We’re living in a globalised world. Cheaper flights and higher incomes mean millions of us have come to see regular travel for holidays and work as a necessity, not a luxury. Businesses of all sizes trade across borders, and many individuals freelance for international companies. For others, living abroad means access to opportunities they wouldn’t have in their birth country. In 2017, 14 per cent of the UK population was born overseas, up from nine per cent in 2004. Australia and Canada have even higher numbers.
Banking, however, remains local. If you’re in the UK, the chances are you’re still with the first bank you signed up to as a teenager – a financial partner you probably chose because your parents banked there, or because of a short-term sign-up bonus, the benefits of which have long since expired.
Because banks have had a captive audience and local networks, many services they offer are woefully out of step with a globalised society, none more so than international payments. This is an enormous industry – according to McKinsey, $10 trillion is sent across borders by consumers and small-to-medium businesses every year – but it is plagued by excessively high charges that make moving this money outrageously expensive for the regular consumer or business owner. In March 2019, the World Bank estimated the average cost of a remittance at 6.94 per cent of the transfer value. On a £500 transfer, that’s nearly £35.
Even more problematically, many of these transfers are advertised, perfectly legally, as “free” or “zero per cent commission”. In fact, a far greater charge is hidden in an exchange rate mark-up. And that has obscured the market. Research commissioned by HM Treasury from the UK’s Behavioural Insights Team, shows that most people struggle to find the cheapest option when transactions are priced in this way. And that creates an ugly cycle. People can’t compare costs, so they don’t shop around, which means they end up being overcharged. Banks and brokers all over the world use this model.
The good news is that change is coming, and 2020 will be the year banks wake up to transparency. The potential is huge – pricing these transactions upfront, without a rate mark-up, will allow people to compare costs between providers and know what they’re really paying. In 2020, a new landmark ruling from the EU’s Cross-Border Payments Regulations will come into force, stating that the customer must know the full costs and charges of international transactions upfront. This is a significant development. For the first time, a regulator has mandated transparency for this service on behalf of the consumer.
Europe isn’t alone in taking action. Following high levels of customer complaints, the Australian Government has asked the ACCC (Australian Competition and Consumer Commission) to investigate the issue. The Canadian Government recently commissioned a study concluding that Canadians pay an average of six per cent in fees when they send money abroad. And the UK’s FCA has committed to implement rules as good as or better than the EU’s regulations.
It’s clear that the tide is turning, and it’s about time. Capital Economics estimate that in 2015, Britain’s consumers and small businesses lost £5.6 billion to exchange rate mark-ups, with Canadians losing $4.3 billion and Australians A$3.1 billion annually. The profits on these hidden fees are massive and unjust.
Bringing transparency to just one area of banking in this way is just the first step in what could be a revolution in financial services. 2020 will be the start of transparent, borderless financial services, for everyone.
Taavet Hinrikus is the co-founder and chairman of TransferWise
This article was originally published by WIRED UK
