With a little understanding and planning I’ll share some common-sense tips to put you back in control of your international transfers helping to ensure that more of your money stays with you.
The foreign exchange rate affects all of us since we are all using a currency of some sort. An exchange rate is the relative performance of one currency against another. For example, GBP/USD (pound sterling to US dollar rate), when the rate is falling like it has been, it means that the pound is getting weaker while the US dollar is getting stronger. It means that those who start off with pounds but want to buy something in US dollars will be able to buy fewer dollars for their pounds. On 1st January 2013 you were able to get 1.63 US dollars for every one pound, but on 25th February you could get only 1.51 US dollars for the same one pound. Lets say you transferred GBP 200,000 to America you would now get (0.12 x GBP 200,000) $24,000 less than at the beginning of the year. An eight per cent difference to your dreams, plans and hopes.
Conversely, while the period has seen it become more expensive to purchase US dollars, for those with US dollars it has become cheaper to buy pounds.
Staying with this timeframe as an example. If you had funds in US Dollars, perhaps from sale of property in America, or you had found a dream home in the United Kingdom, a salary in America you wanted to repratriate then it would be a wise move to consider looking at how best to move funds into pounds after such a large move.
1. Consider who will transfer your money?
In the old days anything related to financial matters would be discussed with your bank. The bank would be helping you with your savings, your mortgage, your life insurance, your investments and of course your international money transfers. Over time each of these areas have had new players come in and offer a choice to consumers and businesses alike. This has helped lower costs and offer choice where there wasn’t any before. The past few years have seen with whole banks disappearing, divisions sold off or being saved by their governments causing scandal, corruption and revealing to the public just how inefficient and cumbersome they had become. Out of all those products probably the International money transfer side is still considered a profitable area for them. Every organisation will focus on their key clients. So tip number one, if someone is looking at you as a ‘cash cow’ – look at alternatives
2. Understand the cost breakdown
When you make an international transfer, the rate given to you will largely be made of two things. One is the interbank market rate (sometimes called the mid-market rate) and the second is the bank or broker cost, to make the transfer. This will be built into the rate given to you which is why it is so difficult to know which providers offer the best value. A bank will in addition also charge you a fee for doing the transfer (sometimes up to £40), specialist FX providers may have a smaller fee for smaller transactions say £10 for transfers below £5,000 to cover transmission costs.
Not every bank or FX provider will tell you how much ‘spread’ they are charging to make the transfer (the difference between the interbank market rate and the rate they quote you). One crude way to guess would be to check a currency converter site such as Yahoo Finance. This will show the interbank market rate. Comparing the rate at the same time will show the difference, which is called the spread. It gives you an idea to be used a guide but is not very accurate.
3. Separate the costs and focus
Often people get solely focused on the transaction fees alone rather than the Interbank rate.
It is best to separate these out. Ideally, you want the BEST interbank market rate along with the lowest broker cost. The interbank market rate is driven by the market, it goes up or down way beyond our control. Our only way to get the best of that is TIMING. We have no other control over it other than the time we enter and exit the market. A currency specialist can advise on the better target levels to look for. The second part however, you do have some control over which is the broker cost. Instead of acting reactively at the time of transfer. Make a plan. Get in touch with several currency firms you like the look of and explain the trade you want to take. At the end of it you want to come to a conclusion as to how much they take cost for you to transfer your funds. Cheapest wins in general but consistently cheaper is better. Instead of shopping for rates you really should be shopping for the best value provider who will take out the least amount out of your money transfer.
4. Build a good relationship with your currency specialist and get them to work for you
If you look at almost every FX provider’s literature, they will all say they are the cheapest and can save against the bank. If this wasn’t true they would be a poor provider! Like all things price is one element of the total package. A quick checklist of things to look for are:
- Are they regulated?
- Will my funds go to a segregated account?
- Are their fees and charges transparent and recorded on the confirmation note?
- Is their pricing consistent and won’t revert back to a wider spread in future?
- How fast will your funds arrive at the destination?
- Can you transfer funds online and be notified at every stage where your funds are
A good foreign exchange firm is one who is transparent and explains how they get renumerated, past that there isn’t a huge difference between a large FX provider’s service and a smaller one in terms of actual service – You fix a rate, you transfer currency 1 to their account, currency conversion happens and then they forward to your destination. A larger firm will have just like any other large organisation fixed costs, staff costs huge marketing costs. That will all come out of your rate one way or the other. They shall be either as a percentage of the transaction or number of pips (like a single point). If you are still unsure try a transfer but with a smaller amount. Most have free registration. That way you get to see the whole transfer process.
5. Avoid the tricks some FX firms play
If you think you will get a better deal by revealing to provider 2 what provider 1 quoted and can you price match, it works sometimes but what will typically happen is that provider 2 (usually one of the bigger firms) will definitely beat it – Those telephone dealers are as slick as can be and will be your best friend – Their big city bonus depends on bringing in your business. You might like all the attention you are receiving but always remember any kind of account management and attention in general is going to have a cost that will end up with you paying for it somewhere along the line. It might even be a loss leader for them but in the sales process they might find that you make regular transfers so once they have your business and you continue to use them – no-one knows any different and they have recovered their loss leading rate and gained you as a client. Fact is, until you know the actual spread you are getting, your broker cannot be relied upon to be consistent in their cost to you.
This removes the need for shopping around calling a bunch of brokers which is very inefficient way of doing it because many variables need to be aligned.
6. So now you got your costs covered, now focus on getting the BEST rate
Once you know how much the broker will charge you for making the transfer and you are happy with it. Focus now instead on getting the BEST rate. By BEST we mean that the exchange rate has gone as far as it can it that direction. If you had sold your pounds and bought US dollars in late 2007 when the exchange rate was around 2.000 that could be considered a good move as the rate has been falling ever since. To put this into perspective, the GBP/USD exchange rate has fallen some 8 per cent. Banks and FX providers will charge from 0.33 – 4 per cent of the transfer amount and everyone of these more or less uses the same mechanism, the SWIFT network to transfer funds.
7. Work with your FX Provider to put a plan
A currency specialist will be spending a lot of time looking at charts, news events, financial data and will have a good idea where support and resistance area are. These are areas where the exchange rate may no longer continue in the same direction. You should talk to the specialist who can draw up a personalised plan based on your goals and set some target rates to follow. These would include things like which target rates would suit your purpose, which type of transfer to make, if the market is ready but you are not should you fix now forward later, or you get set up a limit order where you have the funds ready but are waiting for a particular level to hit.
8. Don’t get too focused on using comparison sites – Not impartial
Remember that comparison sites are not impartial. The website owners are running a business to generate money. They largely make a market for themselves usually from larger FX providers who re-compensate them, for passing leads to them. If you look at the FCA list of payment providers you will see that there are hundreds of providers, yet on these sites there are barely a handful. They are not in-tune with the markets and play it safe by effectively promoting the larger FX providers. The sites are generally filled with useful information for newcomers to money transfer but until the day they can either list all FX companies and be able to get an actual delivered quote from them so an actual FX provider comparison (excluding the intermarket rate) can be made then the site cannot be relied upon for being impartial. Unfortunately this encourages the situation in the FX Provider market similar to dominating power of the big banks. Only a handful of larger FX providers have access to the leads being generated which is a shame for a site wanting to offer you a comparison. While the surrounding information might be considered useful and reviews of value, be more hesitant on going through a quote on their site as the results are just revolving randomly between the biggest ad space spenders.