The recent release of FXcompared’s first International Money Trend Index report offers a number of interesting insights into the foreign exchange marketplace. Perhaps most interesting was the disparate costs to customers for performing a transaction, suggesting that banks are unable (or unwilling) to negotiate the international frameworks required to simplify inter-bank transfers.
The biggest loser under the current set-up however, is the customer.
Consider the following scenario:
A UK business receives an invoice from their Australian supplier for £1000 (or the local dollar equivalent). When payment is made, their bank charges £72 for the international money transfer to the supplier – a 7.2% currency conversion and handling fee.
The bank’s mark-up on each transaction is a relatively small part of this fee however. The charge also needs to cover costs including monitoring foreign exchange rates, checking for errors in the accompanying “paperwork”, and paying the employees responsible for actually entering the details of the transaction. The process is slow, relatively manual-intensive, and therefore costly.
A business choosing to pay international invoices using a non-bank provider can significantly reduce the transfer cost. The same £1000 invoice can be processed for just £18 – a 1.8% handling fee – reducing the overall cost of the transaction by £54.
For businesses making dozens of international payments, these savings quickly mount up, providing a particularly attractive alternative to traditional banks. The use of a centralised platform that connects suppliers and customers directly removes the additional layer of bureaucracy introduced by traditional inter-bank payments.
The figure above is relative contribution of bank fee and FX spread for bank-to-bank international money transfers from the UK for GBP 1,000 and GBP 10,000 (November 2015).
To stay competitive, the incumbent international banking industry needs to reduce both their charges and their own running costs, or risk seeing further erosion of their market share to non-traditional players. The key to achieving these savings will be an increased use of automation, and a move towards having the customer carry out the majority of their own low-level error checking before the payment transfer request is submitted.
Increased automation does not necessarily mean an erosion of margins either. Although the customer is charged £18 for the automated transaction, the actual cost to the provider is just £1 – offering significant potential for profit.
This new breed of international payment processing platform is also designed for simplicity, further reducing manual intervention and time to deployment. By removing much of the human element from each transaction, employment costs and data errors are no longer factors in pricing.
Automation also helps lower the friction associated with international payment processing, banks and their customers can increase their global reach without a significant hike in running costs. Again, lower costs and simplified processing make it easier for businesses and banks of all sizes to buy and sell abroad.
Without automation, customers will simply go to a provider who offers simpler transactions and lower prices. And incumbent banks will be the biggest losers.