Foreign-exchange transfers constitute an enormous market. More than $700bn a year will be transferred internationally between friends and family this year, according to World Bank figures. The trade is also a gigantic rip-off, with banks and other financial services firms routinely using uncompetitive exchange rates and unnecessary fees to take advantage of customers.
In 2015, UK consumers spent £5.6bn on "hidden" foreign-currency fees, including for cash withdrawals and card payments abroad, estimates Capital Economics. But these days, an existing business making big bucks is game for "disruption" by the financial technology (fintech) sector. So in the last few years, a number of upstarts have entered the transfers market, promising better rates, lower fees and fast transfers. These firms are attempting to fill a number of niches, from personal remittances and business payments to holiday money.
One of the best-known is TransferWise, a peer-to-peer platform for currency transfers. This means that instead of a bank or currency broker selling you foreign currency and wiring it overseas, your exchange (of pounds into euros, say) is matched with one or more people making the opposite exchange (euros into pounds). This means much lower charges: currencies are converted at the mid-market rate, less TransferWise's fee (0.5%, with a minimum of £2, for many major currencies, though fees for other currencies will be higher).
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CurrencyFair performs a very similar service, with one important difference. Unlike TransferWise, which uses the mid-market rate for converting currencies, the exchange rates offered on Currency Fair are set by its users. This means that the rate you get may be better or worse than the mid-market rate. CurrencyFair then charges 0.15% of the amount exchanged plus a fixed fee of €3. If no users are available to match the transfer you want to make and you don't want to wait, CurrencyFair will match with you, charging up to 0.6%.
CurrencyFair says that on average, across all transactions, customers pay around 0.35% plus its €3 fee (ie, less than TransferWise's 0.5% fee), but the reality is that sometimes you will get a better rate on TransferWise and sometimes on CurrencyFair. So it's best to compare both.
While TransferWise and CurrencyFair seem cheaper than traditional currency brokers for smaller transactions, the best brokers may still get a better rate on larger amounts. So another start-up called CurrencyTransfer.com, which bills itself as "Expedia for international money transfers", follows a different model: searching for the best rates available from a selection of currency brokers.
While it is happy to deal with both personal and business customers, the minimum amount it recommends transferring is £5,000, so it will generally only be useful for larger transactions such as property purchases and the like.
Of course, the big question with any service like this is the security of your money. UK-based currency transfer firms are regulated by the Financial Conduct Authority (FCA). Larger ones must be "authorised", while smaller ones may be "registered", which involves a lower level of scrutiny. An authorised firm must keep client money separate from its own funds, so if it fails your money should be protected unless clients' money has not been properly segregated due to fraud or negligence.
However, if money is missing, losses will not be covered by the Financial Services Compensation Scheme (FSCS), so you do not receive all the same protections as when transferring money via banks. CurrencyFair, based in Ireland, is regulated by the Central Bank of Ireland rather than by the FCA.
Save on holiday spending
New foreign-exchange services are making international payments cheaper other start-ups such as Revolut are aiming to do the same for holiday spending. Revolut offers a smartphone app married to a prepaid credit card that could save you money on holiday. You download the app and load money into it, then use the accompanying card to withdraw up to £500-worth of cash a month free of charge (a 2% charge per withdrawal applies above that). Other transactions in stores or online are free up to a value of £5,000 per calendar month. After that, a fee of 0.5% applies. Currencies are converted at the interbank exchange rate. The app also lets you transfer money to other users via text, email or social media.
Banks must evolve to survive
New rules being drafted by European regulators are set to force banks to reassess a major part of how they do business. Next year, the European Banking Authority will publish draft standards and guidelines relating to its Revised Payments Directive (PSD2), which aims to increase competition by requiring banks to grant third-party providers direct access to customers' bank accounts via the banks' application programming interfaces (APIs).
That may sound very technical, but what it means is that a whole new range of "disruptors" should be able to tap in to the banks' systems to provide payment services much more cheaply and conveniently than the banks do. Customers could opt to keep their current account, but use digital payment products from third parties instead of their bank's credit and debit cards.
Accenture, a consultancy, estimates that banks could lose up to 43% of their current payment-based revenues €2bn by 2020. Those banks that fail to adapt could end up as simple "utilities", providing basic back-end services for customers. Meanwhile, the opportunities for other firms to enter the market are huge not just for more innovative banks and fintech start-ups, but for other financial services companies and for tech giants such as Apple and Google, who will be keen to expand their own payments services such as Apple Pay and Android Pay.
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