Monday, January 13, 2014

Currency exchange rates and moving money between currencies

People need to move money between currencies all the time for many different important reasons. For me, we get paid in USD yet have to pay bills in EUR. So, we have to move enough money over to pay bills from a local bank account. I have seen many people doing this and many think they are saving money with their methods they use. But, there is a hidden fee hidden in many services; the adjusted conversion rate! And worse off, many people don't even know they are paying this fee! Below, I will do my best to explain these hidden fees, show how to find out these fees, and then show ways to avoid them.

At the time of writing this post (January 2014), the USD-EUR exchange rate is ~1.367. So if you withdraw €100 from an ATM, it will cost you ~$136.70 from your US-based account. For the following math examples, I will use this rate. But beware; this rate slightly changes daily, and even more so in the long run. A great place to check the daily exchange rate is here (xe.com).

Ways Banks Get Your Money

Trust me, people make money off of you when you move money! There are 3 ways institutions can make money from you. One is the currency conversion fee, or CCF. Your US-based bank may, depending on this bank's ATM you use, charge a CCF. Some US-based banks never charge this, some (like my credit union) sometimes charge this, and I am sure some always charge this. My CU charges 1% if I use the wrong bank's ATM. Generally, Visa is the reason you get charged this. (For me personally, if I use an AIB ATM, I do not get charged a CCF, but if I use an Ulster ATM, I will get charged a 1% CCF).

The other way your bank can make money from you here is just a flat rate fee, common in the US. This is usually disclosed at the terminal, but not always. So, I generally take note when I get charged this to ensure not to use these ATMs in the future. Also, you may not know if you are charged this until you see your monthly statement (if you don't reconcile your accounts, you may never find out).

The last way banks can make money from you here is the adjusted conversion rate. You won't necessarily get charged a separate CCF, you will just get a conversion rate that has been adjusted. So, this is a hidden fee that you only realize if you do the math from the amount withdrawn and compare that rate to the daily exchange rate. In my experience, banks adjust your rate by .05 (not percent) for their wallets.

Lastly, let me state that this isn't always banks performing the above methods. Maybe you use PayPal to move money (very popular and easy to get around restrictions). Maybe you write a check to yourself and cash it locally. Maybe you perform international wire transfers (IBAN and SWIFT codes). Maybe you use a service like CurrencyFair. Maybe you use other services not listed here. But trust me, everyone is doing something to make money from you; some just don't disclose how much, yet lead you to believe they are charging nothing (by using a hidden adjust rate).

Am I Really Losing That Much?

Sometimes I believe people don't think they are losing that much money, or are losing none at all. And, yes, I said losing money, because you could be costing yourself hundreds of dollars more than you need to. Let me attempt to show some examples with some math. We will acquire €1000 to Europe in our example. We will use an exchange rate of 1.367. We will use a 1% CCF (sometimes this can be 2% or even 3%). We will use an adjusted rate of 0.05 as I have seen this quite often (if you like percentages, 0.05/1.367*100 = 3.66%)

Your bank charges a 1% CCF:
€1000 x 1.367 x 1.01 = $1380.67

Your bank adjusts the rate by .05:
€1000 x (1.367 + 0.05) = $1417

Your bank scheme charges both:
€1000 x (1.367 + 0.05) x 1.01 = $1431.17

You find a method with no CCF or adjusted rate (how much you should get):
€1000 x 1.367 = $1367

With this example, you lost $64.17, just moving money, that you didn't need to lose!

Well Then, How Should I Move Money?

You may have to do what I did. I moved $10/€10 with a few different services to calculate what rate I was really getting. Here is what I learned.

Paypal: Paypal generally charges no fees. But, when I transferred money, they adjusted the going conversion rate by 0.046. On €1000, this equates to $33.82 in added fees that you didn't realize. This method does easily work both ways (USD->EUR or EUR->USD).

ATMs: I found a bank in Ireland (AIB) that when I withdraw euros here using their ATM, my CU doesn't charge me a CCF or a flat fee at the terminal. Also, I have gotten 0.005 better on my exchange rate than the average daily rate, so I know that I am generally getting a great exchange rate using this method. But, when needing to move thousands of dollars, and having a withdrawal limit of $500/day, this takes several trips to the ATM and then the bank. This method starts to break down. And, this method only works to get USD to EUR when in Europe. But, I do frequently use this method to get money to Europe.

IWT: International wire transfers can be tricky. Fees can vary widely depending on both banks, and the conversion rate won't be disclosed until you are done. My CU does not have IBAN, so I was unknowingly charged a couple percent by JP Morgan, the intermediate bank. But, some banks actually have free transfers! I believe some Charles Schwab accounts do this for free, and I do know Charles Schwab gives very competitive conversion rates. So if you have good banks, this can be easy and cheap! If you have bad banks, this can be very costly. Try moving a small amount of money first to test the waters. If you have a CU like mine which charges a large standard fee to send money out ($40 for me), then it isn't really worth testing this method.

CurrencyFair: I found this company and after doing some sanity checks, they became my favorite way to move money. They charge a flat rate per transaction (~$4-6) and they show you the exchange rate before starting the transfer. They adjust the rate by ~0.003, quite small! (http://www.currencyfair.com/) This method works great both ways as well.

Selling a US check to your European bank: Some banks will buy a US check off of you (similar to buying actual currency). They will have a combination of a flat fee or adjusting the exchange rate. If you can find a good local bank that gives a good exchange rate by testing the waters, this can be a good option too. You won't know how competitive their rate is until after the fact once all the processing is done. So, try a small check first and then calculate their rate, and look up the historical average on that day. XE.com lets you pull up the average exchange from a given day.

But What About...

I am sure there are some other options out there, but the same rules apply. Find out how they are making their money, and compare their competitiveness with other methods.

Finally, I will delete any comment that appears to be spam. So if you have a service you like, make sure you don't sound like a representative of that company :) Show me the math!

1 comment:

chris said...

thanks very much for the information you've provided here. i'm an american who's lived in ireland 8 years, with an AIB account. i'm moving to hungary soon, and after that possibly somewhere in Asia, possibly Germany. some of my payments for online work come from Canada, but i've otherwise only got the one AIB account, so i'm trying to get my head around exchanges and transfers and where it's best to 'store' my money. very valuable information here, and i'll be testing the waters soon. cheers.