Retail FX: the last bastion of no competition?

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With the July school holidays now upon us, many Australians will pack their bags and head overseas to chase the European summer. With this will come the inevitable rush to exchange currency. Unfortunately, Australian consumers often have limited options when it comes to competitive ways to exchange currency. According to Capital Economics, Australians spent over $1 billion in fees and poor exchange rates on their currency exchanges in 2016.

This is a problem that is only set to increase. Australians travel frequently for leisure and business, with Australians travelling internationally on the increase over the last 10 years. About 10 million Australian residents travel overseas each year, for a holiday (59.3%), to visit friends and relatives (23.8%) or for business (8.6%). Furthermore, Australia ranks 10th highest in the world for transferring money overseas, with over US$15 billion (A$17 billion) transferred in 2012.

This problem is magnified for high net worth (HNW) Australians, as this demographic both travels more often and exchanges currencies more frequently. According to data from RFi Research, the majority of HNWs travel overseas at least once a year, with younger HNWs more likely to travel at least once every six months. The biggest pain point identified for moving funds internationally are the high fees.

Convenience allows for high costs

The reason we pay so much in fees is multifaceted. Australians exchange currency at the airport for convenience with some of the worst rates available, or via domestic banks, which choice also unfortunately comes with a range of hidden foreign exchange charges.

Analysis from News Corp and The Currency Shop shows that on $2,000 travellers can lose as much as $350 by exchanging cash at the airport. Consumers are being charged more for the convenience of selecting from a large range of currencies at the last minute.

Customer confusion is another leading cause of the fee sting. The ‘No Commission’ signs at exchange booths attract customers under the guise of competitive costs. Customers should check the wider buy and sell FX rates that usually cancel out any commission fee.

Another common trap is when travelling customers are asked whether they want to pay their bill in their own currency or the currency of the country they are in. Paying in your own currency is known as ‘Dynamic Currency Conversion’ and is generally not favourable to the client. If you accept this offer, the merchant or the ATM operator will perform the FX transaction at a foreign exchange rate that they determine.

The buy/sell spread on money transfers offered by most domestic banks ranges from 3-5%, which means that customers would typically be charged between $150 to $250 on a $5,000 foreign exchange transaction. These charges have not seen a significant change in the last decade.

Prepaid travel cards are one way to avoid future exchange rate uncertainty. However, they often come with a range of fees, whether that’s for loading the card, using it at an ATM, re-loading or closing the account, or being hit with exchange rate conversion fees when you use the card.

Using credit cards may also come with unexpected costs, with the industry average being a 2.5-3% fee on transactions and a $2.50-$5.00 ATM withdrawal fee.

The more efficient providers

The disruptors in the industry are the fintech players like Transferwise, Currency Fair and Worldremit. These providers are shaking up the FX money transfer industry by specialising in small payments for individual customers. Their online business models provide low overheads and that benefit is passed on to customers in the form of more competitive exchange rates.

Specialists like OFX and XE can be more competitive with their spreads. Our research found that on a $5,000 transfer, OFX could save a customer $182 compared to the most costly of the big four banks, while using XE could save over $200.

However, many customers prefer the security of a large bank. So, what is the industry doing about it?

Demand will drive product innovation

Locally, the big four banks are looking at adopting SWIFT global payments innovation (SWIFT gpi), a service which could allow real-time cross-border payments between institutions in Asia Pacific to ensure international transfers could occur in real time, as opposed to days. However, this remains in an exploratory phase.

At Citi, being an international bank, we have a globally mobile client base that travels more frequently than the average customer. Our clients expected us to innovate, and our contribution to industry disruption has been the launch of the Global Currency Account. It allows account holders consolidate their foreign currency holdings in one place, with individual accounts in up to 10 currencies. Citi’s FX spreads are lower than the domestic big four banks and are competitive with fintechs. The currencies are linked directly to a debit card, meaning users can switch between currencies instantly via their mobile app and pay with their card when travelling, with zero ATM fees charged when using local currency.

As our world becomes more global, domestic banks will also increasingly feel the pressure from customers to become more competitive with their foreign exchange options.

Technology is integral to product innovation, and there is an opportunity for fintechs to mould this space and drive bigger players to deliver on competitive rates, transparency and real time instant cross border payments. Multi-currency bank accounts are likely to become the expected way global citizens interact with their money and manage a life without borders.

 

Matthew Hayja is Head of Foreign Exchange Products in Citi’s Consumer BankAny advice is general advice only. This article was prepared without taking into account any individual’s objectives, financial situation, or needs.

 

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9 Responses to Retail FX: the last bastion of no competition?

  1. SMSF Trustee July 12, 2018 at 10:08 AM #

    This is the area I’ve felt for a long time was ripe for disruption. The spreads and fees that the banks and traditional FX providers charge are scandalous. I understand that if you want to get Euro currency from a branch office in suburban Sydney you have to pay for storage costs, the wages of the teller, the security of the notes and often transport from another branch if there’s no supply in your suburb, but it’s not a lot cheaper to go via a Travel Money card or similar.

  2. Christian Antoniak July 12, 2018 at 12:12 PM #

    Citibank offer a good product through their debit card. You can withdraw cash at close to the daily listed exchange rate.
    ING offer a great deal also with their cards. Close to the daily listed exchange rate and if you put in $1000?per month and make 5 withdrawals you get your ATM fees rebated. Qantas crew use both Citibank and ING now our overseas allowances are paid into our bank accounts at home

  3. JI July 12, 2018 at 1:19 PM #

    I am lucky enough to travel extensively and spend close to six months per year overseas. I use two cards whilst travelling.
    1. A citi debit card to access cash at ATMs worldwide with no fee from citi – note, the bank you are using the card in sometimes charge a fee. The FX rate is very good.
    2. A Bankwest credit card, no annual fee and no foreign conversion fees. Also a very competitive rate.

    I believe the rate for both cards is set by Visa/MasterCard and is generally close to the wholesale rate.

    • MS July 12, 2018 at 3:49 PM #

      I use the same. Haven’t found better.

  4. Vicki Carlisle July 12, 2018 at 4:27 PM #

    It would have been interesting to see a real comparison of the total $A costs of the different options for a set amount of foreign currency (or multiple currencies). Say 1,000 USD/EUR/NZD and a similar value in THB and HKD – obviously it would have to be on the same day to remove those fluctuations.

    Aside from that my tips would be to always have some of the local currency, and to use it all up before you come home – pay the hotel bill (make sure you have allowed for transfer!) or eat/drink at the airport (expensive as that may be). The conversion rates & fees on getting rid of excess foreign currency on your return are far worse than the costs of buying.

    • SMSF Trustee July 13, 2018 at 9:17 AM #

      Actually Vicki, the costs of converting cash currency when you get home are not greater than buying it in the first place. They’re the same, because the spreads that banks charge are symmetrical – 5% or 10% either side of the mid-rate.

      But you do make a good point. Having bought your foreign currency paying the buy spread before you went overseas, you don’t want to convert it back to A$ and pay the sell spread as well. That doesn’t cost more, but it probably feels like it because at that point the spread becomes “real”. The $100 you converted to euro before you went becomes $90 when you get home. You “lost” half of that when you bought the euro and the other half when you sold euro to buy A$.

      My wife and I always do last minute shopping, sometimes at the airport, before we fly home when we have excess cash currency.

  5. John July 12, 2018 at 9:40 PM #

    Yes, I can second the Citi bank debit card comments. Flawless performance experienced in uk, Asia, America, Europe. The ING orange everyday debit card seems to be the new close competitor, albeit with some technical conditions to use and I’m not sure how their FX rates compare to Citi…

  6. Graydon Forward July 13, 2018 at 2:53 AM #

    Ripple and XRP will kill all of them for cost, speed and efficiency when it is released shortly. Coming to a bank near you. Get ready for a whole new paradigm.

    • SMSF Trustee July 13, 2018 at 9:20 AM #

      Don’t know about speed and efficiency. I can convert A$ to many other currencies via my netbank account immediately. I can do that via an app from my phone, locally or overseas if I’ve set up roaming. I can then pay in foreign currency if I want to or need to.

      That’s pretty fast and efficient!

      So unless they have a cost advantage, I wouldn’t be quite so sure they’re creating a whole new paradigm.

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