Estimated reading time: 7 minutes
If you’ve made a money transfer abroad but don’t understand the process and cost, now’s the time to learn to save money in the future.
Understanding How A Money Transfer Works
Canadians define ourselves not by who we are but by who we AREN’T.
Sure, we love hockey, but mostly, we look south of the border and contrast ourselves against our American cousins.
We have universal healthcare; they don’t. Americans are brash, loud, and boastful; we’re introspective, quiet, and grounded.
Yet, when we’re honest with ourselves, we share MANY commonalities.
We love sports, are generous to a fault, and most share a common mother tongue.
We also love going on vacation in each other countries.
In 2019, 13.25 million Americans visited on holiday.
That doesn’t hold a candle to our numbers, though.
In 2018, we made 44.4 million trips across the border.
Now, many of those were for cross-border errands.
But, with many fantastic holiday destinations down south, a fair chunk was for touristic purposes.
Toss business trips into the mix, and it’s easy to see how interconnected our two nations are.
We have a question for you if you’re among those who frequently travel or do business in the States.
Have you ever considered whether you were getting a great deal on foreign exchange from your bank? Likely not.
Whether paying a vendor in Detroit or buying a property in Arizona, every shift in FX rates matters.
Today’s article shows how to save every time you move money stateside.
Hot Take: Banks Are Successful Because We Don’t Question Their Rates
Every service a bank offers generates millions in revenue annually.
From ATM fees to interest on mortgage payments, they are making cash hand-over-fist.
Foreign exchange is no different.
Your financial institution isn’t doing you a favor by offering this service – they’ve built significant profit margins.
They do this in two distinct ways – one is visible, while the other is hidden.
You are probably familiar with wire transfer fees.
Banks apply these charges to a transfer upfront.
Depending on the bank and type of transaction, these can cost $20 to $45.
However, the Bank of Montreal is an outlier – they charge 0.2% of the transfer amount capped at $125 – bonkers.
These charges may sound outrageous, and they are.
However, they aren’t where the banks earn most of their foreign exchange profits.
Instead, they get it by charging an exchange rate significantly different from the REAL one.
What is the REAL rate of exchange?
In finance, it’s called the mid-market or interbank rate.
This price is what banks and brokers use to exchange capital with each other.
So, to make even MORE money on FX transactions, your bank will sneakily offer an exchange rate that’s 2%-5% off interbank.
To illustrate how badly you’re getting fleeced, let’s assume you’re buying a house in Scottsdale, Arizona.
To complete your purchase of a 300,000 USD property, you’ll need to send 30,000 USD.
The Bank of Montreal – your financial institution – currently offers a CAD/USD rate of 0.6899.
At this rate, you’d send 43,564 CAD, which accounts for BMO’s ridiculous 80 CAD wire fee.
Now, most of our fellow Canadians would shrug at this point. “That’s the cost of doing business,” they would say.
But let’s see what you would send if you could access fee-free transfers at the interbank rate.
At publication time – April 2020 – the CAD/USD interbank rate stood at 0.7065.
You would send 42,462 CAD south at this price – or more than 1,100 CAD less.
If you’re keeping score at home, BMO made over $1,000 of their $1,100 profit from their exchange rate margin!
Do you think it’s right for ANY financial institution to charge $1,100 just to click a few buttons?
We thought not.
How to Do Online Money Transfer Providers Like XE Work?
For generations, we had no alternative to these bloodsuckers.
However, fintech startups have violently disrupted the foreign exchange space in the past decade.
You may be familiar with one of them. Since the dawn of the web, XE.com has been a trusted source of currency data.
Steven Dengler and Beric Farmer, XE’s founders, originally posted FX information on their site as a pet project – in 1993, their main business was web consulting.
However, by 2001, it became clear that they had become known as the currency site.
As such, XE redoubled its efforts on that side of the business. In 2002, they opened an online currency trading desk.
It wasn’t until 2015 that they made real strides toward becoming a money transfer site.
That year, Euronet, an electronic payment services giant, acquired XE.
In addition to offering ATMs and PoS solutions to retailers, they also operated Ria Money Transfer and HiFX.
For Euronet, the acquisition of XE.com was huge, giving them a much more significant internet presence. HiFX had dedicated users – but they were nothing compared to the customer base of giants like Western Union or Transferwise.
Shortly after gaining control of XE, they launched XE Money Transfer.
Today, XE is HiFX, as Euronet merged the latter’s infrastructure into XE.com’s interface.
So, how does XE Money Transfer work?
You start by initiating a transfer. Once you’ve defined the amount you’re sending, the origin, and the destination, XE will pull funds from your bank.
Then, instead of moving your cash through the SWIFT system, one of XE’s partner institutions will pay your recipient.
This way, XE can avoid fees associated with shipping money to/from intermediary banks.
They, in turn, pass the savings along in the form of low/no payments and exchange rates close to interbank.
Save Hundreds, Perhaps THOUSANDS Of Dollars Annually
That sounds cool, but how exactly do money transfer providers like XE save you money?
Let’s revisit your Arizona real estate transaction.
So, we need to send 30,000 USD to Scottsdale to cover your down payment and closing costs.
Let’s do it through XE Money Transfer.
After creating an account, you queue up a transfer equaling 30,000 USD on the other end.
XE does not charge fees, so you won’t need to toss 20-80 CAD on top of your transfer.
When it comes time to send, you’ll get a CAD/USD rate of 0.7030 – only 0.4% off interbank.
What’s the result?
To send exactly 30,000 USD through XE, you’ll only need to mobilize 42,675 CAD.
That’s almost 900 CAD less than if you were to move your money through BMO!
The Online Money Transfer Market Is Surprisingly Competitive
You might be able to find an even BETTER deal than that.
As we’ve said before, the online money transfer industry is highly competitive.
Transferwise, OFX, and Currencies Direct also serve thousands of Canadians daily.
These providers may offer better rates than XE, but that’s not the only reason you should consider them.
To compete in a crowded marketplace, these transfer providers have core specialties.
Transferwise offers the interbank rate and has an easy-to-understand interface.
OFX provides business owners with hedging tools like forward contracts and limit orders.
And Currencies Direct caters to online sellers by offering to receive accounts and other perks.
Take your time when choosing an online money transfer firm.
Certain firms may be better positioned to help you, depending on your circumstances.
Saving Money Is More Important Than Ever
With markets in turmoil and the future uncertain, every nickel counts.
Every time you reach into your pocket, ask yourself, “Am I getting the best possible deal?
Chances are, you could do better.
If you’re still moving money through your bank, stop.
By switching to an online money transfer provider like XE, you can save vast sums of money over time.
Discussion: What services have you used to transfer money abroad?
Please leave me your comments below.