Forex Transaction and Transfer Costs
There are a number of costs and charges - both direct and indirect - that substantially impact how much money you successfully transfer overseas:
- Transfer Fee; this varies from provider to provider (usually banks), and is gradually disappearing except in relation to "over the counter" transactions, but can be as much as £35 in the UK and $30 in Australia. This can be significant in percentage terms if relatively small amounts of money are involved and is a real deterrent to regular transfers.
- Exchange Rate: this is where you can lose substantial amounts of money. New expatriates will often calculate the Australian or other foreign currency value of a transfer by dividing or multiplying the sum by the headline foreign currency (forex) rates appearing on television or newspapers. In fact, the rates quoted are usually the Interbank rate - the rate at which international banks will exchange deposits. This can be likened to the “wholesale rate” and banks and other foreign exchange providers build as much as a 2.5% or more margin into their exchange rates when it comes to buying and selling currencies for individual clients.
This can subtract thousands of dollars from a large personal transfer and you are advised to shop around for the best rates available. That will not always be a positive experience – many banks are unresponsive when it comes to a request for more competitive forex rates. This may be because the size of any personal transfer pales in comparison with the large sums traded in the forex market on any day, but also because the business generates very substantial margins.
If you are shopping around for a rate in the future you will need to talk in terms of the “margin over the interbank rate” that you will be charged. Most bank counter staff will “not have a clue” what you are talking about and you will first need to establish the correct point of contact in the bank – which is usually the Treasury department.
- Receiving Bank Fee – this usually comes as an unwelcome surprise and typically amounts to about £10 in the UK and about $15 in Australia. Levels vary considerably in other countries.
This may seem to be a difficult process to understand and get under control but some time and energy expended in learning to manage this process effectively is worthwhile. You will largely find that it is not the banks who are leading edge in this area - in terms of costs, flexibility or use of the internet - but the web-based transfer companies such as OFX.
If you are contemplating the transfer of a large sum back to Australia then this area deserves special attention - whilst you cannot control the market forex rate you can make potentially very significant savings on the (partially) "controllable" aspect of the transfer - the margin made by the bank in exchanging the currencies. Do not accept the view, often espoused by bank staff in branches, that rates are not negotiable for larger transfers - small percentage differences in exchange rates on large transfers can translate into thousands of dollars in savings.