Money Transfers for Small Business

How do money transfers compare vs. banks when sending as a small business?

In an increasingly globalised world, more and more small businesses are doing business across country borders, which means they need to pay suppliers, buy capital goods or pay remote working employees in different currencies.

A decade ago, the first port of call for many small businesses when transferring money or paying suppliers in other countries would have been the banks. With competition intensifying and money transfer providers now offering the same, and, in most instances, cheaper international money transfer services, customers have far more options to choose from.

However, the greater range of choice means you also need to consider all your options carefully. Costs vary widely, particularly between the banks and money transfer providers, and you could stand to save hundreds of pounds per transaction. 

An attractive alternative to banks?

Money transfer providers specialise in helping their clients make the cheapest, best and fastest international transfers around the globe. This contrasts with banks, which offer a much wider range of financial services, of which international payments is just one. By using a money transfer provider, you get access to their specialised focus, global currency expertise and customer support set up specifically to help you transfer funds internationally.

Money transfer services are able to keep their costs down because they have lower overheads than the banks. They have taken full advantage of technological innovation; setting up online businesses that are available 24/7 and require less costly on-the-ground infrastructure to do business. As a result, they can charge a fraction of what banks have traditionally charged.

Bank charges – difficult to quantify

Intense competition from money transfer companies has pressured banks to become more transparent about their charges and upfront fees have come down or, in some instances, been removed completely. But it is still hard work to get to the bottom of what you can expect to pay across the different banks for an international money transfer. Bank charges vary widely, both in the amount and the nature of fees charged.

The cost of making an international payment usually includes:
– An upfront transaction fee.
– A foreign exchange margin (a premium added to the prevailing foreign exchange rate).
– Hidden fees, which are other unspecified bank charges that may be added during the process of transferring the money to another jurisdiction.
The upfront fee is the most transparent fee charged. Where the banks make most of their money offering this service, though, is in the foreign exchange premium. This is the margin they add to the prevailing foreign exchange rate, and the final rate is often described as the “bank exchange rate”.

Forex rates increase transaction costs

Foreign exchange premiums are, in effect, the most significant hidden cost in any financial transaction. To determine what this is, you need to compare the exchange rate you are quoted with the exchange rate cited on Google or any other independent source, such as Reuters or Bloomberg.

This premium varies significantly between banks and between banks and money transfer brokers. It can add hundreds of pounds to the cost of transferring money internationally and so it is worth making sure you are getting a competitive forex quote.

Hidden fees are all the other charges you are not likely to be alerted to upfront. They are the fees other banks in the payment chain may charge before the money reaches the intended recipient, including the recipient’s own bank charges. When making an international money transfer, however, you will get the option to decide whether the recipient should incur those charges, whether you will share them with the recipient or whether you will pay them in their entirety.

Another important consideration is the global reach of the bank or international transfer provider. This can be seen in their list specifying the countries to which you can make international payments. Barclays supports payments to 200 countries worldwide, in over 50 currencies, and Lloyds covers 100 countries. Leading money transfer providers now offer global coverage that is as extensive. OFX, for instance, works in more than 190 countries and offers 55 different currency conversions.

Reducing transaction costs – Analysis

With all these moving parts, it’s difficult and time-consuming to determine the pros and cons of using a money transfer broker instead of a bank and how much banks will charge versus money transfer services. So we’ve done some of that homework for you.

We have come up with three payment scenarios to show you what you can expect to pay, the comparative costs and how long it will take if you are going to use a leading UK bank or an international money transfer service.

Cross-currency payments within the EU

Although still part of the European Union, UK businesses doing business with companies in the European Economic Area (EEA) will regularly need to make international money transfers. To assess how much you will pay if you do this through a bank versus a money transfer service, we have assumed a small business needs to pay £20 000 for equipment imported from a company operating in the Euro-area.

Making payments in the EEA is relatively straightforward and quick when you transact with the large UK banks, such as Natwest, Barclays Bank, HSBC and Lloyds. The transaction can usually be completed in one business day – and the same business day if you pay extra and get the order through before their cut off time. Money transfer providers offer the same service.

The flat fees banks charge for the transfer vary depending on the bank account you have with them and also whether you are doing it online, on your mobile or in a branch. Base charges for online transfers, however, range from £4 at HSBC, £9.50 at Lloyds and £10 at Royal Bank of Scotland and Natwest. Barclays does not charge for online international transfers but it will make money in the bank exchange rate mark-up. Meanwhile, money transfer providers, such as OFX, do not charge a transaction fee at all.

To assess the difference in the foreign exchange premiums charged by banks and money transfer providers, we got quotes from a number of online money transfer comparison sites. Our calculations confirmed that mark-ups added by the banks were significant. The average foreign exchange margin on transferring £20 000 to Euros was 3.5%, with one bank adding 3.1% and another 4.2% to the Google-quoted exchange rate.

This translates into an average exchange rate-related cost of £700 on the transaction, with the least expensive bank taking £620 and the most expensive £840.

Money transfer providers, like OFX, also earn most of their revenues from forex mark-ups, but the premiums they charge are significantly lower than those quoted by the banks. The premium quoted on the transaction was about 1%, which translates into £200 – a saving of at least £420 on the forex rate alone when transferring £20 000 to the equipment supplier via the money transfer service instead of a bank.

Remote working employees

Our second scenario sees a small business needing to deposit a £20 000 salary in a US-based employee’s account. Fees for money transfers to major countries outside the EU, for instance, the US, are higher, with Royal Bank of Scotland and Natwest charging £22 for the transaction. Once again, you would not pay a fee for this if you did it through an international money transfer service, like OFX.

Hidden bank fees may be charged if there is another bank involved in the payment process. In its fee schedule, Barclays alerts clients to the fact that it charges a £4 recipient fee. As mentioned above, the small business would need to decide whether to foot the bill for those so that your employee gets the full amount in their bank account or whether to share the fees or leave them up to the employee to pay.

The average exchange rate premium charged by the leading UK banks on this international transfer payment to the US was 3.3% (an effective £660) based on our research and the premium ranged from 2.9% (£580) at the lower end through to 4% (£800) at the upper end. The money transfer broker’s premium of 1.2% was a far more reasonable £288 – amounting to a saving of £372 compared with the average bank forex premium.

Locking in an exchange outcome

In this scenario, the small business needs to pay a Thai supplier £20 000 for goods in three months’ time. Given the significant volatility in the global currency market and the fact that the supplier is located in an emerging market, which is subject to even greater currency variations, the business owner wants to lock in the exchange rate so that there are no surprises when it comes time to pay.

In this instance, the business can negotiate a three-month forward contract to convert the £20 000 into Thai baht. A money transfer service, like OFX, has specific services it offers smaller business and can set up the contract efficiently and cost-effectively.

Banks can do this too but, again, their service is expensive. This is highlighted in a recent European Central Bank report that found small businesses were being charged hedging rates on forward agreements that were up to 25 times higher than the charges bigger clients had to pay. So small businesses stand to save significantly if they opt to negotiate forward contracts with money transfer service that specialises in meeting their forex needs.

Analysis Roundup

These three scenarios highlight how much more expensive banks can be when you use them to fulfil international money transfers. It also shows how much the costs differ between the large UK banks and how difficult it is to come up with a final figure that incorporates all the fees involved in the transfer, including the exchange rate premium charged.

Money transfer companies offerings tend to be more transparent, understandable and cheaper than the banks. They are already offering the same global reach as the banks and there is a wide range of choice.

However, as with any fast-growing industry, not all companies are going to be reputable or reliable. For that reason, it is important to do your homework to make sure the money transfer provider has a good track record. You can gauge this by checking customer ratings and comments.

You also need to understand what it is they offer, whether their services and support will suit your needs and what they will charge. The more transparent the money transfer service is about what they offer and how much they charge the better.