It can seem like the banks have a monopoly on foreign exchange – but there are far cheaper ways to send money abroad or buy holiday cash, says Emma Lunn.
Financial services are gradually becoming more transparent and more competitive in many areas – from fund fees to current account switching. But there’s one area where companies still make hefty profits from poorly informed customers – currency exchange. The sheer amount of profit banks make from foreign-exchange transfers has been laid bare after leaked documents showed that Santander made €585m from money transfers in 2016 – equal to nearly a tenth of the bank’s global profit of €6.2bn.
The Spanish-owned bank is far from alone. In fact, high street banks can be the most expensive way to exchange money, cashing in on the “foreign-exchange margin” – the mark-up they apply to the interbank rate (the rate banks give each other) when customers transfer money into other currencies.
Given that the pound has weakened sharply in the wake of the European Union referendum, it’s more important than ever to get a good deal on your foreign-exchange transactions, even if it’s just so that you can enjoy a bit more spending money on your summer holiday. The good news is that you don’t need to rely on banks for your foreign-exchange needs – there are plenty of other options out there, from peer-to-peer services to specialist brokers and prepaid cards. But whichever method you use, don’t be fooled by marketing-speak. Banks and foreign-exchange companies commonly advertise “no fees” or the “best exchange rates” – but they’ll be making money somewhere in the transaction.
What to look for in a currency broker
So what option should you choose? If you need to transfer a sizeable amount of cash to an account overseas, there are plenty of foreign-exchange brokers, including Travelex, MoneyCorp, HiFX, Currencies Direct, TorFX, CaxtonFX, UKForex and WorldFirst. These firms will almost always beat the banks’ rates. For example, at the time of writing, the interbank rate stood at €1.18 to £1. HiFX would give you €117,110 for £100,000, but Natwest just €115,146 – a gap of nearly €2,000.
However, it’s tricky to declare which is the best value broker of all, as it will depend on the exchange rate on the day you want to make the transfer, and the currency you need. To work out the best deal, you’ll need to find out how much foreign currency you’ll get for a set number of pounds, after all the fees and charges have been taken into account. Compare FX rates from a number of providers and don’t confuse indicative rates – which are often shown on websites – with live rates.
Choose a provider with a good track record: check online reviews and comments on online forums frequented by those who use these services, such as expatriates. Lastly, favour firms that are “authorised” by the Financial Conduct Authority (FCA) rather than “registered” – they are subject to greater regulation. Forex brokers are not covered by the Financial Services Compensation Scheme in the event that anything goes wrong – so if you’re concerned about a firm, don’t use it.
The peer-to-peer option
Another option is peer-to-peer service Transferwise. This firm matches demand from clients who want to buy and sell currency, then makes payments from its account in each country rather than wiring money across borders. It converts money at the interbank rate, adding a small fee for doing so. In our previous example, Transferwise would give you €117,114 for £100,000, €4 more than you’d get from HiFX and €1,968 more than you’d get from Natwest. Transferwise has announced a partnership with app-only bank Starling, which gives Starling customers in-app access to Transferwise’s services for making transfers from the UK to 35 currencies.
Currency Fair, another peer-to-peer firm, works in a similar way, with one tweak: individuals set the exchange rate at which they are willing to pay. For example, if you want to buy euros with pounds, it will hook you up with someone wanting to buy pounds with euros if you will accept their rate or they accept yours. Again, Currency Fair charges a small fee on each transfer. The two firms generally offers similar value and neither consistently offers better rates than the other.
The pick-and-mix bank account
Bank transfer, brokers and peer-to-peer services are all used to transfer cash between a bank account in one country and another account in another country with a different currency. But there is another option: a multi-currency account. This type of bank account allows you to hold more than one currency in the same account, and to switch cash between currencies without using a third party. All the big banks such as Barclays, HSBC, Lloyds, Citibank and the Royal Bank of Scotland offer this option. The problem is that, while convenient, they tend to come with a myriad of fees and conditions.
For example, Lloyds offers two international current accounts which work in pounds, euros and US dollars, with a Visa debit card for each currency and fee-free international transfers. Its international current account is available to customers with either an annual income of £50,000 (or currency equivalent) or £25,000 to save or invest with Lloyds. The account has a monthly fee of £7.50/€8/US$10. Lloyds’ other option is fee-free – but to be eligible for its premier international current account, you need to save £100,000 with Lloyds within six months. Alternatively, if you have a salary of £100,000 or more you can take up to 12 months to deposit £100,000 with the bank. The account comes with a dedicated relationship manager and worldwide travel insurance.
However, HSBC’s Currency Account is more accessible and looks better value. This doesn’t have a monthly fee or require a minimum balance to maintain the account. Customers can hold funds in up to 14 currencies; can send money to other HSBC accounts around the world without charge; and can switch money into different currencies fee-free (although you will pay the exchange rate set by HSBC, which is likely to be worse than you could get through a specialist currency service).
Put it on your card
If you’re a regular traveller, rather than living or working abroad, then you’ll notice on your bank or credit card statement that most debit and credit cards charge a myriad of fees for overseas usage. These include non-sterling transaction fees, cash withdrawal fees and transaction fees. For example, if you use a TSB debit card you’ll be charged £1 every time you use it in a shop overseas, plus a non-sterling transaction fee of 2.99%. ATM withdrawals cost 1.5% of the transaction fee, with a £2 minimum and £4.50 maximum. So, a £5 item in a shop would actually cost £6.15, and a £50 ATM withdrawal would set you back £53.50.
The good news is there are a small number of cards which are cheaper to use abroad. Metro Bank doesn’t charge non-sterling transaction fees or cash withdrawal fees when you use a debit card in Europe – although further afield you’ll pay a non-sterling transaction fee of 2.5% and £1.50 per ATM withdrawal. Virgin Money’s Essential current account doesn’t charge extra for debit card transactions anywhere in the world, but levies a £1.50 ATM fee overseas. Among credit cards, Halifax’s Clarity card and Santander’s Zero card are best for foreign use.
Neither charge a non-sterling transaction fee or ATM fee. However, both charge interest on cash withdrawals (18.9% and 29.9% respectively) from the day of the transaction, so it’s best either to avoid using credit cards for withdrawals or to repay the balance straight away.
For many people, a prepaid card is a better option for holiday spending. They can be loaded with cash before you go, locking in the exchange rate. You can then use the card as you would a debit card, to spend or withdraw cash. But choose carefully – some prepaid foreign currency cards come with a raft of fees and use their own (rather than Mastercard’s or Visa’s) exchange rate. One card that is consistently a top pick by experts is the Revolut prepaid Mastercard, which gives perfect interbank rates for most currencies, including euros and dollars.
ATM withdrawals are free up to £200 a month, but have a 2% fee thereafter and there are no fees for other transactions. You’ll need the Revolut smartphone app to top up your card and switch your balance between pounds, euros and US dollars should you want to. As an alternative, Monzo’s prepaid card doesn’t charge any fees at all – it’s free to spend and withdraw cash. However, it uses the exchange rate set by Mastercard which, although competitive, is not quite as good as the interbank rate.