It’s hardly the most profound thing in my blogging history when I say that a lot of money can be won or lost in the zero sum game of currency exchange.
Not just in the business world, where some astute planning, hedging and plain old organisational skills can mean a major bottom line difference.
It can be equally important in an individual sense as well, but it seems to me that with every transaction the loser is always the individual, who always seems to get the thin end of the currency wedge.
The only time I had to move a significant sum of money between currencies was when I sold an apartment for a modest low-five-figure profit. I had to work really hard with the receiving bank to get a dealer rate, which made quite a big difference to the rate I was originally offered.
If you have money to start with, this can become less of a problem and you have much more control in the negotiation. I knew a chap who took advantage of very good exchange rates to buy all the US dollars he needed for living expenses over a two-year degree course over there. He had the money to do that. Few do.
In other every-day transactions, like making electronic purchases with a euro card in the UK, you’re taking a hit every single time. There’s an inter-bank rate, then there are the rates applied when the bank or payment authority either buys from you or sells to you. These can vary prodigiously from the inter-bank rate. This is, of course, where the bank makes its money, but it’s hard not to feel like a hostage in the whole process.
Ecommerce companies like Amazon make a fortune this way, as do the airlines on their in-flight rates.
This seems to be one of the few areas remaining where the consumer finds it hard to exert power in the relationship. You’re starting to see more and more currency transfer websites offering much lower fees than bricks-and-mortar banks to change money, which is great. But you’re still a hostage to the rate they offer you.
The good news is there has been significant change in the last few years. I’ve used both CurrencyFair and TransferWise to move money between £Stg and €Euro. Slightly different models but effectively use the matching principle. You move money to their account in location a. They move money from their account in location b to yours. No money actually travels. One company matches you with a consumer going the other way. The other company uses their own capital. Fees and exchange rates are transparent, agreed in advance, and a significant saving over banks. I have literally saved £1000s since I moved to the UK transferring money between UK and Ireland. At this stage the transfer takes 24 hours to move cleared funds, faster than the bank.
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Eoin, many thanks for taking time out to make such a well-reasoned comment. I too have used TW several times. The exchange rates are indeed transparent, but I’m arguing that the rates themselves build in additional margin that you and I end up stumping up for.
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