While transferring money between banks in the same country is usually free (or close to it), consumers sending money to a bank in another country are often faced with high fees and hidden charges. It doesn’t make sense to make regular small deposits and withdrawals to investment services in another country if you are faced with double digit fees. Fortunately, fintech startups such as CurrencyFair and Transferwise have come on leaps and bounds in recent years and forcing the money transfer industry to look carefully at costs.
Why it’s important
Diversifying a proportion of your investment portfolio across different countries is a sensible way to reduce risk. It also gives you exposure to investment opportunities in foreign markets. Most of us who invest in equities can do this easily with international stock market trackers held via a local broker. However, with P2P lending it’s much harder: in general you have to directly open an account with platforms in other countries. Once you open an account and start to transfer money, minimizing transaction costs will give you a better return on investment.
There are three key things a P2P investor needs from an international money transfer service: speed, security, and low cost. The time taken for money to transfer is a missed opportunity of investment. If it takes a week to deposit and another week to withdraw funds, that could end up being close to 0.5% less interest on a platform like ViaInvest.
The Traditional Banking System
Using your high-street bank to transfer money to another country can be a lot more expensive than you think. As an example, UK residents wanting to transfer money to another European country could pay £20 to £25 (€22 to €28) per transfer with Santander, Barclays or Nationwide.
Even if the direct charges are not that high, there may also be a ‘hidden fee’ from a poor exchange rate. In this case, the firm carrying out the exchange may add a mark-up to the market exchange rate and make a profit from the margin between the two.
The Present Options
At the moment there are a few options to transfer money to more cheaply cross-country than the typical bank. This post on P2Pblog compares some of the options from the perspective of a UK investor transferring money to a Euro denominated platform.
Two popular low-cost money transfer services used in Europe are CurrencyFair and TransferWise. Paysera is another service that you sometimes see used to transfer money to investment sites. It often depends on the size of your transfer as to which is the cheapest, so it’s worth trailing a transfer amount on a few options to see which is the cheapest.
As a practical example, as I write a transfer of £1,000 to Euros would leave me with a transfer fee of £4.98 on TransferWise or about £2.66 via CurrencyFair.
Although these can reduce the size of your ongoing regular investments, often P2P platforms require the first transfer to be from your bank. This helps with checks against money laundering etc.
The Future of Low-Cost Money Transfers
Some fintech startups are hoping to use cryptocurrency technology like Bitcoin to enable even lower cost international transfers. Aside from the technical challenges, one of the difficulties in creating a workable solution is the level of checks and regulatory requirements to prevent money laundering and tax avoidance. The bitcoin currency itself has faced problems with high transaction fees, so that alone is unlikely to offer a solution.
Some of these money-transfer start-ups are focusing on the remittance market, where workers send small but regular payments to their families in other countries. This is similar in practice to an investor in P2P lending: depositing a proportion of their savings each month into their P2P investment accounts.
As transfer costs continue to be reduced through these technical advances, there is less friction for overseas investors to move their capital between investment services.