 (c.£9) that CustomHouse charges for the delivery wire, and again $0 for EFT upload, vs
  • 0.2% of the principal amount (0.002 x $10,000), or $20 fee, plus $10 communication charge, total $30 or about £15 that BMO charges
I've left out the UK bank receiving charges in the comparison since they would be the same (e.g. at LloydsTSB it is £7 to receive a wire) in each case but that would reduce your net amount deposited into the UK bank account.

The net end-to-end advantage of CanadianForex is £162, and CustomHouse £58 compared to the transfer through BMO. The economic advantage of the FX dealer is clearly significant. Why pay extra if you don't need to?

Here's a graph from a UK-based FX dealer FirstRateFX in which they tout their comparison of themselves to some UK banks.

The costs are not the only consideration when picking which method to use to transfer funds. In the next post, I will look at items like registration, security, customer service, speed of transfer, hours of business, online vs telephone transfers and range of services.

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