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 Bank. Any advice is general advice only. This article was prepared without taking into account any individual’s objectives, financial situation, or needs.