Trading places

New online forex services give banks a run for their money

Currency Exchange Rates As Euro Falls To Two Year Low Against Dollar
The old technology. Source: Bloomberg

Money transfers abroad have been a constant source of inconvenience and expense for expats – at least as long as banks had a virtual monopoly on the business. Now a whole raft of online services and mobile phone apps are making the process quicker, easier and cheaper.

This is especially good news for immigrants sending remittances to family at home, but useful for anyone who has occasion to transfer money out of Europe. Instead of taking several days to work through the clunky bank transfer system – with each step geometrically increasing the chance of mistakes – these transfers can take place within minutes. And instead of lengthy IBAN or bank routing numbers, senders can even transfer cash using just the cellphone number of the recipient.

The comparison website geldtransfair.de provides an overview of 31 new transfer services. One well-known provider is TransferWise, based in the UK. Like many of the new services, it matches customers who want to change opposite currencies, for example one user who wants to change euros to dollars with another who wants to convert dollars to euros.

It then performs the conversion at or close to the interbank exchange rate, charging a small commission to do so. TransferWise’s 3 million customers therefore benefit from better currency exchange rates than offered by the banks, who buy and sell currency at different rates, pocketing the difference. The fees are also lower, even on small amounts, with TransferWise charging about 0.5 percent, and rival CurrencyFair a flat fee of €3.

TransferWise and CurrencyFair both offer websites and apps in several languages, further easing the process. They are also entering into deals with other financial service providers, for example, customers of the German online bank N26 can use the TransferWise app for transfers. Another new service, Amizo, which is also based and regulated in the UK, allows payments from cellphone to cellphone.

Beating the banks

The big technology players are also getting in on the action. PayPal, a spin-off of eBay, says about one-fifth of its payments are cross-border. It requires both parties to have PayPal accounts, backed up by a bank account or credit card. Transfers are quick, but, like banks, the firm adds its own “spread” to the exchange rate, meaning users get a worse deal than with the matching services. Its fees are also higher, especially if a debit or credit card is used.

Facebook’s messaging service, Messenger, also offers currency transfers, powered via TransferWise. But at the moment the service is only available to Facebook users in select countries, including the US, UK, Canada and euro-zone members.

The new transfer methods are a big improvement on bank transfers, prisoners as they are of outmoded technology. Other traditional providers of transfer services, such as Western Union and MoneyGram, can also be relatively slow and expensive. But some big banks are playign catch up: Deutsche Bank last month invested in Modo Payments, a US startup for mobile phone transfers.

Ironically, emerging markets have been in the vanguard in money transfers, especially of mobile phone systems. Many in these markets don’t have a bank account while cellphones are widespread because of the absence of landline infrastructure. Kenya’s M-Pesa has spread throughout Africa as a market leader in payments via text messages, with a dense network of agents for participants to pay in or take out cash. It now offers an international service, although it is operated by Western Union and so incurs hefty fees.

Blockchain technology, using publicly accessible ledgers to track transactions, is also proving useful in cross-border transfers. In particualr, countries plagued by high inflation like to use Bitcoin and other cryptocurrencies built on the technology. Ripple, which provides blockchain services to banks, has already signed up more than a hundred customers.

Stefan Reccius is a trainee at Handelsblatt and Sheera Plawner is an intern. Darrell Delamaide adapted this story into English for Handelsblatt Global. To contact the authors: reccius@handelsblatt.com and plawner@handelsblatt.com

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