How To Calculate Money Transfer Fees Correctly?

We all know that making international money transfers costs us, but understanding exactly how much a transfer is going to cost is seldom ever clear until it’s too late. In fact, the money transfer system can often seem akin to something of a dark art shrouded in mystery.

This is no coincidence by the way, the smoke and mirrors are not a by product but rather, are a product feature designed to confuse unwitting customers.

Therefore we have written this post that deconstructs exactly how the  money transfer system works, and how you can calculate exactly how much your next transfer is really costing you.

Money Transfers Using Your Bank

An estimated 94.6% of us have bank accounts. Therefore it stands to reason that our first port of call whenever we need to make a financial transaction is our bank. However, whenever we instruct our bank to handle an international money transfer for us, it can prove to be rather expensive.

This is because banks charge customers a fee anytime they use the SWIFT banking system. Individual banks are allowed to set their own transaction fees too and as such, they tend to vary pretty dramatically between banks.

In the US, the fee scale ranges from $2.50 – $15 depending on the particular bank, and the finer details of the transfer.  The fee amounts are usually buried pretty deep in the banking terms and conditions booklet that very few of us ever bother to read and so it can come as a shock to first timers who suddenly find that it’s going to cost them $15 to send just $50 to their Brother in Europe!

Furthermore, it doesn’t quite end there. As well as charging a flat transaction fee, banks also apply a ‘markup’ on currency exchanges too  whenever you send money overseas to a foreign currency account, the bank gets to set the exchange rate and they tend to charge 2-3% above the standard market exchange rate.

Are The Banks Dishonest About How Much They Are Charging?

Whilst banks do state the transaction fees amount (in the banking T & C’s and also at the authorisation stage of making the transfer) they are less transparent about the mark-up and don’t exactly advertise the fact that they are offering a sub-optimal rate and making a further profit at your expense.

In fact, the only way a customer can ascertain for themselves how much the mark-up is costing them, is to check the exchange rate the bank is offering and then compare it against the daily rate on a website like XE.

Therefore whilst the banks are not technically doing anything wrong, many critics would call the opaque practice a form of dishonesty by omission.

Wire Fes vs Exchange Rates

As we have now seen, whenever we make an international payment or transfer via our bank, there are two types of costs – the wire fee (or transaction fee) and then the exchange rate mark up. Therefore when making an international transfer we need to look at both.

How To Calculate the Exchange Rate Markup You Are Paying

Let’s now work with a real life example and see how much it will cost to send $1000 dollars to an acquaintance in the US from my HSBC UK bank account.

Firstly the current US – GBP exchange rate on XE says that $1000 is £817 and so I might expect the transaction to cost me around £817. Of course,  I do need to bear in mind that HSBC UK charges £2.75 ($3.36 in wire fees) so I know that the transaction will cost me at least £819.75.

However, when I come to the final, ‘authorise transaction screen’ on my online banking account, I see that HSBC are advising that the transaction is going to cost me £847.75. Bearing in mind we know the fee is $2.75, some simple maths tells us that the currency exchange is costing £845 which means HSBC are charging an extra £28 as their ‘mark-up’.

All in, the transaction is costing £30.75 which is around $37.60 on today’s XE rate.

Alternatives To Using The Banks

Fortunately, there are alternative ways to send money internationally and there is an entire sub-market of financial services providers who can offer low cost money transfers.

The most famous money transfer company in the world is possibly Western Union – their heritage goes back to 1851 and they have offices all over the world. However, they are notorious for also charging high fees.

Modern times have however seen an explosion of fin-tech companies using innovating tech interfaces to help customers handle low cost money transfers. Wise, Revolut and Money Corp all offer low, or zero-fee transfers, along with slightly lower mark-ups than the banks. Practically, these financial service providers offer the best transfer rate, including the USD to PKR exchange rate and CAD to the INR exchange rate, just to name a few. For more information on this, check out this page with an FAQ for transferring money abroad.

Final Thoughts

Hopefully you now understand how foreign bank transfers work and how to calculate how much your bank is charging. Sending money across the world still costs money but it does not have to be as expensive as the banks would like it to be anymore!


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