Earning money from our laptop while being anywhere in the world is undoubtedly en vogue right now. While the digital nomad movement has been around for a while, the pandemic helped accelerate people’s desire to leave the office and work remotely. Consequently, this had led to a surge in demand for cheap international money transfers.
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The problem with international payments
Taking the growing affiliate marketing economy as an example, we can see how crucial international money transfers are to keeping costs down. An affiliate marketer will produce content on a medium, be it a website, Youtube channel, or social media, and earn a share of the revenue generated from the sales they help create. In other words, they provide their audience a link and receive a commission.
It’s slightly more effective than being a door-to-door salesman because it takes less time to reach a wider audience – and that audience, unlike the person behind the door, you already know something about. However, the audience is global, as are the partnerships with which an affiliate marketer may be involved.
When receiving payments from US-based Amazon sales, despite living in Europe yourself, you may be getting paid in USD. This creates a problem because Amazon’s currency exchange behind the payment method is excessive and will rinse you for up to 4% in exchange margins per payment.Read more: How to Monetize your Website with Amazon Associates Program
Banks are no better, either, and so when you pay to a bank account abroad, freelancers on Upwork, and overseas marketing agencies to grow your content (and subsequently, business), you may also be getting charged up to 4% in exchange margins – plus a flat fee.
Any online business is like this, too. Selling on Amazon, affiliate marketing, being an influencer, being a digital marketing agency, even being a freelancer… You’re generally buying supplies and outsourcing abroad while receiving income from all around the world. If you’re being charged ~4% in both directions, it could potentially be halving your net profit margin.
One of the worst culprits is PayPal which many affiliate marketers use.
Despite being an online payment service, which one would assume has more efficient infrastructure than a high street bank, the exchange rate margin alone is around 3.5%. If we consider this as the collection account, it is £3,500 scratched off of £100,000 revenue – and that’s without accounting for charges for international outgoings.Read more: Best 9 Payment Solutions for Affiliate Marketers [Reviews & Guide]
Money Transfer Services – Currency Specialists
Currency specialists used to be reserved for either big businesses or those willing enough to head to the local shopping center and receive a reasonably average foreign exchange rate – albeit better than the bank next door.
However, with the liquidity of the FX market in conjunction with drastically improving technological infrastructure, the awkward practicality of sending money overseas is beginning to meet our high theoretical expectations of it being an efficient process.
Money transfer companies are what we get if we cross those same currency shops in a shopping center with Uber. The speed at which online money transfers have evolved is exponential, with them being more app-focused, convenience-focused, and affordable.
Like Uber did to the Taxi market, it became incredibly more efficient overnight for the customer. Like money transfer companies, the delivery is faster, and the cost is cheaper. The most significant difference here is that instead of lifelong, hardworking taxi drivers losing out on revenue, it’s the high street banks that contributed to our economy’s collapse in 2008.
It’s not just the technology alone that got us here so quickly, but the fierce competition. There’s no longer one or two currency shops in town to choose from or a handful of banks, but an endless list of fintech startups.
While some money transfer companies deal primarily with individuals, others focus on businesses. The best choices as rated by MoneyTransferComparison are divided into use cases.
For example, Wise and Revolut are focused on individuals or small businesses looking for small, quick, foreign currency business payments. At the same time, OFX and Currencies Direct focus on larger, more sophisticated transfers and business solutions.
Here are some of the benefits of using a money transfer company compared to a high street bank.
No Fees Per Transfer
While not all money transfer companies are the same, no-fee money transfers are increasingly common. While it may not initially seem like it matters which way you’re charged (i.e., if you’re being charged through a poor exchange rate instead of a fee), it does matter.
Fees are usually more punishing for smaller transfers. Many high street banks charge a flat $/£/€ 30 for international transfers regardless of the transfer amount. While this may not be a huge deal when transferring $100,000, it is a big deal if you’re frequently sending $200 to a freelancer for work or a supplier.
Fees can add up over time and be deceivingly large, so it’s a massive cost-saver to use a money transfer company with no fees.
Better Exchange Rates Than Banks
If a money transfer company is not charging any fixed fees, it’s likely to take a cut from the exchange rate (known as the exchange margin). It’s not just the fees being less than banks, though, the exchange rate offered is almost always preferable to high street banks.
It’s common to see around 3% – 5% exchange margin when using a bank for an international transfer. This is ~$4,000 for every $100,000 exchanged – putting a serious dent into your profits.
It’s not impossible, either, to find a money transfer company offering no exchange margin. This is known as the interbank rate – or in other words, the best you could possibly receive. Beyond these anomalies, 0.5% – 1% is a typical exchange margin range, depending on the company and transfer amounts.
This means businesses are spending around ~75% less on unnecessary exchange margins. The savings are often even higher than this when accounting for fees too.
Get Your Own Virtual IBAN to Receive Funds From Multiple Currencies
Being an international business, clients, suppliers, and staff may be from worldwide. One of the biggest benefits of using a money transfer company is opening a new account with a virtual IBAN in seconds. In one space, the UI will display your account balance in, say, 20+ currencies around the world.
These virtual accounts mean a business can pay suppliers and expenses in their domestic currency using the international IBAN/card details. Some websites will have a dollar price and a euro price – and they’re far from perfectly matched.
Paying in the currency that isn’t their base currency can mean you’re letting the seller take charge of the exchange. If they’re relying on PayPal, MasterCard, or a high street bank for these exchanges, the exorbitant costs may be reflected in the price you pay.
So, having multiple virtual accounts worldwide means being more flexible. If the USD price is preferable, you can exchange your EUR to USD internally within the money transfer app and then use the USD account details to pay.
It also has its advantages when receiving money too. When we receive money from a bank account abroad, it’s easier to provide international clients with payment details in their domestic currency for simplicity and efficiency.
Furthermore, it will mean the business receives all of our revenue without exchanging any money. This is preferable to auto-exchanging for every transaction or sale because it gives us control over the timing of the exchange.
If it’s a poor time to exchange because of the market rate, or if a business would get a better deal on our exchange if it were larger in volume, they can now wait, hold, and exchange when the moment is preferable.
Holding money in currencies around the world may mean never having to exchange. For example, having a European client as an American company, it may be worth holding onto that EUR currency from the sale if they have a European supplier down the line. This could result in zero exchanges instead of two (which would be 8%+ in cumulative exchange fees with a bank).
Hedging Products to Mitigate Currency Risk
If the market is highly turbulent, a business may be worried about waiting rather than seeing it as a benefit. For example, a firm has to pay an overseas agency €20,000 in two months for their services.
Money transfer companies offer the possibility of hedging. An essential hedging tool is a Forward Contract, which would help the business in the above scenario. If the exchange was to take place today, it might cost $22,500.
However, in two months, it may cost $24,000 if there’s a devaluation of the USD. To prevent this, a Forward will lock in that $22,500 price for a small fee which uses interest rate differentials – this is also known as the Forward rate. So, the contract is executed in two months, and $22,500 pays for €20,000 of services, thus mitigating the currency risk during those two months.
Most money transfer companies will offer options contracts too, which is the same, but you have the option after those two months whether you want to execute it or not. Because if forecasted predictions were way off and the USD appreciated, you may wish to pay using the new market rate. Of course, options contracts incur a larger fee for such control.
Business Solutions and Dedicated Account Managers
If the idea of locking in forward contracts, or even executing large transfers, feels uncomfortable, then money transfer companies usually offer a free dedicated account manager to help. Such an account manager is there to build a relationship with, who can help facilitate transfers and advise on the best way forward.
An account manager offers a single point of contact, making it easier to communicate. The benefits are far-reaching, from expert market guidance to advising on sophisticated currency products.
It’s not just currency in isolation that they deal with, but also business solutions relating to currency. For example, UK-based Halo Financial offers free FX audits for businesses, which could help identify discrepancies, mistakes, and inefficiencies in how you handle currency as a business.
We often understand the benefit of using specialist business solutions but struggle to identify whether or not they’re worth the money. Accountants, for example, are generally established as having benefits that outweigh the high costs. On the other hand, consultants are more difficult for smaller companies to weigh up.
The most significant advantage of money transfer companies is that they remove the need for weighing up or cost-benefit analysis. The benefits are vast, and the cost is zero. Most money transfer companies have free accounts with free dedicated dealers – it’s becoming an industry norm.
In most scenarios, the only fee you’re paying is contained within the exchange margin – which we know is already cheaper than high street banks, PayPal, Western Union, and other more traditional forms of currency exchange.
The technological revolution has been driven by fintechs, although some industry veterans like Moneycorp have kept up with the new competition.
To find the best exchange rate may depend on the scenario (i.e., the value of the transfer). The top 10 money transfer companies in the USA, for example, will all have around a 1% margin or below.
Because accounts are free and take a matter of minutes to sign up, it’s worth dividing up a handful of money transfer companies into different use cases and pros/cons and simply signing up to several.
Unlike during the 20th century, there’s no need for loyalty or complacency when handling money.