There’s an aspect relating to money saving that is often overlooked. While there are thousands of resources teaching enthusiastic readers how to financially control each and every aspect of their lives, there are hardly any that deal with the important topic of Foreign Exchange.
Foreign Currency and Me
People falsely believe that foreign currency education is an overshoot. Even though they are fully committed towards saving in all other areas in their life, they would not bother themselves to learn about a topic which can potentially save them thousands of dollars down the road.
Though this number many seem excessive at first, it is within reason (and can reach hundreds of thousands in costs for small business owners, or high net worth individuals).
The Brits are known for their passion for exploring the world. With 55% of Brits traveling abroad every summer, and each trip costing, on average, £1,200 (reference), a single Brit could be paying as much as £5,000 just on travel currency commission during his lifetime.
Brits and othe Europeans also fancy buying houses abroad as an investment before they retire (reference) costing £120,000 on average. Using a standard bank markup, it means £3,000-£6,000 in fees (not including mortgage payments, or rent fund repatriation).
In the U.S, there are strong chances that you have relatives living abroad, whom you send money to (either as remittances or personal gifts). Either that, or that you’re studying, working, or immigrating into the USA. After all, there are over 40m immigrants residing in the USA (reference), 890,000 Foreign Students studying in the USA and 280,000 American Students studying abroad (reference), and 3-6 million Americans who have relocated out of the country (reference).
Each of these segments, making up 15-20% of the entire U.S population, will transfer tens, or hundreds or thousands, of dollars in his lifetime, which easily translates to thousands, or tens of thousands, in currency exchange fees.
There are additional activities that involve foreign currency exchanges. From buying an item online on a store which doesn’t accept your local currency, to investing in foreign stocks, currency exchanges are an integral part of the process.
First step towards saving
The first step in the process is to become aware of how the market works. Each individual must achieve the basic understanding of how banks, companies, and exchange offices make their money.
The 3 FX pricing pillars are as follows:
- The Fee
- The Commission
- The Exchange Rate Markup
The important thing to remember is that the company must make some sort of profit by processing your transaction, or exchanging your cash. That means, that a “no fees” or “no commission” don’t really make a difference. Banks, commercial companies, and exchange bureaus like to play around with the wording to make you believe you’re getting the best deal.
If you want to figure out whether you’re getting a good deal or not, you need to ask one question – how much do I get after all fees are deducted. It doesn’t really matter how much they charged you in each stage of the process, but rather get a bottom-line understanding of your costs. When you have this number, you can simply compare it to the official exchange rate. If 10,000 Australian Dollars are officially 7,070 American Dollars, but you’re only getting 6,700, it means you’ve been paying 370 Dollars in various fees.
The second step towards saving
The second step of the process is to identify facilities that give better rates on foreign currency exchanges (or international transfers). Though it may sound easy, now that you know how to look at a currency quote, it most certainly isn’t. The largest and most accessible facilities aren’t necessarily the cheapest.
When it comes to exchanging cash for travel (in the UK they call it travel money or holiday money), it really depends on where you are on the globe. In the UK where there’s a sophisticatedly competitive market, you can buy currency online for as little as 1.5% of the lump sum you are exchanging. In the USA, they take much higher margins online. Take Travelex for instance, which charge a flat 2% in fees on your exchange in the UK (transferring 1,000 GBP to Euro), and over 10% in the USA on Dollar/ Euro trades. So in the states, it’s probably cheaper to find a trusted nearby exchange office.
When it comes to transferring remittances or other small-volume, high-frequency, money transfers, new online platform come to your aid. In the UK you have tens of online platform that allow you to change your money for a fixed price. They include Transferwise, Currencyfair, Azimo, World Remit, Ria, Xoom, and a bunch of other remittances-focused companies. In the USA the offering is a tad more limited, but many of these companies do take on American clients. Transferwise, for example, backed by Virgin’s and Paypal’s founders, has recently started taking on USA-based clients. These companies usually offers low fixed-margin exchange rates representing costs of 1% of the total, or less, even on the smallest transfers. You can find a comparison of the costs on the World Bank website.
When there’s a large one-off transfer, or frequent medium-volume trades, it’s always good to seek for a foreign exchange specialist firm. Not only they could offer you better rates than others, they can also consult on the right time to make a trade and thus increase your savings. If they forecast a certain trend between a pair of currencies, they can acknowledge you with the information, allowing you to make most of your buck.
The most important thing to bear in mind is that you want a reliable partner to take care of the transaction for you, so this must be your main focus, together with the pricing structure. In any case these companies will present a saving of at least 50% against your bank, charging no fees on larger transfers, and using margins of 1% or lower (whereas banks could charge as much as 5% plus fixed fees). So the tricky part is to identify the credible ones of the bunch.
How to identify reliable firms?
The problem with using commercial firms to exchange your money is trust. Banks are inherently trustworthy, because of their sheer size, strict regulation, and the fact they have been operating for dozens or hundreds of years. That makes people trust them in spite of the fact they are often being fined for misconduct.
When it comes to commercial companies, you have the apply the same rules as you do with banks. You want them to handle many clients (a firm handling 50,000 clients a year or more would be considered quite large in this industry) and handle large amounts of money (largest companies transfer billions annually). You want them to be operating for at least 10 years (some companies like Moneycorp have been at it for 35 years already). You want them to be properly regulated, locally and internationally (companies like World First have been registered with 10 different regulatory bodies across the globe).
The bottom line is to use a lot of common sense. When you make contact with such a company, take a paranoid stance, and ask them to prove their validity. The decent firms will be pretty much used to it, and happy to supply you with evidence, or even invite you to their offices to meet them face to face.
Improving your foreign exchange habits can save you more than just a few dollars in the long run. If you spend hours each week trying to optimize your expenses, and/or looking after your investments, there’s no reason you wouldn’t devote a few hours into foreign currency exchanges, when you need to do them.