I get my salary in Singapore dollars, which is sent to my bank account in India. When I joined Tech in Asia, I had looked up the conversion rate from Singapore dollars to Indian rupees. But the amount coming into my account monthly was lower than what I had expected. Until now, I simply assumed it was because of currency rate fluctuations. But now, sheepishly, I realize that it’s my bank quietly gulping down a hefty portion as ‘FX spread’.
“You’re not alone,” says Mumbai-based fintech expert Prajit Nanu, who has just started up a company called Instarem to tackle exactly this issue for millions around the world. “I have a 60-year-old uncle in the US who sends about US$150,000 to India every year. I asked him, ‘How much money do you lose in the transfer?’, and he said, ‘My bank charges me just US$35 per transaction’. He had no clue that his bank was taking a much bigger cut off each transaction,” Prajit (he prefers to use his first name) tells me over dinner at a mall in Jakarta, after meeting at our recent Startup Asia Indonesia conference.
My head starts buzzing as I hear just how much money banks and money-transfer agents siphon off when ordinary people like you and me – or small startups – send or receive money from one country to another. These remittances, as they are called, have hidden costs. That’s because a lot of people do not understand the FX spread. They only see the currency conversion rate and transaction fees. I was one of them. Now I know better.
Fxxk FX
FX spread is the difference between the wholesale inter-bank FX rate and the rate quoted to you by the bank or international money transfer company.
Prajit explains how this affects me: “Today, the US dollar conversion rate is INR 62.31. But if you go to a bank in the US and tell them you want to send some money to India, they won’t give you the rate of 62.31, they will give it at 58 or 59. That is where banks make their money – not on the transaction fee of US$10 or 15 but on the FX spread from 62 to 59 per dollar.”
Big multi-national corporations and high net worth individuals can negotiate hard with banks for wholesale inter-bank rates for their money transfers and also get reasonable transaction fees. The inter-bank rate at which banks send money between themselves is free from FX spread – that is, it is the same as the currency conversion rate. It’s the ordinary people and small businesses sending or receiving money who get socked with a lower rate, which is actually the inter-bank rate minus an FX spread, and that’s besides the transaction fees. The deductions vary from 3 to 7 percent, and can even go up to 10-12 percent of the transferred amount in some corridors such as Africa, when everything from fees to spreads are added up.
The cold logic in this is that banks are more interested in the big transactions. Many banks don’t even do international money transfers because of the numbers of transactions involved, while others make hefty cuts and take days to wire the money.
This is where Instarem wants to be a disruptor. By partnering with banks that don’t have a remittance business or global scale, it can slash the costs of these transactions, and make them more transparent too.
“For example in India, ICICI Bank will never want to work with us. They are a strong player in the money that comes into India and will see us as a potential rival. So we have chosen banks that don’t have a large global presence but have a good distribution network within India,” explains Prajit.
A partnership made in Australia
In November, Instarem got a license to do remittances in Australia, and tied up with an Indian bank. Now, if you want to send US$1,000 from Australia to India. You deposit that into an Instarem account in Australia, which in turn credits the equivalent of US$990 in Indian rupees (INR 50,005) to the receiver’s account in India the very same day or the next. The currency movement is at inter-bank rates, and the US$10 deduction – due to Instarem’s 1 percent cut – is the fee.
Everyone wins. The remitter pays just 1 percent of the amount, instead of the 3-7 percent they would have on other channels.
That’s what makes Instarem different, says the founder. It offers inter-bank rates on all transactions. “If you want to send US$1,000, we will charge you 1 percent of that and give the recipient the remaining US$990 at the inter-bank rate without charging FX spread for switching currencies. Our entire fee is included in that 1 percent. So this is entirely transparent,” says Prajit.
Instarem is happy with the 1 percent because there are huge volumes of money transfers to do. And the partner bank, which did not have a large remittance business to begin with, now has a new revenue stream while leaving all the nitty-gritty to Instarem.
Had that same sum been transferred through the usual banking channels, anything between INR 2,000 (US$33) and INR 5,000 (US$80) would have been swallowed up. Instarem’s flat fee of 1 percent on the inter-bank rate – for amounts between US$200 and US$10,000 – works out to INR 505 (US$8) in this case. Above US$10,000, Instarem charges an even lower rate of 0.5 percent, and for anything below US$200, there’s a fixed charge of US$2.
Compare that with the global average cost of transferring money, which is 8.58 percent of the remittance amount, says a World Bank report (PDF link). And the scale of this rip-off runs into tens of billions of dollars per year. Peer-to-peer money wiring, mostly from individuals and small businesses, is a US$580 billion annual market globally.
What’s more, the largest share of the world’s remittances comes to India (US$71 billion), followed by China (US$64 billion), and the Philippines (US$28 billion). In other words, Asian countries are the worst hit as they’re losing over 8 percent of the wired inflow to bank transfer charges.
Banks tend to charge an average of 12 percent for small remittances, whereas money-transfer agents like Western Union averaged 9 percent, according to the findings of the same World Bank study.
Banks get fat at the cost of developing nations
The high cost of sending and exchanging money came up at the last G-20 summit of developing nations, with India pressing for government intervention with central banks to reduce these charges. “It’s an ethical, logical, and economic issue,” said India’s railway minister Suresh Prabhu, and the summit pledged to do something about it. “We commit to take strong practical measures to reduce the global average cost of transferring remittances to 5 per cent,” the G-20 communique stated.
Whether the banks go along with that or not, Instarem is going full steam ahead to make a dent. “Our first market is going to be the remittance money coming into India. Next year, we will go for Bangladesh, then the Philippines, China, and Vietnam,” says Prajit.
This will be music to the ears of Veera Shakthi, an NRI (Non-Resident Indian) for 16 years, who had a bad experience when he sent money from Sydney, Australia, for his mother’s operation in India. He says on a consumer review website that he lost both time and money because the remittance service keeps “sitting on your money until the exchange rate is favorable to them.”
The reverse flow is equally in need of a pain-reliever. Meenakshi Mehra is the founder of diamond jewelry boutique Tsshimmer. Her company is based in India but has customers across the globe. “I pay up to 4.5 percent to PayPal for just about average service. I wish there was a better and cheaper option,” she says.
So it’s not just the banks over-charging for this. There are many others feeding off people like you and me who need to shift money from one country to another. The global money transfer organizations like Western Union, regional ones like Remit2India, as well as digital era ones like PayPal are all in this feeding frenzy.
Read the fine print when you use PayPal
PayPal has this cool image among techies, but Prajit takes a different view. “PayPal’s India head recently mentioned in an interview how a porter in Rajasthan is being paid through PayPal. What the article doesn’t say is that the porter is paying up to 4.5 percent of the amount to PayPal every time he gets some money through PayPal. So many technology companies transfer money to its employees abroad using PayPal, and PayPal deducts anywhere between 3 and 5 percent. To transfer US$1,000, as much as US$30 to 50 is deduced as PayPal’s fees.”
There are also startups in this space making tall claims about zero fees for remittances, taking advantage of the lack of awareness among most people about the FX factor.
Recently, XendPay, a new service founded by Rajesh Agrawal, chairman of London-based commercial foreign exchange company RationalFX, introduced a “pay what you like” model. XendPay describes itself as “the world’s first free money transfer service”. But what it waives is just the transaction fee, and not the FX spread, so it’s not a solution – it’s just part of the problem.
Digital currency bitcoin is also touted as a route to slash the price and increase the speed of international money transfers. BitPesa, a Kenyan mobile money transfer firm that launched in May 2014, claims its remittance transactions are “twice as fast and 75% cheaper” than competitors, because it uses bitcoin to transfer funds. It does not charge a transfer fee, but levies a 3 percent FX spread on each transaction.
Immigrants, students, and startups feel the pinch
Immigrants, expats, and students – for whom every dollar saved goes a long way – are the obvious potential beneficiaries of this freedom from FX, when they send money to family and pay bills or college fees. But even bigger potential gainers are small and medium-sized businesses.
Many internet startups in Asia targeting global markets use PayPal or banks which advertise low fees without mentioning the FX effect. Every time these startups pay suppliers and employees, or receive money from customers, there’s a 5 to 10 percent cut, and that hurts even more in the early stages of a company when it is strapped for cash.
This space is ripe for disruption, and there are several new players trying to do just that. CurrencyFair, started by three ex-bankers in Ireland, allows people to swap currencies. So, if you have British pounds and are looking for US dollars, it can connect you to someone who has US dollars and is looking for pounds. It’s a peer-to-peer exchange market.
What Instarem is focused on is the requirement of people in developing countries of Asia, which have a large diaspora working in more developed economies and sending money home. They’re not swapping currencies – it’s one-way traffic.
Instarem will set the ball rolling this month in Australia, from where about US$2 billion is being remitted to India annually.
A David among Goliaths
To be sure, Instarem is a David among the Goliaths in the Australian remittance business. The Goliaths are the global banks, and money transfer operators Oz Forex, Western Union, and Moneygram. “But we have a clear price advantage,” Prajit says.
For example, if you send US$1,000 from Australia to India, here’s how much the recipient will get from the various players in this market, after the deductions (from data collected by mystery shoppers):
- Through ANZ : US$927 (7%)
- Through OZ Forex: US$949 (5%)
- Through World First : US$963 (4%)
- Through CommonWealth Bank : US$958 (4%)
- Through HiFx : US$968 (3%)
- Through Instarem: US$990 (1%)
This can vary, according to the FX spread of the day, but there will always be a substantial price difference between a service that offers an inter-bank rate and others that use an FX spread.
Entry barriers
The main challenge for Instarem lies in simply being allowed to operate, because there are powerful lobbies and entrenched cartels looking to slap down any tech disruptor in the world of global finance. “In some markets like Africa where Western Union and MoneyGram have anti-competition practices, they are trying to ensure that tech disruptors do not come up. In the UK, just to get a bank account is probably the scariest part. Only the big boys control the market at this point. Small startups like us who want to disrupt the market face a huge challenge,” says Prajit.
Instarem is launching first in Australia partly because it was easier to get a license there. The US is the largest remittance market, but each federal state there has its own licensing policies. “It will be a 12-to-15-month exercise to get all the licenses, and will cost US$1 million. So that will only come after a fairly large series A funding,” says Prajit, whose co-founder Michael Bermingham is an American, and will relocate there when the time comes.
Another challenge is security. Lately, money transfer services have come under the spotlight as terrorist groups were found to be using them to transfer money. Some banks in Australia shut down their remittance services in order to hit the terrorists.
Prajit argues that Instarem has a more secure process than the traditional money transfer players. “We do a pure account-to-account money transfer. We get money from a KYC (know your customer) verified bank account and deliver money to another KYC bank account.”
The terror money is mostly transacted in cash, he points out. That is, physical currency is taken from the remitter and delivered to the recipient. Western Union, which handles the majority of remittances by migrant laborers, does cash transactions. So does Thomas Cook, principal agent in India for MoneyGram. In that respect, Instarem’s bank-based operation is far more secure, says Prajit.
A party in Phuket set it all off
Prajit founded Instarem six months ago with Bermingham. Currently based in London, Bermingham has over nine years’ experience in FX operations and compliance in the UK, Australia, Hong Kong, and the US. Prajit has worked with technology and outsourcing companies in the US, UK, and India for over 12 years. Their startup was incorporated in Singapore in August 2014, and raised seed funding of US$250,000 from private investors.
Prajit had nothing to do with the remittance industry until September 2013 when one of his friends decided to get married and wanted to have a bachelor party in the Thailand resort of Phuket. Prajit was assigned the task of booking a villa for the bash. He Googled, picked a terrific spot, and wanted to send INR 40,000 (US$640) to book it.
“I called the villa, told them to take my credit card number, and deduct the payment. They said that won’t be possible, and they wanted me to send it to their account as a bank-to-bank transfer. I called up my priority relationship manager at the HDFC Bank in Mumbai for help. He asked me to do a lot of documentation,” Prajit recalls.
Out of sheer frustration, Prajit posted on his Facebook wall that he was looking for a way to send money to Thailand from India. One of his school friends who read it was on a two-year assignment in Thailand, and offered to help. Prajit transferred money to his friend’s account in India, and the friend transferred an equivalent amount from his own account in Thailand to book the villa. “He told me that every month he has been moving money from Thailand to India and his bank was charging a fee for the transaction and taking an FX spread cut as well,” says Prajit. And that was his first glimpse at this problem.
In the course of his various tech jobs, he had done a US$1.5 billion deal in London, set up a 1,000-person business in Mumbai for WNS, a global business process management company, and was director for global business development for the TMF Group which helps companies expand internationally and set up tax efficient structures. Yet, he had never felt the pinch of cash transfers before that Phuket episode.
And now, he can’t imagine anything more important, not just for his startup, but also for a family in India that gets a few dollars less than they should, because of the sleight of hand by a big bank. “In India, even a saving of US$10 out of a US$1,000 remittance is one good meal for the family. Why should they be denied the full value of their own money?” asks Prajit. I can’t help being reminded that I’m one of the countless such people getting ripped off.
See: I just bought my first bitcoin. Here’s what I learned
This post What the FX! Banks are bleeding you dry on your money transfers. A new startup wants to disrupt that appeared first on Tech in Asia.
What the FX! Banks are bleeding you dry on your money transfers. A new startup wants to disrupt that
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