Buying and selling foreign currency can be a high-stakes gamble, with murky exchange rates and fees making it virtually impossible to work out if you’re getting a fair — let alone the best — deal. Whether you’ve sold your holiday château in a post-Brexit funk and you’re holding a pile of euros to sell back into sterling, or you’re a restaurateur trying to pay a French supplier for a consignment of truffles, or you just need some Swiss francs in your pocket for your ski holiday, it’s all too easy to get stung.
Providers may promise ‘commission-free deals’ or low fixed fees. But the chances are they’ll be making a handsome profit by hiding other costs in the quoted exchange rate. The problem for consumers and business customers alike is that it’s not easy to compare forex costs. Exchange rates fluctuate throughout the day and each provider takes a different margin and operates a different fee structure, while robust price-comparison mechanisms have yet to emerge.
The big financial-services comparison sites, such as MoneySuperMarket and confused.com, don’t yet offer a comprehensive foreign-exchange service for small transactions. It’s not possible to tap in the amount of euros you need and quickly find out which high-street bureau de change will work out cheapest. The best such sites can manage is to summarise providers’ charging structures and point you to their individual websites — where you’ll have to enter how much currency you want and usually fill out a lengthy personal details form before you’ll see the final cost.
The comparison sites are better at assessing pre-paid currency cards, which you load with sterling before you travel to get more competitive rates and lower ATM charges compared with debit or credit cards. MoneySuperMarket and confused.com compare cards based on typical exchange rates offered and ATM charges. MoneySuperMarket also compares some money-transfer services more suited to those who need to send larger sums overseas. But again, other than an indicative exchange rate, it does little else than signpost the providers’ websites.
What about the major banks? Surely these global currency-trading institutions offer their customers the most competitive exchange rates? Not so. Time and again, banks are slated for the high costs they charge for all kinds of forex transactions, from expensive overseas ATM charges and transaction fees on debit cards to hidden costs buried in their exchange rates for small business customers.
Research by the low-cost ‘peer-to-peer’ money-transfer venture TransferWise — which matches online customers against others seeking the opposite currency swap — found that the cost of sending £1,000 to Europe via a high-street bank between July and September 2015 varied from £31.67 using the Lloyds UK Local Account to £77.94 at TSB.
Worse still, analysis by online forex provider Money Mover suggests small businesses are being stung for £4 billion a year in hidden fees by the major banks: as much as 96 per cent of the true cost of international transfers is concealed from the customer in skewed exchange rates. Money Mover found the average transaction cost charged by Britain’s six biggest banks on a transfer of £75,000 was £1,822, or 2.43 per cent. At Barclays, which emerged as the most expensive, the total cost to transfer £75,000 into euros came to £2,776 (3.7 per cent). Perhaps unsurprisingly, the bank rejects these findings as inaccurate and misleading. But Money Mover stands by its figures, which it says were based on actual exchange rates, phone interviews with the banks and analysis of their clients’ records of actual money transfers.
‘When it comes to international payments,’ says a Money Mover spokesman, ‘UK banks are collectively failing to give SMEs [small and medium-sized enterprises] the knowledge, transparency and visibility which they need to make an intelligent and informed decision. This lack of transparency is not only unfair and uncompetitive, it’s also costing SMEs precious cash in unnecessary fees.’
Taavet Hinrikus, co-founder of TransferWise, says he’s not surprised by the findings. ‘Banks often hide additional charges by putting a mark-up on the exchange rate or even by not being open about the fee itself,’ he says. ‘For example, the bank may advertise a fee of between £4 and £25, but then you see you’re missing a whole lot more once the money has been transferred. Our advice would be to shop around, always check the real exchange rate for the day on Reuters as a point of comparison, and look at alternative providers to your bank.’
So if you need dollars, yen or euros, what’s the best way to be sure you get a fair price? First, you need to understand how the forex business works and what costs you’ll be expected to pay. If you need to send €500,000 to your solicitor to buy a home, or directly to a supplier in France, you’ll need to arrange a money transfer. In the case of a property purchase you’ll then have to set up regular payments for ongoing costs including local taxes and maintenance. The total cost, each time, will be a combination of the exchange rate, a margin added by the service provider and any transaction fees.
The good news is that this market has become more competitive and numerous specialist forex brokers have emerged, often easily beating banks on cost. Of course they’re out to make a profit too, and they do so by taking a cut of the exchange rate; but typically a much thinner cut than the banks. Among the most established providers are HiFx, CaxtonFX and SGM Foreign Exchange. Banks and brokers also offer forex futures contracts, allowing customers to lock in a particular rate for future delivery as a hedge against exchange-rate volatility.
Daniel Webber of money-transfer comparison site FXcompared says using a specialist broker rather than a bank can save an individual or business between £2,500 and £6,000 on the purchase of £250,000 worth of euros, based on data for mid-January. For property running costs, he adds, you could typically save £40 to £60 on every monthly £1,000 transfer.
There’s also a thriving community of online services that charge a small commission rather than taking a margin, and claim they can offer low prices because they have fewer overheads to pay than the banks and established brokers.
The downside of not using a bank, however, is that not all brokers and online services offer full consumer protection. Crown Currency, one of the UK’s biggest currency brokers, went bust in 2010 with more than 12,000 customers losing a total of almost £20 million. Crown attracted clients by offering competitive rates but fell into trouble and used client money to settle debts — and fund the lavish lifestyle of director Peter Benstead. He killed himself after pleading not guilty, though his wife and son were both given jail terms for their part in what amounted to a ‘Ponzi’ scheme. Customers are still waiting for compensation.
Meanwhile, regulators are being urged to stamp out confusing and hidden forex costs. TransferWise has set up a campaign called Stop Hidden Fees, and James Daley of consumer rights website Fairer Finance is another voice calling for change.
But ultimately, the best way to avoid costly mistakes is to do your own research on rates, fees and the status of the firms you choose to deal with. And if you decide to use an alternative to your bank, Humphrey Percy of SGM Foreign Exchange says customers doing so for the first time should always check that the provider is authorised by the Financial Conduct Authority, which means it must keep customer money separate from its own funds; firms that are merely registered with the FCA don’t come with financial protection. And in the end, currency dealings will always be a matter of caveat emptor.
Laura Whitcombe is knowledge and product editor of This is Money.