Unless you’re younger than Facebook or have never been on holiday, you’ll likely remember a time of exchanging your cash for some overseas spending money. The options were pretty much limited to handing over sterling notes in a post office, ASDA, or currency store in your shopping center.

However, in the past decade, something else became the dominant way of spending money abroad: using your high street debit or credit card anywhere, anytime. Whilst this new level of convenience was impressive to many, it made poor exchange rates all the more hidden. At least before when we were using the currency stores we could see in bright lights the awful rate offered, and we would shop around a little.

The same goes for sending money abroad digitally too. Banks remain a common way of sending money, and the fees can be up to 4% plus a fixed $/£/€ 30 in some cases. 

 

The Rise of Challenger Banks and Money Transfer Services

As contactless debit card payments became the norm when on holiday, something else was brewing in the background. Challenger banks such as Starling and Monzo, which were founded in 2014 and 2015 respectively, were driven by the failures of high street banks. 

Hence the term ‘challenger’ banks, they challenged the status quo; what consumers have accepted as being normal for far too long. Mainly, this was centered around usability and pricing – both Starling and Monzo have free bank accounts with incredibly easy-to-use apps. Their entire infrastructure is built on fintech magic, with zero hedging on having physical stores.

They noticed that high street banks have legacy systems making it hard to quickly adapt to new technology, but they weren’t going to wait around. Fortunately for expats, holidaymakers and small business owners, challenger banks also took it upon themselves to offer competitive exchange rates. 

Given their incredibly low overheads, they didn’t see the need to extort on consumer-side costs such as exchanging money. Instead, they somewhat settle for the revenue generated from debit card purchases instead.

To go a step further, there are money transfer companies that specialise solely in sending and spending money abroad. Without the full-on bank regulations that even challenger banks surrender to, they can offer virtual accounts as a loophole, meaning no banking license is required.

These are perhaps even more refined and slick, with almost no excess weight in offering secondary services. Companies such as TransferWise are simply about receiving money from a variety of currencies, exchanging money, and sending money overseas for as little as they can whilst still making a profit (or in some cases, many are still yet to turn a profit).

For comparison, instead of the aforementioned 4% exchange margin plus $/£/€ 30 of high street banks, money transfer companies are offering ~0.5% margin with zero fees – and in some cases, the rate offered is essentially the interbank rate! Without solely relying on SWIFT/Wire processes and the lacklustre communication between international banks, fintech FX brokers are far more efficient with exchanging money – with as many transactions as possible completed internally within the FX company’s customer accounts.

 

 

Best service for international money transfer

The best service for international money transfer will depend on the use case of each and every customer. However, we can divide the use cases into two categories: frequent, small, and cheap money transfers abroad with a priority on speed and convenience, and secondly, larger transfers, perhaps business ones, with a priority on bespoke solutions and customer service.

For the former, it can be argued TransferWise is one of the best providers, though there are some others such as Revolut, which offer an incredibly slick and convenient service. Generally, TransferWise is highly rated in customer reviews because of its functional app, consistent rates, and multi-currency wallet that’s easy to receive money into.

For the latter use case, it could be argued to be Currencies Direct or TorFX, though MoneyCorp and OFX are also reliable options. Currencies Direct is certainly a customer favourite when it comes to having friendly dedicated dealers who help advise on large transfers, as well as having no wire fees and excellent business solutions. They also specialise in overseas property, making it a good choice for those buying a holiday home or investing abroad.

 

 

Not all fintechs and money solution companies offer good value

It’s easy to fall into the trap of assuming all FX specialists or all fintechs are ahead of the curve. Evidence for why this isn’t true is plentiful, such as when looking at Virgin Money, PayPal, and Payoneer.

For example, Virgin Money paints itself as a money transfer specialist, but it couldn’t be further from the case. Their wire fees are £7 for any transferred amount over £100 – this is incredibly high, and in some cases worse than a high street bank. The exchange rates themselves are also less than favourable too, and often reported to be several percentages short of the interbank rate.

It’s not like they’re charging this money for an expert level of service, either, because with a 1.3* Trustpilot score, customers claim the customer service is terrible and there isn’t even a dedicated dealer. Bear in mind Currencies Direct has a dedicated dealer for free.

Another example is PayPal, which one would fairly assume an email payment company to be efficient at online payments. Currency conversion charges are commonly over 4%, not to mention that you cannot just attach a virtual US bank (i.e. a free account from TransferWise) to PayPal and withdraw in USD. No, they claim as a British account holder, you cannot attach overseas bank accounts to the PayPal account with no explanation as to why (perhaps to force us to pay their ~4% conversion fee…)

Finally, with Neobanks popping up left, right, and center, it’s great that there is more choice. The more choice the better, as a consumer. And the more choice, the more competition, and so the race to the bottom continues. It does seem somewhat futile, however, for neobanks to focus on money exchange, when they are competing with existing unicorns and giants such as TransferWise – a £10+ billion behemoth. 

Instead of battling on exchange fees alone (because, well, we have reached a stage where there’s no room left to undercut), it seems that such newcomers are going to have to differentiate on the basis of peripheral services. Basic banking services and cheap FX are now a given, but can they facilitate commission free stock trading, low-cost crypto, and 0% student overdrafts? We expect this is where the direct will go once the race to the exchange rate bottom has been concluded – and, as much as many of us would like to, we cannot rule out the part high street banks will have to play, even if it is a diminishing role!