Are Money Transfers Expensive?

Online money transfers offer a fast, easy, and efficient way to send funds to recipients in faraway destinations. Recent years have seen an explosion of new options as financial technology (“fintech”) innovations have displaced and disrupted traditional approaches to retail banking.

It’s now easier than ever to send money across the country or across the world. All you need is an Internet-enabled computer or smartphone to access your choice of reputable money transfer companies. The only question is this: are they expensive and are they worth the money?

Let’s break down the costs involved with using specialized money transfer services, plus compare money transfer services to traditional options like banks and wire services.

Exchange Rate Markups

If you are sending money to a recipient in another country, you will probably need to have the funds exchanged into the local currency. The only real exception to this rule occurs if the origin and destination countries use the same currency, like in the European Union (EU) where most member states denominate in the euro.

The money transfer provider will take care of the currency exchange for you. When you’re setting up your transfer online, you can fiddle with the amount in either the origin or destination currency, as you prefer. The rate you will pay is specified, as foreign exchange widgets will display the conversion automatically.

Banks and financial institutions use a rate known as the mid-market interbank rate when they exchange currencies among one another. This rate marks the midpoint of the current “buy” and “sell” prices on international currency exchange markets. It is not available to retail consumers, who always pay markups on the mid-market rate.

Thus, the question is, how much do money transfer services mark up their exchange rates, and how do their markups compare against banks? The simple answer is that specialized money transfer providers almost always offer better exchange rates than banks. This is one of the ways that they have a competitive advantage.

Banks, financial institutions, wire services, and money transfer providers all apply different markup margins to their exchange rates, so exact figures will vary depending on which option you select. However, industry-wide analysis reveals that banks usually apply margins of 3.5% to 6.5% on currency exchanges, while money transfer providers start as low as 0.25% above the mid-market rate and max out in the 2.5% to 3% range.

Let’s work through an example of how this would impact your transaction, splitting the difference among the quoted ranges. We’ll take an average of 5% for banks (halfway between 3.5% and 6.5%) and 1.625% for money transfer services (halfway between 0.25% and 3%).

Next, let’s place the mid-market rate on a USD to EUR exchange at US$1 to €0.80. Thus, for US$1,000, you could get €800 with the mid-market exchange rate.

Buying that €800 from a bank would cost you US$1,050 after applying the bank’s markup. By contrast, that same €800 would cost just US$1,016.25 from a money transfer service, saving you a cool US$33.75 right off the top.

Also, many money transfer services will offer you a better exchange rate if you are converting large amounts of currency. Most banks maintain fixed rates no matter the size of the transaction, creating the potential for even greater savings if you are sending a bigger sum of money to your recipient.

Transaction Fees

The next cost consideration applies to transaction fees. Again, these vary among money transfer providers. Some offer no-fee service, while others apply additional costs that may differ depending on your chosen method of payment. In these regards, a few trends apply:

With respect to transaction fees, even the most expensive online money transfer services tend to charge far less than banks. According to Business Insider, U.S. banks charge an average of $25 to $30 for domestic wire transfers (within the United States) and $45 to $50 for international transfers. These rates apply in addition to any currency conversions that may be necessary to process your transaction.

As of January 2021, even the costliest transaction fees applied by money transfer services max out at around $20. Thus, you are virtually guaranteed to pay less than half of what a bank would charge you to send money abroad, even if you select the costliest payment and delivery options.

Service-Based Value Advantages

Money transfer services also offer distinct service advantages that are difficult to quantify but nonetheless add up to a better and more flexible customer experience. They support a wider range of payment options, including bank account payments, credit and debit card payments, mobile wallet payments, cash, and even cryptocurrency. Traditional financial institutions almost always limit customer options to account-based funding or cash.

Specialized money transfer providers also support an expanded set of delivery options, which may include bank account deposits, cash pickups, mobile phone top-ups, and even cash deliveries to private addresses. Traditional approaches to money transfers exclusively offer direct deposits and, in a limited number of cases, cash pickups.

It’s difficult to put a price on these conveniences as every customer values them differently, but in any case, they significantly boost the appeal of using a money transfer service instead of a traditional bank.

The Bottom Line

Nothing is free and using a money transfer service to send funds to someone in another country will cost you a few bucks. However, compared to the costs of using a bank or wire transfer service for the same transaction, online providers typically charge far less while simultaneously providing far more value for your money.