Beat the foreign exchange trap: How to send money overseas cheaply and securely
Overseas money transfers are big business for banks and turn them a tidy profit. But if you want to save money, when wiring a large sum of money abroad, the best option is usually to dodge your bank and use a Foreign Exchange (FX) broker.
For individual customers, buying a property abroad is likely to be the biggest foreign exchange transaction, but other transfers for holidays, emigrating or investing in business can also mean large sums of money being transferred to various countries.
In order to get the best deal for your money, it is important to shop around. A small percentage difference in the rate can result in large savings.
For example, if you are a buying a home for £200,000 and you can find an FX firm offering an improvement of just 1 per cent, you would save £2,000.
This is Money talks to Emmanuel Addy from www.fxcompared.com who advises how to get the best deal, the important details to watch out for and why you shouldn’t use your High Street bank for overseas transfers.
The FX comparison website was originally created as part of a project funded by the UK government’s Department for International Development (DFID) to assist migrant workers sending small amounts of money home to friends and family in emerging markets.
How do I go about finding the cheapest way to transfer £100,000?
A good starting point is to ask your bank for a quote. It is unlikely to offer the best rate, but it does give you a benchmark – also, it may offer you special discounts or offers for being an existing customer.
You should then check the rates and services that are offered from a range of top FX providers – www.fxcompared.com is one such comparison website to do this.
According to Emmanuel, it provides visitors from around the world with an independent and transparent comparison of the best value services.
He adds that it caters for any amount of the mainstream currencies and demonstrates the considerable savings that can be made compared to banks.
The website takes into account factors including fees, exchange rates (updated real-time), amount received, speed and method of transfer.
Looking at the website on the morning of Monday February 6 2012, a £100,000 transfer to Spain offers a large difference between FX firms and High Street banks.
For instance, using The FX Firm – which according to www.fxcompared.com is FSA registered (this is very different to regulated, as we mention further on) – will get you €120,175.53. However, the same amount via Halifax will get you €116,062.13 with a £9.50 fee.
Are all of the FX firms regulated (If one goes bust, will I get my money back) and are they covered under the FSCS scheme?
People need to carefully select their currency specialist. The collapse of Crown Currency in October 2010 left some 13,000 clients about £20million out of pocket as it did not have client segregated accounts.
According to www.fxcompared.com the currency brokers listed in its tables are Financial Service Authority (FSA) authorised payment institutions (or the equivalent within their respective country of operation), have an extended history of successful operations and have excellent client reviews and customer feedback.
Given the fact that there are hundreds of currency specialists in the UK, with this number growing over time, the companies listed in its tables are handpicked based on extensive review of their operations and company profile.
All the companies listed also have segregated client accounts which means funds are ring-fenced separately and are safe should anything happen with the FX company. But don’t take someone else’s word for anything before committing a large sum of money, check an FX service out first with the FSA yourself. [www.fsa.gov.uk or 0207 066 1000]
Below are a few tips to bear in mind when dealing with a foreign exchange broker:
• Avoid companies that don’t require you to provide any identification documents. These are required by law and this could suggest the company is not a registered Money Services Business. You can check the register of money service businesses at HM Revenue and Customs.
• Avoid companies that are offering a rate the same as the interbank market rate or above it. This would mean the company is not making money or is losing money on your transaction. Although this might seem like a good thing, it may mean the broker is speculating to make a profit or it could mean it is making losses which might threaten their solvency.
• Only deal with brokers who operate client segregated accounts, that way you’ll know that your money is safe. It will be able to confirm who its bankers are.
• Don’t be afraid to ask questions to satisfy yourself you are dealing with a reputable company. It is after all your money.
Currency exchange firms, unlike banks, are not covered by the Financial Services Compensation Scheme (FSCS) so if something does go wrong, you cannot be guaranteed to obtain full compensation, like the situation which hit customers of Crown Currency in 2010.
But bigger businesses – those trading over €3million a month – must be authorised by the FSA. A little research should prove how stable a currency firm is and show if it has ring-fenced funds.
Crown Currency was an exception to the general FX situation. Currency orders from the majority of online providers are immediate, with currency sent out on receipt of payment. Crown offered an advance ordering service with very attractive rates – even for travel cash – which meant that it held many customers’ funds for periods of up to nine months.
Compare online: Fxcompared allows you to source out the best deal for your overseas transfer
Why shouldn’t I just use my High Street bank?
Whether for one-off payments such as buying a property or regular payments such as income, pension, monthly bills or repatriating salary, you will almost always get more for your money by going through a specialist currency dealer, according to Emmanuel.
Most consumers will traditionally use their banks to make international payments without understanding that there are alternative financial products available. It is estimated that 90 per cent of overseas currency transfers are done via banks.
However, banks add a considerable margin to the exchange rates when trading foreign currency and historically charge a fee for the transfer (usually somewhere between £10 – £40).
This substantially reduces the amount of foreign currency being received. So if you are making regular monthly payments say for an overseas mortgage, the fee for each transfer also mounts up.
Service is important too. Currency specialists will advise on the best time to make your transfer so that you make the most out of your money, given the global financial crisis and the often dramatic fluctuations in exchange rates.
In short, there are other options to transfer money globally that are cheaper, offer better exchange rates and afford the same security as banks.
How do FX firms manage to offer a better deal?
For high value transfers, the difference between the cheapest and most expensive way of sending money can run into thousands of pounds.
Most High Street banks charge about 4 per cent more than a currency specialist and also charge a transfer fee that can be anywhere between £15 – £40 for each transfer.
So for an overseas property purchase of £100,000 that’s a massive £4,000 difference.
Currency specialists make their money on the difference between the rate it buys the currency and the rate it offers the consumer.
This is a premium on the interbank rate, which is the rate at which banks buy and sell to each other. For currency specialists this is around 1 per cent, whereas High Street banks will charge about 4 per cent.
Specialist currency dealers can also take the hassle out of money transfers by advising on when the best time is to make your transfer given the fluctuations in exchange rates.
How long will a transfer take?
Typically, transfers with currency specialist take between 1-4 days.
What if I need to transfer the money instantly (or within one day?)
For smaller amounts of several hundred pounds there are money transfer organisations where you can take your money into an agent, make a transfer and the recipient can collect the funds in the local currency.
Western Union offers consumers the service to take the cash into any of their branches or agents and for the funds to be collected by the recipient within 30 minutes.
Western have also recently launched a direct to bank service which allows you to deposit money directly to a qualifying bank account within a maximum of 3 business days using a credit card.
It is worth remembering that if you are sending smaller amounts of money on a regular basis, it is worth saving up so that you send as infrequently as possible to reduce the number of times you have to pay fees.