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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 the Canadian dollars that you need to be aware of.
Note: Read our daily currency update to stay ahead in the Canadian Dollar Forecast.
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:
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.
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.
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 authorized 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.
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 make 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.
For the foregoing reasons, cross-border financial transactions can involve more players. The more players are 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 at $25 short because of the processing fees. That means you must add the additional charges upfront to cover the amount lost and to ensure your supplier gets the full amount.
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 make 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:
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.
Open an account today and see how our digital payment platform can improve your profitability and keep you agile and active in the global market.
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