Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 262

Retail FX: the last bastion of no competition?

With the July school holidays now upon us, many Australians will pack their bags and head overseas to chase the European summer. With this will come the inevitable rush to exchange currency. Unfortunately, Australian consumers often have limited options when it comes to competitive ways to exchange currency. According to Capital Economics, Australians spent over $1 billion in fees and poor exchange rates on their currency exchanges in 2016.

This is a problem that is only set to increase. Australians travel frequently for leisure and business, with Australians travelling internationally on the increase over the last 10 years. About 10 million Australian residents travel overseas each year, for a holiday (59.3%), to visit friends and relatives (23.8%) or for business (8.6%). Furthermore, Australia ranks 10th highest in the world for transferring money overseas, with over US$15 billion (A$17 billion) transferred in 2012.

This problem is magnified for high net worth (HNW) Australians, as this demographic both travels more often and exchanges currencies more frequently. According to data from RFi Research, the majority of HNWs travel overseas at least once a year, with younger HNWs more likely to travel at least once every six months. The biggest pain point identified for moving funds internationally are the high fees.

Convenience allows for high costs

The reason we pay so much in fees is multifaceted. Australians exchange currency at the airport for convenience with some of the worst rates available, or via domestic banks, which choice also unfortunately comes with a range of hidden foreign exchange charges.

Analysis from News Corp and The Currency Shop shows that on $2,000 travellers can lose as much as $350 by exchanging cash at the airport. Consumers are being charged more for the convenience of selecting from a large range of currencies at the last minute.

Customer confusion is another leading cause of the fee sting. The ‘No Commission’ signs at exchange booths attract customers under the guise of competitive costs. Customers should check the wider buy and sell FX rates that usually cancel out any commission fee.

Another common trap is when travelling customers are asked whether they want to pay their bill in their own currency or the currency of the country they are in. Paying in your own currency is known as ‘Dynamic Currency Conversion’ and is generally not favourable to the client. If you accept this offer, the merchant or the ATM operator will perform the FX transaction at a foreign exchange rate that they determine.

The buy/sell spread on money transfers offered by most domestic banks ranges from 3-5%, which means that customers would typically be charged between $150 to $250 on a $5,000 foreign exchange transaction. These charges have not seen a significant change in the last decade.

Prepaid travel cards are one way to avoid future exchange rate uncertainty. However, they often come with a range of fees, whether that’s for loading the card, using it at an ATM, re-loading or closing the account, or being hit with exchange rate conversion fees when you use the card.

Using credit cards may also come with unexpected costs, with the industry average being a 2.5-3% fee on transactions and a $2.50-$5.00 ATM withdrawal fee.

The more efficient providers

The disruptors in the industry are the fintech players like Transferwise, Currency Fair and Worldremit. These providers are shaking up the FX money transfer industry by specialising in small payments for individual customers. Their online business models provide low overheads and that benefit is passed on to customers in the form of more competitive exchange rates.

Specialists like OFX and XE can be more competitive with their spreads. Our research found that on a $5,000 transfer, OFX could save a customer $182 compared to the most costly of the big four banks, while using XE could save over $200.

However, many customers prefer the security of a large bank. So, what is the industry doing about it?

Demand will drive product innovation

Locally, the big four banks are looking at adopting SWIFT global payments innovation (SWIFT gpi), a service which could allow real-time cross-border payments between institutions in Asia Pacific to ensure international transfers could occur in real time, as opposed to days. However, this remains in an exploratory phase.

At Citi, being an international bank, we have a globally mobile client base that travels more frequently than the average customer. Our clients expected us to innovate, and our contribution to industry disruption has been the launch of the Global Currency Account. It allows account holders consolidate their foreign currency holdings in one place, with individual accounts in up to 10 currencies. Citi’s FX spreads are lower than the domestic big four banks and are competitive with fintechs. The currencies are linked directly to a debit card, meaning users can switch between currencies instantly via their mobile app and pay with their card when travelling, with zero ATM fees charged when using local currency.

As our world becomes more global, domestic banks will also increasingly feel the pressure from customers to become more competitive with their foreign exchange options.

Technology is integral to product innovation, and there is an opportunity for fintechs to mould this space and drive bigger players to deliver on competitive rates, transparency and real time instant cross border payments. Multi-currency bank accounts are likely to become the expected way global citizens interact with their money and manage a life without borders.

 

Matthew Hayja is Head of Foreign Exchange Products in Citi’s Consumer BankAny advice is general advice only. This article was prepared without taking into account any individual’s objectives, financial situation, or needs.

 

9 Comments
Graydon Forward
July 12, 2018

Ripple and XRP will kill all of them for cost, speed and efficiency when it is released shortly. Coming to a bank near you. Get ready for a whole new paradigm.

SMSF Trustee
July 12, 2018

Don't know about speed and efficiency. I can convert A$ to many other currencies via my netbank account immediately. I can do that via an app from my phone, locally or overseas if I've set up roaming. I can then pay in foreign currency if I want to or need to.

That's pretty fast and efficient!

So unless they have a cost advantage, I wouldn't be quite so sure they're creating a whole new paradigm.

John
July 12, 2018

Yes, I can second the Citi bank debit card comments. Flawless performance experienced in uk, Asia, America, Europe. The ING orange everyday debit card seems to be the new close competitor, albeit with some technical conditions to use and I’m not sure how their FX rates compare to Citi...

Vicki Carlisle
July 12, 2018

It would have been interesting to see a real comparison of the total $A costs of the different options for a set amount of foreign currency (or multiple currencies). Say 1,000 USD/EUR/NZD and a similar value in THB and HKD - obviously it would have to be on the same day to remove those fluctuations.

Aside from that my tips would be to always have some of the local currency, and to use it all up before you come home - pay the hotel bill (make sure you have allowed for transfer!) or eat/drink at the airport (expensive as that may be). The conversion rates & fees on getting rid of excess foreign currency on your return are far worse than the costs of buying.

SMSF Trustee
July 12, 2018

Actually Vicki, the costs of converting cash currency when you get home are not greater than buying it in the first place. They're the same, because the spreads that banks charge are symmetrical - 5% or 10% either side of the mid-rate.

But you do make a good point. Having bought your foreign currency paying the buy spread before you went overseas, you don't want to convert it back to A$ and pay the sell spread as well. That doesn't cost more, but it probably feels like it because at that point the spread becomes "real". The $100 you converted to euro before you went becomes $90 when you get home. You "lost" half of that when you bought the euro and the other half when you sold euro to buy A$.

My wife and I always do last minute shopping, sometimes at the airport, before we fly home when we have excess cash currency.

JI
July 12, 2018

I am lucky enough to travel extensively and spend close to six months per year overseas. I use two cards whilst travelling.
1. A citi debit card to access cash at ATMs worldwide with no fee from citi - note, the bank you are using the card in sometimes charge a fee. The FX rate is very good.
2. A Bankwest credit card, no annual fee and no foreign conversion fees. Also a very competitive rate.

I believe the rate for both cards is set by Visa/MasterCard and is generally close to the wholesale rate.

MS
July 12, 2018

I use the same. Haven't found better.

Christian Antoniak
July 12, 2018

Citibank offer a good product through their debit card. You can withdraw cash at close to the daily listed exchange rate.
ING offer a great deal also with their cards. Close to the daily listed exchange rate and if you put in $1000?per month and make 5 withdrawals you get your ATM fees rebated. Qantas crew use both Citibank and ING now our overseas allowances are paid into our bank accounts at home

SMSF Trustee
July 12, 2018

This is the area I've felt for a long time was ripe for disruption. The spreads and fees that the banks and traditional FX providers charge are scandalous. I understand that if you want to get Euro currency from a branch office in suburban Sydney you have to pay for storage costs, the wages of the teller, the security of the notes and often transport from another branch if there's no supply in your suburb, but it's not a lot cheaper to go via a Travel Money card or similar.

 

Leave a Comment:

     

RELATED ARTICLES

Can Aussie banks rediscover their glory days?

Banks, BHP, RIO, CSL and the tyranny of size

Why Aussie bank hybrids are rock solid

banner

Most viewed in recent weeks

Warren Buffett changes his mind at age 93

This month, Buffett made waves by revealing he’d sold almost 50% of his shares in Apple in the second quarter. The sale not only shows that Buffett has changed his mind on the stock but remains at the peak of his powers.

Wealth transfer isn't just about 'saving it up and passing it on'

We’ve seen how the transfer of wealth can work well, with inherited wealth helping families grow and thrive for generations, as well as how things can go horribly wrong. Here are tips on how to get it right.

Welcome to Firstlinks Edition 575 with weekend update

A new study has found Australians far outlive people in other English-speaking countries. We live four years longer than the average American and two years more than the average Briton, and some of the reasons why may surprise you.

  • 29 August 2024

A health scare changes my investment plans

Recently, I spent time in hospital for pneumonia. Health issues can clarify what really matters, and one thing became clear to me: 99% of what we think is important is either irrelevant or doesn’t need our immediate attention.

The tortoise wins in investing

For decades, it’s been a truism that taking greater risks with stocks should equate to higher returns. New research casts doubt on that and suggests investing in ‘boring’ stocks and industries may be a better bet.

Welcome to Firstlinks Edition 573 with weekend update

Steve Eisman, best known for his ‘Big Short’ bet against US subprime mortgages before the 2008 financial crisis, is now long and betting on what he thinks are the two biggest stories of our time: AI and infrastructure.

  • 15 August 2024

Latest Updates

Investing

The challenges of building a portfolio from scratch

It surprises me how often individual investors and even seasoned financial professionals don’t know the basics of building an investment portfolio. Here is a guide to do just that, as well as the challenges involved.

Property

What's left unsaid in Australia's housing bubble

The current difficulties confronting housing policy partially stem from an explosion of mortgage debt. We've engineered a price for housing that will cause a severe problem for future generations – if it isn't addressed.

Superannuation

A $3m super tax could make this strategy attractive again

Transition to Retirement Income Streams have waned in popularity but that could change if the proposed extra tax on super balances above $3 million goes ahead. 60-65-year-olds who are still working could benefit most.

SMSF strategies

Does a declaration of trust satisfy SMSF separation of asset regulations?

While separation of assets remains one of the most reported contraventions by SMSF auditors, the question is: does a declaration of trust satisfy the requirements of SMSF regulations? There isn't a simple answer.

Investing

Stop paying attention

Want to make better investing decisions? Do what the most skilled investors do and find a way to ignore the meaningless information you are bombarded with on a daily basis.

Shares

How to unlock the big opportunity in misunderstood small caps

Political turmoil and new regulations have left Europe-listed small caps unloved and under-covered. Taking a 'friendly activist' approach to investing in those with global growth opportunities can reap dividends.

Shares

This cornerstone of stock market valuation has been left behind

For decades, cyclically adjusted P/E ratios have been a common and widely accepted gauge of market valuation. But as the financial landscape continues to evolve, so too must our tools for understanding it.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.