What are the cost of our cross-currency transfers?
Tuesday, 28 February 2023, 3 minute read
“Get your free forex here?” Rubbish! There are no free foreign exchange payments. It’s not technically possible. There are good deals and bad deals, not free deals. There are free domestic payments, these you can easily prove. In a domestic payment the customer pays £1,000 and if the merchant receives anything less than £1,000 it is clearly not free. With cross-currency transfers, if the customer pays £1,000, but the merchants wants to receive euros, how many euros would make it a free transfer? €1,100, €1,300 or €1,400. It is this opacity that leads payment companies to happily advertise “free forex” payments. There is no lack of transparency with domestic payments so companies don’t offer free domestic payments. Crezco does offer free domestic payments but Crezco does not, and cannot, offer free international payments.
There is a big difference between a domestic payment and an international payment. When the customer wants to pay in a different currency to what the merchant wishes to receive, Crezco goes to a marketplace to sell the customer’s currency and buy the merchant’s currency. Currencies are all independently distinct commodities. We’re swapping one commodity for another. If the customer wants to pay in apples, but the merchant wants to receive pears, Crezco collects the apples and trades them for pears. How many pears? It depends on demand and supply, but we always visit the most competitive marketplaces. Domestic payments do not involve such marketplaces.
Rate, spread, fees?
People talk with confidence about a ‘real’ rate. There is no ‘real’ rate. It does not exist. If it does exist (as a concept), it is not an absolute truth like 2 + 2 = 4. Its more like a generally accepted estimation for a good price. A close description of, or a proxy for, the ‘real’ rate is the ‘interbank rate’. The interbank rate is the most recent rate at which a selection of the world’s largest banks (JP Morgan, Bank of America, HSBC, Barclays, etc.) trade with each other on a special marketplace just for banks (hence ‘interbank’). They do not do it for free, they’re banks. They make the trade for a small commission on each trade, say 0.01% (or 1 bps) of the volume. However, the volumes at which they trade are so large they can still make significant profits per trade. A single USD 1bn trade can net USD 100,000 in profit on a commission of 0.01%. This isn’t an unrealistic trade.
This interbank rate, used amongst the largest banks globally, is not the rate banks agree to trade directly with their customers. Each customer, depending on how much they trade, will pay the interbank rate plus something for their efforts, often called a spread. If you’re a large hedge fund or corporation like Microsoft, you’re likely also trading billions annually and so you receive access to a smaller spread. If you’re a retail customer walking into your bank directly, you receive a very large spread. Companies like Revolut, Wise, and Crezco group together all the forex transactions of their customers, thereby trading larger volumes as a whole, get access to lower spreads, but it is not the interbank rate.
Even if the foreign exchange fee was free, which it isn’t, many banks generate additional fees by adding a fixed “sender fee” to each international payment. This has nothing to do with the exchange rate, it is just a fee to initiate a payment and it can be very expensive. Starling charges a minimum of 30p on each international transaction, but HSBC charges £5.00, Lloyds £9.50 , and Santander is £25.00. To be clear, Crezco does not charge these “sender fees”.
Crezco can help
Crezco makes international account-to-account payments easy and secure with the best exchange rate available and no hidden fees. You can make international payments directly to the supplier’s / employee's existing local bank account without creating any virtual IBANs or local wallets.
So what does Crezco charge?
We charge a commission of 0.25% of the gross volume on each international transaction. It would be nice to do it for free, but despite planting thousand of trees, we’ve found money doesn’t grow on any of them. Here is the maths:
Supplier Invoice Amount: EUR 1,000
The invoice amount you need to pay to your supplier in Berlin, Paris or Lisbon. We can pull these invoice details from your accounting software.
FX rate accessible to Crezco GBP / EUR: 1.14916
The best exchange rate accessible to Crezco from multiple marketplaces
GBP equivalent with prior rate: GBP 870.20
The GBP amount Crezco would have to pay to settle your EUR 1,000 invoice if we were not to generate a penny / dime from the transactions. This rate is still not a “free” international payment for the reasons aforementioned.
Crezco fee (0.25%) on GBP 870.20: £2.18
Crezco’s revenue, the cost of our services for collecting your GBP, trading your GBP for EUR on the best marketplace we can find, and sending your EUR along local SEPA payment rails in Berlin, Paris or Lisbon, while handling reconciliation and a few other “nice-to-have” features.
Total cost: £872.38
This is the total sum you pay as a customer to send EUR 1,000 to Berlin, Paris or Lisbon, assuming 1.14916 is the exchange rate received by Crezco. It is the cost to Crezco to pay your invoice in EUR plus our service fee.
Implied FX rate: 1.16289
The exchange rate you, the customer, receives with Crezco, assuming the rate Crezco receives is 1.14916, inclusive of the £2.18 fees generates by Crezco. It’s not free, but it’s good for you and it’s good for me (”me” rhymes better than “us”).
There are no further hidden fees, no sender fees, and we do not quote one price but provide another. Websites claiming free FX payments should not be trusted. Websites are not held accountable to the truth… who is? Nobody fact checks and polices websites. We are all held accountable to our customers and our conscience, but the irony of encouraging readers to not believe what they read isn’t lost on me.
About the author: Ralph Rogge - CEO at Crezco
With a background in both technology and payments, Ralph saw the introduction of open banking payments as the missing technological innovation required to better address invoice payments. At Crezco, Ralph focuses on building a strong culture and awesome products. Ralph believes a product should be so intuitive you could use it with your eyes closed.