Have you sent money to a friend or family member overseas and wondered why your $100 doesn’t always end up as $100 in their hands? You are not alone in this.
International money transfers can be a real puzzle when it comes to understanding all the hidden costs and exchange rates.
This article is here to help you. It explains all the hidden costs of money associated with international money transfers in detail so you can make the most of your money transfers next time.
Let’s get started!
5 Hidden Costs Of Money In International Money Transfers
Banks and money transfer companies don’t disclose the total fee for international money transfers. They keep certain charges hidden to earn profits.
Below are the hidden costs associated with international money transfers.
Marked-Up Exchange Rates
When you transfer money to another country, your currency is converted to the recipient’s currency. The amount of money received by the recipient depends on the exchange rate.
Most banks and money transfer companies use a marked-up exchange rate, which differs from the mid-market range, and this rate is not disclosed to customers.
The marked-up exchange rate is usually 1-3% above the mid-market range. The banks earn a hidden fee from this rate.
For example, if the mid-market exchange rate for 1 USD is 0.91 EUR, certain banks may charge you 0.93 EUR per USD. In this case, the markup rate is 0.02 EUR per USD.
The hidden cost of money due to exchange rates depends on the currency and the bank or the money exchange company.
Additionally, some banks may chargea fee to convert one currency to another. The total currency conversion fee is calculated as a percentage of the transaction amount. Usually, banks don’t mention this charge as a separate fee.
Did You Know? Research shows Americans lost $5.8 billion in exchange rate markups in 2023 alone.
Intermediary Bank Fees
The SWIFT network (Society for Worldwide Interbank Financial Telecommunications) handles many international money transfers.
All banks are not a part of the SWIFT network, and when yousend money through a bank that’s not a part of the SWIFT network, a correspondent bank helps with the transaction by charging a fee. This fee is known as the intermediary/correspondent fee.
For example, if you send money from the USA to the UK and it passes through two intermediary banks, both banks will deduct a fee.
The deduction amount is variable and depends on the bank and the money transfer company.
The intermediary bank fee is hidden and not disclosed upfront.
Transfer Fees And Commissions
Banks and money transfer companies charge an extra fee to facilitate international payments. Transfer fees vary widely depending on the bank and the transaction amount.
Usually, international bank transfers undergo anti-fraud and anti-laundering checks. Hence, it can take 3-5 working days for the money to reach the recipient.
The banks use this time to float the money and earn an interest. If you want the money to reach the recipient quickly within a day, the bank may charge you for that, too.
Some banks don’t mention transfer fees and commissions as separate fees; they are usually hidden from you.
Recipient Fees
Some banks may deduct a small fee when the consumer receives the money from a foreign country.
This fee varies between banks and may also depend on the amount you receive.
Additional Charges
You may have noticed the term “additional charges” while doing international money transfers.
However, banks don’t explain what this involves, and customers don’t inquire about it.
Additional charges may cost around 5% of the total amount and involve charges for bank overheads, account maintenance, and other administrative expenses.
Factors Affecting The Hidden Fees Associated With International Money Transfers
The hidden cost of money associated with international money transfers varies depending on the banking system, the destination country’s laws and regulations, the currency, the transfer amount, and the intermediary banking network.
Let’s discuss the above factors in detail.
- Banking system: Countries with developed banking infrastructure often have direct connections with international banks. Hence, they don’t need the help of intermediary banks, which cuts the cost of intermediary bank fees.
Additionally, some banks in different countries with direct relationships sign interbank agreements to reduce the costs of sending and receiving money through international money transfers.
- Currency: Countries with volatile currencies have a high exchange rate risk. Banks may charge higher currency exchange fees to mitigate this risk.
- Local laws: Some countries have strict regulations and compliance requirements. This is important to prevent issues like money laundering and terrorist financing.
However, banks must spend extra money on administration and operations to comply with local laws. Usually, banks cover these expenses from the customers, which may increase the hidden fees.
Example:
The fee for international bank transfers from the USA to the UK and Nigeria can be stated as an example of this.
The USA and the UK have strong relations, banking infrastructure, and highly stable currencies. In contrast, Nigeria has strict local laws and a less stable currency.
Due to the above reasons, the cost of international money transfers is higher between the USA and Nigeria than between the USA and the UK.
Tips To Avoid Paying High Fees For International Money Transfers
According to a survey done by Wise, 81% of Americans believe the hidden cost of money in international money transfers is a junk fee.
Below are some tips to save costs associated with international money transfers.
- Research your options. These days, many banks and money transfer companies offer different rates. Ask your provider to break down the total fee clearly and understand the hidden cost of money in different banks so that you can choose the best option.
- Use tools like CompareRemit to compare your options. Simply enter the country where you must send the money and the transfer amount, and the tool will show all available options. You can choose the cheapest option that suits your needs.
- Some third-party services like Wise offer transparent fee structures and use mid-market exchange rates. Use these types of services to save money on hidden fees. Check out this article for Wise money transfer reviews.
- Use banks with direct international connections with the destination country. This can reduce intermediary bank fees.
- Try to send money in the recipient’s local currency. This can circumvent the markup exchange rate and currency conversion fees associated with international money transfers.
- Use digital currencies like stablecoins for international money transfers. Digital currencies don’t utilize banks to reach the recipient. Hence, you can save money spent on hidden fees.
Additional Tip: If you have a bank account, you can earn significantly from bank account bonuses. Check out this article to learn how.
Summary
When you make an international money transfer, some charges are not disclosed to you upfront. These hidden fees include markup exchange rates, intermediary bank fees, transfer fees and commissions, recipient fees, additional charges for bank overheads, account management, etc.
Research states that these hidden fees are costing Americans billions. You can avoid hidden fees by using third-party services like Wise, digital currencies, and banks with direct international relations.
Research all available options and choose the service that suits your needs and budget.
FAQs
1. What Factors Impact The Cost Of International Money Transfer Fees?
The transaction amount, transaction speed, currency, local laws and regulations in the destination country, and the service provider impact the cost of international money transfer fees.
2. How Do I Reduce International Fees When Sending Money?
You can reduce fees when sending money internationally by using a multi-currency account, P2P transfers like PayPal, and sending money through a card instead of banks using digital services or digital wallets.
3. How Do Exchange Rates Affect Hidden Charges For International Money Transfers?
Banks and money transfer companies set a slightly different exchange rate than the mid-market range and profit from this. Compare exchange rates from different providers to understand the hidden costs and get the best deal.
Leave a Reply