Banks are shortchanging millions of Australian immigrants. Here's what they don't want you to know.

Live abroad and you can be assured of one thing - at some stage you’ll send money back home. But how much do you actually know about how banks and money transfer companies profit from your expense? And what can you do to change that?

Banks versus money transfer operators

Most remittances happen via traditional channels such as bank transfers and specialist money transfer operators (MTOs) like Western Union, MoneyGram and PayPal. Banks dominate the remittance market, while MTOs have about half as much market share.

Australian banks transmit the majority of international remittances through the SWIFT network, which usually take 1-3 days and requires a customer to have a bank account. Remittances higher than US$5000 are usually conducted via banks.

In general, though, MTOs deal with smaller transfers as well as money sent to areas underserved by banks.

The actual size of the transfer market

The remittance industry is a multi-billion dollar industry, with 70% of remittances being sent to developing nations alone. In 2016, globally, 230 million people sent $500 billion in remittances.

In Australia, the industry generates over US$7 billion annually. Australia is placed in the world’s most lucrative remittance region. According to the United Nations’ International Fund for Agricultural Development, the Asia-Pacific region receives over $113 billion in remittances annually. India and China are the top recipient countries, with the Philippines - which includes a remittance corridor between Australia and the Philippines - following close behind.

The old players and the new in the remittance industry

Customers use banks and big name remittance operators because they feel their funds are secure with names they‘re familiar with. Trust and convenience makes the banks a first choice for many customers. With MTOs, name recognition and global presence is key. Western Union, MoneyGram and Ria operate a combined 1.1 million retail locations across 200 countries. This presence has generated loyalty from customers and billions of dollars a year, for both the banks and money transfer companies.

However, in recent years the industry has seen the rise of several digital players in the field that are well worth your attention. While they might not have the familiar names, there are good reasons why they are ruffling the feathers of the big name remittance companies and banks. Mainly, they save you time and money.

To understand how, you’ll need to first look at the traditional players.

The expensive problem no one talks about: the real exchange rate and undisclosed spread earnings

The real exchange rate goes by many names: the mid-market rate, the interbank rate, or even the spot rate. What it is, in practice, is the midpoint between the buy and the sell rates on the global currency market. It’s the most accurate measure of a currency’s worth; it also fluctuates constantly as monies are traded all over the world on foreign exchange markets.

Banks and brokers habitually apply a “spread” to the mid-market rate, which means they get the currency at the rate you find on Google, but give you a worse rate and pocket the difference. This exchange rate spread isn’t quoted in the transfer fee, and banks don’t want it publicised - for good reason.

To get an idea of how the real exchange rate is calculated - like the one on Google - here’s an example:

• One bank buys at a rate of 2
• Another sells at the rate of 1.5
• The mid-market rate would then be the average of both: 1.75

While banks and money transfer operators use the spot rate when trading between themselves, they don’t use it with you. You get a lower exchange rate, and that difference between the interbank rate and your exchange rate varies greatly, depending on the country corridor and currency in question. That’s the spread.

When comparing the exchange rates of the Big 4 Australian banks for the euro (€), pound (£) and US dollar (US$) for this article - NAB, ANZ, and Westpac had exchange rates that were about 4.5% higher than mid-market rates, while the Commonwealth Bank (CBA) rates were over 5% higher.

The cost of using the traditional players: high street banks

1. Upfront bank fees

If you have a bank account and transfer money online, with a fee of AU$18, or just AU$12 for amounts over AU$10,000, ANZ has the lowest online money transfer charges of the Big 4 Australian banks. Slightly more expensive is Westpac with an online charge of $20, while National Australia Bank (NAB) and the Commonwealth Bank both charge $22. This is the online banking fee which is deducted from the amount you send. It’s even higher if you transfer money over the phone or at a branch.

2. Intermediary and recipient bank fees

Then the intermediary bank - there can be up to three - as well as the overseas bank will also charge fees, all deducted from the amount you sent. Most banks won’t tell you about the fees you’ll be charged by the other banks, so it’s up to you or your beneficiary to gather that information.

3. Poor exchange rates

You won’t usually find information about exchange rates anywhere in a bank’s fees section. That’s because banks avoid calling this a charge at all. Rest assured, though, they are making a profit off of your exchange rate. Banks purchase currency at the interbank rate - the same rate you’ll find on Google - but, when it comes to you, they offer a much worse exchange. And then pocket the difference.

Worse still, when you’re sending money internationally via the industry-standard, SWIFT, it’s nearly always an intermediary bank that actually converts the money on your behalf. Which means it’s rare that you can even research rates ahead of time. But more on this later.

4. Extra fees

Additional fees and charges will apply if you’re using a credit card, or if you want to trace, cancel or amend a transfer. And, finally, the banks will hit you again with poor exchange rates, masking the margin or spread - typically 2% to 5% for major currencies.

The cost of using the slightly newer players: money transfer operators

An example: Western Union fees

Western Union prides itself in being a leader in global payment services. So how does it work here in Australia?

With Western Union, if you’re sending AU$1000 from Australia to the UK, you’ll run into a few charges. One spelled out, the other not so spelled out.

Western Union Fee 1: Sending fee

Western Union charges a AU$10 service fee on top if you want your recipient to receive a AU$1000 bank transfer. If, however, you need your recipient to pick it up in cash, that service fee increases to AU$20 for the privilege.

Western Union Fee 2: Poor conversion rates

On 19 June, 2017 at 22:21 AEST, when looking at Western Union pricing, there was an extra AU$38 in fees hidden into your transfer. To figure that out, if you Googled the exchange rate for Australian dollars and British pounds at the same time, it showed this:

1 AUD = 0.597 GBP

That would mean if you were sending AU$1000 and have already paid the AU$10 fee on top, then AU$1000 = £597.

However, with Western Union, the actual amount they stated you’d receive was £559.05 - not £597. That’s an extra AU$38 Western Union tacked on to your bill by giving you a bad exchange rate. And they never even told you. Which means they’re no better than the banks.

To send the same amount via MoneyGram at the same time will incur a AU$65 fee, with an exchange rate 1AUD = 0.560 GBP.

The cost of using the newest market disrupters: digital players

This is where the digital players come in. Using mobile and online platforms, they often make international transfers easier and simpler for you, and provide competition for traditional operators. Most are also making sure you get great exchange rates - much closer to the ones you find on Google. It’s a shock to the system for their better-known competitors.

The added efficiency and lower costs increase benefits for you, the customer. And because they’ve learned from the mistakes of regular remittances - many won’t hide their fees in their rate. They tell you up-front. What you see is what you get.

How can they afford this? Well, many of them don’t actually send money across any borders. With local accounts in the countries they operate, you can pay your Australian dollars to an Australian bank account, and they’ll pay out British pounds to your recipient from a British bank account. That completely eliminates hefty international SWIFT fees. Less charges on the transfer means less charges for them, and less charges for you. Easy.

Two simple steps to make sure you’re not losing out

Most people know very little about the remittance process, which works to the advantage of the banks and big name money transfer operators. The fees depend on the amount of money being sent, prevailing exchange rates at the time and the destination country. Each and every transfer costs you money, but you can minimise the costs.

The best way to figure out what kind of a deal you’re getting is straightforward:

1. Find out the real value of your money on Google or by using an online currency converter.
2. After that, check out several providers and compare the end amount you’ll receive.

That way, if you follow just those two simple steps, any not-so-transparent fees or undisclosed exchange rate markups should come to light. Granted, if you’ve been using your bank to transfer money overseas, then both of those steps are much harder as it’s often extra fees and bad exchange rates levied by intermediary banks in the process, but it certainly can’t hurt your wallet to shop around.

There’s no magic formula when it comes to finding the best way to save, however, just a tiny bit of work should save you some serious cash - especially over the course of a year.