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Thanks to the internet and technological advances in digital communication, the world is truly connected. The economies of different nations are heavily intertwined and transportation technology connects enables everyone to trade easily. This also means that our money is not confined to the countries we live in.
But sending and receiving money internationally is not as easy. There are many reasons why you need to send and receive money internationally regularly such as migrant workers sending money back home, or freelancers with foreign clients, or and parents sending money to their children studying abroad.
There are other host of reasons that are rare,but significant such as paying for medical treatment overseas, sending monetary gifts to friends and family, paying rent or buying property abroad, etc. In short, sending money abroad or receiving money from another country is common in today's world.
And yet, for most, it can be a daunting and stress-inducing task, especially because of the high fees and the complexities involved in making a money transfer abroad. Consumers end up with poor exchange rates and high fees (often hidden charges) when sending money abroad.
This is despite the range of alternative payment options available at their disposal. This is partly due to a lack of awareness about the new payment options. Let's simplify the money transfer process.
Transfer fees will depend on several factors including the amount of money you are sending, the recipient's destination country, the transfer speed, how you pay for the transfer, how the money is received, and who is sending your money (banks, online platforms).
Understanding this information can help you save money while sending money overseas.
Transferring to another currency means one currency has to be converted to another currency. The exchange rate is how much one currency is valued against another currency.
Even though the exchange rate is not a fee, it is a money transfer cost that needs to be considered. It will determine how much money will be received at the other end, or how much money needs to be sent to ensure that the recipient receives the required amount of money.
Since the exchange rate between the two currencies fluctuates depending on market conditions, you need to take this into account when sending money abroad.
Most banks and money transfer companies do not use the mid-market exchange rate-the one you see on Google search when transferring money. They add a markup to the rate which is not disclosed to the consumers.
For example, if the USD/MXN price is 20, the market is saying it costs 20 MXN to buy 1 USD. Now, at certain banks, it can cost 21 USD. The markup rate in this case is 1 MXN per USD. The profit comes from the difference between the mid-market exchange rate and the marked-up exchange rate.
The marked-up is generally a percentage of the amount transferred, and so if you are sending a large amount of money, the cost can get high.
For example, the currency exchange costs of the above case would be 5%. So for every $10,000 sent to Mexico from the United States, the cost is $500 before accounting for service fees and additional charges.
Consumers end up paying an exorbitant amount in money transfers. You can compare the exchange rate upfront given by the banks or the money transfer service provider before going ahead with the transaction.
On top of the fluctuating currency exchange rates, there are other charges that you may not be aware of - which we refer to as hidden charges. These are the correspondent/intermediary bank fees and recipient fees. The best way to avoid these charges is to use services that list the fees upfront.
Some money transfers employ a third-party bank (correspondent bank/intermediary bank) to carry out international money transfers between banks that do not have a financial relationship. This third-party bank deducts a fee directly from the money being transferred.
This fee which is called the correspondent/intermediary bank fee can vary depending on the banks and is usually not informed upfront. It is difficult to predict the amount of the fee.
There is a worldwide system of interlinked banks called the SWIFT network (Society for Worldwide Interbank Financial Telecommunications) that carries out the bulk of the international money transfers.
However, not all banks in the world are part of the SWIFT network and this is where the correspondent banks help with the transactions between banks that do not have a connection with each other.
Some banks around the world charge consumers for receiving funds from overseas. This fee is not something you or your bank can control. The fee will differ from bank to bank.
The best solution to skip this cost is to look for alternative options if you don't want the recipient to be charged with it.
Your local bank may be the most convenient and trusted option when thinking of sending money. But for sending money overseas, things can get tricky.
Banks tend to offer poor exchange rates and levy several hidden charges (as discussed earlier).
Before you decide to send, it is best to spend some time researching (for alternative options) and keep the following things in mind when making your decision.
Luckily, there are ways to save money on costs when sending money abroad. Here are some useful tips to follow.
There are many ways to send money overseas. There are bank and non-bank options with different fee structures. If speed is not your concern, cheaper options include Bank Drafts, Cashier's Checks, ACH transfers to name a few. These methods may take longer to reach your recipient but they are reliable and safe.
Demand for convenient international transfers has led to the establishment of several money transfer companies that are authorized and are actively operating. Some of the popular ones include Western Union, MoneyGram, Wise, etc.
Online money transfer is one of the widely used modes of money transfer due to lower fees, better exchange rates, and enhanced convenience.
Shopping around can save money by getting you the best deal.
Comparison tools like CompareRemit can help you find the one that suits your transfer needs or find you the best deal. You can simply enter the country you want to transfer, enter the amount and compare your options.
You will see a list of all the available money transfer service providers, along with the exchange rates offered, the transfer speed, the transfer fee, and the amount receivable.
Understanding how much of your money gets lost in transfer fees is the first important step to save money on costs for sending money abroad. You can lose your money in the hidden exchange rate costs, and other hidden charges levied by banks. To save more money, check the competition, compare the exchange rates, and always read the fine print. While the global average cost of remittance is still high, at 6.5% which is more than double the 3% Sustainable Development Goal set by the United Nations, you can get transparent and affordable pricing if you have the know-how.
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