New cross-border payments solutions are offered seemingly every day. These solutions use everything from stablecoins to pay-by-bank platforms. However, international wire transfers still play a crucial role in money movement, and that’s not likely to change anytime soon.
In a recent PaymentsJournal podcast, Justin Jackson, SVP, Head of Enterprise Payments at Fiserv, and John Min, Chief Economist at Monex USA, discussed the present and future of international wire transfers and the methods financial institutions can employ to leverage this powerful tool.
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A Win-Win: Leveraging International Wire Transfers and Foreign Exchange Services
PaymentsJournal A Win-Win: Leveraging International Wire Transfers and Foreign Exchange Services
Functional, Secure, and Reliable
Wire transfers have a place in the payments landscape because they function more efficiently than the alternatives. They’re secure because banks on both ends of the transaction are constantly monitoring its status. Wire transfers are also more reliable because of the beneficiary information that accompanies the transaction and ensures that the payment is routed to the right account.
Account-to-account and P2P payments, which have grown immensely in the past few years, have limits on transfer amounts. Wire transfers can far exceed those limits, moving tens or even hundreds of millions of dollars. They also have international reach, which is vital to companies doing business around the globe and are often a lifeline for consumers with family overseas.
International wire transfers do have downsides, however. Issues often arise because financial institutions aren’t aware of all the aspects of the transfer process.
“One theme that keeps coming up is transparency,” Jackson said. “You don’t know how many intermediaries are going to be handling the transaction and what their timelines are. How long is it going to take them to deliver your funds to the next link in the chain? Most importantly, you don’t know the fees they’re going to charge you.”
The Hidden Costs
When sending overseas, American institutions can wire funds in U.S. dollars or in the recipient’s currency. It can be convenient to send in dollars because the institution doesn’t have to calculate foreign exchange (FX) rates, but convenience comes at a cost.
“Once the dollar hits the foreign account, it has to be converted,” Min said. “At this point, you have no control over the exchange rate or the markup on that transaction. The recipient bank or the financial institution can apply whatever rate it wants, and therefore the hidden costs could be significant. It could be as much as 2 to 3 percentage points.”
The fees come directly out of the transfer’s funds. A business owner, attempting to pay an invoice for €10,000, might find out that only €9500 of the wire transfer was applied to the invoice. That leaves the owner no choice but to send another wire transfer to cover the shortfall, and that payment could also incur fees.
Because of government regulations, institutions might run into roadblocks when trying to conduct transfers in certain currencies. The U.S. State Department has mandated a list of currencies that are prohibited for foreign transfer.
“Some transactions are in a gray area,” Min said. “Sending money into Brazil, for instance, is cumbersome. It’s not just sending the funds. The recipient has to receive paperwork and complete it. Sending money into China can be very difficult because of the regulatory oversight. If you send U.S. dollars into different foreign currencies, then different regulations apply and different fees apply.”
Value-Add Fees
Because of fluctuating FX transfer rates and shifting government regulations, international wire transfer fees can vary substantially.
“The fee could be as low as zero dollars,” Jackson said. “It’s not exactly free; it’s included in the relationship with the financial institution. Fees could also be as high as $50 per wire transfer, but they average around $45. It’s typical for the sender to pay a fee to send a wire transfer, and it’s not atypical for the recipient to be charged a fee by their own financial institution.”
Fees can be a value-add for banks and credit unions because they create an income opportunity. All pricing is negotiated in every FX transaction, so institutions can earn revenue from the markup on currency conversion.
“There’s no one fixed price or one fixed markup rule, so it’s up to each institution to mark up whatever they can get away with to some extent,” Min said. “If you’re doing an FX transaction with a company like PayPal, you could be facing a 250 to 300 basis point fee. It’s a very lucrative revenue source for financial institutions.”
At a 300 basis-point rate, a $10,000 transfer sent overseas incurs a $300 charge. The financial institution gets all the markup share if the transaction is originated through the bank or credit union instead of a third party. Reducing the fee to 100 basis points would still mean $100 of income to the institution and a $200 savings for the sender of the payment.
Asking the Right Questions
Because of the complexity involved with international wire transfers, many institutions have turned to partners. There’s a level of due diligence that should always be applied to partnerships, but it’s especially true of foreign exchange services. Banks and credit unions must ask the right questions to ensure a partner can truly support their needs.
“Institutions should look at their customer base and the types of transactions they’re likely to perform,” Jackson said. “Then ask partners about the currencies they support. How do those line up against the transactions my accountholder base wants to execute? What are the exchange rates? What are the fees? They should also find out any additional fees based on markup.”
The duration of the transfer is another key question. The standard banking practice for international wire transfers is the day the transfer is initiated plus two. If the transaction is conducted today, the money usually appears two days later. That delay is caused by batch processing, because many banks can conduct transactions only during set hours.
Partner companies often operate 24/7, so transactions can be completed the same day or the next day. Many partners have also established branches in other countries, which can speed up transactions and make exchange pricing more competitive.
“The benefit of working with a fintech partner is they’re plug-and-play,” Jackson said. “It connects into your core account processing system; it’s wired into your institution’s online banking system. It fits into your existing reporting structures and data structures and uses existing connectivity. It’s easy and simple, and there’s not a big technical lift.”
While there are strong benefits to working with partners, institutions must ensure they’re working with a regulated money services company. In the United States, that means they’re licensed to operate in every state and at the federal level. It’s critical that financial institutions aren’t assuming any additional risk by working with a third-party partner.
Growing Globalization
Institutions that are using their own systems to send U.S. dollars through an intermediary are leaving an opportunity on the table. Despite talk of deglobalization, more businesses than ever are getting involved in international commerce. As that trend increases, companies will look for more efficient ways to send money.
“You’re able to give your customers a better service while providing them cost savings and generating income for your institution,” Jackson said. “Foreign wire transfers and foreign exchange services can be a valuable offering because they’re a win-win for your institution, your customers, and the recipients of their payments.”
