The Myth of “0 Dollar Fee” on International Money Transfer

A Guide to Remittance costs & hidden Fees

As we explained in part 1 of our blog, the money transfer companies offer an exchange rate from the bid-ask spread and not the mid-market exchange rate. Mid-market exchange rate is the most accurate foreign currency exchange rate but money transfer services and banks operate at the exchange rate margin. In this blog we will discuss about various remittance costs that we should be aware of when sending money from one country to another.

Think about this; in an ideal world while sending money you should be able to get the exact conversion rate. For example, if the mid market rate for 1 USD to INR is Rs 68.00, for sending 1000 dollar to India you should receive 68000 rupees. Well, as we all know that just doesn’t happen and you usually end up paying a cost for your remittances

You usually end up paying some cost for your money transfer from USA to India. This money transfer cost or the margin could vary depending on sending and receiving countries, currency pairs, modes of transfer and many other factors.

The exchange rate offered by money transfer companies are in most cases less than the actual mid-market rate and this could make a huge difference in the amount of remittance being received.

International Money Transfer – Cost & Hidden Fees

Remittance providers, like any other business need to cover their cost and earn a profit. They usually do that in 3 ways –

  1. Direct Fee on the money transfer – It is a flat or a tiered fee charged by the money transfer operators or banks for sending your money from one country to another.
  2. Exchange Rate Margins – Most money transfer companies offer you a lower rate than the market exchange rate and the difference in the 2 rates is the profit they earn.
  3. Fees plus exchange rate margin – Some banks offer a lower exchange rate as well as impose a nominal fees.

But, you can say that your money transfer company claims a “Zero Fee”. Yes, they claim that, but what they don’t tell you is that they are making enough money by indirectly offering you a much lower exchange rate. This margin usually helps them cover various costs including the taxes, infrastructure, marketing etc. plus helps them make a decent profit.

Here is a quick statistic from world bank. As per world bank, current average cost for international Remittance across the world is around 8%. To put things in perspective, every year a total of $ 600 billion are sent from one country to another. Considering 8% cost, you can see that around 48 Billion dollars are being pocketed by the big banks and money transfer companies each year.

Out of the $ 600 billion that immigrants are sending, only $ 550 Billion are actually reaching the destination.

So, when your money transfer company says that they offer you money transfer at no commission or 0 fee, they are talking about the direct fee. What they are not telling you is that they are still charging a hidden or indirect fee from you with a decent exchange rate margin.

For example, if you are sending money from USA to India and trying to get the best value for Dollar to Rupee Exchange Rate, here is how it would work out in the end.

For USD to INR conversion, mid-market rate = 68.0 INR/USD
With this exchange rate, you should get 1000 * 68.0 = 68000 INR.

However, the money transfer company who boasts about their “0 exchange fee”, offers USD to INR rate = 66.1 INR/USD
With this rate, you only get 1000 * 66.1 = 66100 INR
And that’s how the “0 Exchange Fee” actually cost you 68000 – 66100 = 1900 INR
Net Profit of the Money transfer company = 1900 Rupees

The Graph below showcases how the difference in the Mid Market Rates & Exchange Rates offered by the money transfer services creates a decent margin for these companies but end up burning a hole in the pockets of the individual who is sending the money abroad.

exchange-rate-margin

That’s how the money transfer companies use the range around mid-market rate for their profit as hidden currency conversion fee. So, stay vigilant about these numbers when you transfer money the next time.

Hope this information will help you choose a better remittance service to send your hard-earned money with best value. Now, that you know the secret of the “Zero Dollar” fee being offered for money transfer, you can take better & more informed decisions.

Compare Remit Rates to unravel the hidden fees

At Exchange Rate IQ, we are trying to put these things in perspective for our users. We have created a detailed money transfer matrix, that compares not just the fees for all money transfer companies but also compares the real value by comparing the offered exchange rates against the mid market rates.

We also, calculate the realized Exchange rate and sort the results in a sequence to help our users understand which company or bank is offering the best value for their money transfer.

A complex algorithm also analyzes how much you lose if you choose the second best money transfer company. It tells you the difference in the the amount you will receive compared to the best value on a given day.

compare-usd-to-inr

Fig – Get to know the best value money transfer

Hope you liked this blog piece wherein we tried to bust the myth of “Zero Fee” for international money transfer.
Stay tuned for our next blog as we go on explaining how you can avoid falling for tricks of money transfer companies and banks to maximize the value of your money transfer.

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