The Hidden Costs of Your Cross-border Payments—And What to do About Them
If you have traveled abroad and purchased goods and services, you might have thought that your only concern was the exchange rate between your Canadian dollar and the local currency. Weeks later when the bills arrive, the shocking news is that somehow 7 percent was added to that big hotel bill you paid.
Actually, that 7 percent was a combination of foreign transaction fees and service charges. Then there were those currency exchange rate fees on top of a fluctuating foreign exchange rate at the time you exchanged your Canadian dollars that you need to be aware of.
The 7-percent factor.
The more financial institutions and businesses that get in on the transaction process, the more the transaction costs. Here is an example:
Say you paid your hotel bill during your overseas trip to London. You paid for your hotel room in London in Canadian dollars. Here’s a list of the players and how they take their cut:
The London bank servicing the hotel charges a percentage fee for processing your dollars.
Your Canadian bank charges you an additional percentage for exchanging Canadian dollars to British pounds to pay the London bank.
Both the London hotel and bank charge you another foreign transaction fee to make up for their lowered profit margins.
When all those steps are completed you end up paying an additional sum of upwards of 7 percent. You, the consumer, also shoulder the risk that your currency could lose value in transit due to fluctuating currency exchange rates between the time of purchase and settlement.
It is more complicated than just cash conversion.
The cross-border transaction process is more complicated than most consumers realize. The complexity arises as your transaction becomes a target of opportunity for big banks and large financial institutions, which capitalize on their independence and overcharge consumers.
Likewise, if you run a small business and send and receive payments overseas, the aforementioned added costs can easily become a burden to both your bottom line and an impediment to your customers’ satisfaction.
What happens when you move money locally?
Basically, the idea of the movement of money from one bank to another is a misnomer. What actually occurs involves a complex process where banks and other financial institutions reconcile and balance their accounts.
For example, if you were to transfer $500 from your local Chase account to a local Wells Fargo bank, the balance of each account is simply adjusted to reflect your authorised transfer. Locally, it is a zero-sum system relying on long-standing and well-maintained financial relationships and instant, efficient communications, usually without transaction fees.
Cross-border transactions become even more complex.
International financial markets use the same balancing act, but they tip that balance with more complexity and additional steps. In the first place, for one bank to host an international transaction, that bank must have both currencies in its possession. Otherwise, that host bank must have a means of buying the foreign currency to do the deal.
Large banks often deal with a select few overseas banks as agents to do foreign transactions outside the former’s specialty. Small banks, on the other hand, hold no foreign currencies and rely completely on large banks as hosts for their cross-border currency transactions on their behalf.
And they do not do it for free.
For the foregoing reasons, cross-border financial transactions can involve more players. The more players involved, the more money is subtracted during the transaction process.
That subtraction has to be added back in, and the customer eventually shoulders the cost. Say you pay $500 to a foreign bank to reimburse your supplier. Your payment may arrive at its destination $25 short because of processing fees. That means you must add the additional charges up front to cover the amount lost and to ensure your supplier gets the full amount.
What to do about hidden costs in cross-border transactions.
As a consumer, your best method in finding out the most reasonable currency exchange rate is to check out its current mid-market rate or current buy/sell value on the foreign exchange market.
If you are booking travel and intend to make purchases in Europe, there are good short-term safeguards, like euro cards, which avoid cross-border transaction fees. Those cards also are a safe way to buy and pay without consulting a calculator.
If you run a business and expect to do cross-border transactions and be a global marketplace player, you should consider a digital payment platform to remove the hassle and reduce the costs of cross-border payments. Digital payment platforms do that and more by:
Offering its customers access to a well-connected and vast payment network
Providing transparency into their international transactions at every step
Introducing industry-grade security, risk management, and protection against fraud
Want to learn more?
Our digital payment platform is the risk management tool you need to protect your cash flow. You don’t have to continue losing on your FX transactions when you deal with overseas customers. Contact us and see how our digital payment platform can improve your profitability and keep you agile and active in the global market.
Sign up to receive the latest market news from our experts.
Who can use the MTFX payment service?
Individuals and businesses who need to send money in foreign currency internationally can use MTFX’s services. The beneficiary of the transfer must have a bank account for the funds to be paid into.
Personal clients usually use our services to transfer money between their own accounts in two different countries.
Business clients usually use our services to transfer funds to suppliers, fund international operations, or repatriate overseas earnings.
Why should I use MTFX and not my own bank?
MTFX offers currency exchange rates that are 2-5% better than those offered by the banks. Personal clients usually save hundreds of dollars per transfer and for larger transfers, the savings can run into the thousands.
We also offer excellent customer service, dedicated currency specialists, and a 24/7 online platform with best-in-class technology that allows you to complete transfers from any device virtually anywhere in the world.
Business customers save with better currency exchange rates and proven solutions geared towards managing and mitigating foreign exchange risk. Our solutions include forward contracts, market orders, rate alert services, and much more - all backed by great technology and great people.
How do customers send funds to MTFX?
Funds can be transferred via wire transfer, Electronic Funds Transfer (EFT), or ACH payment services. MTFX maintains bank accounts in all major currencies with highly-rated banks. Our banking infrastructure ensures that you can transfer funds to us quickly and securely.
How long does it take MTFX to transfer funds?
Our global network of banking partners allows us to get funds to virtually anywhere in the world quickly and efficiently. Most wire transfers from MTFX will be received by your beneficiary within 24-48 hours. MTFX also offers same-day transfers that are almost instantaneous, as well as low-cost in-country payment services for your less urgent transfers. For further information please speak to one of our currency specialists.
MTFX is in the process of migrating our online dealing system to a newer version which offers more functionality along with an updated look and feel. While we complete our migration, both versions of our online dealing platform will be accessible.