Currency Cons: Money Conversion Meets Internet Innovation
Silent rage is the best way to describe my experience at London’s Gatwick Airport in December 2014, as I battled with the airport money-changers to get a dollar for every pound I handed over.
Needing US dollars to pay for a visa upon arrival in Vietnam, Moneycorp – the monopoly currency exchanger at the airport – had a license to legally pick-pocket me. With no pound sterling in my wallet, and no alternative provider or machine, Moneycorp could demand a 4 pound fee to withdraw 40 pounds from my credit card, a handling fee (because it was a small transaction) and leave me with a poor exchange rate. As I handed over the cash it felt like Groundhog Day: just the latest episode in a decade-long struggle through the endless fees and rules of banks and other parties to pay off credit cards in my native Australia, and access cash from ATMs in the world’s largest cities.
There are two ways to look at my Gatwick experience: 1) Thank heavens Moneycorp was there to save me in my hour of need or 2) Why was I paying roughly 20% commission for a service an ATM could have provided me for under 5%. Of course, it would be even better value if an airport vendor had been allowed to link up with an online currency service, letting me pick up my cash the same way I might collect a parcel.
A further question is: when does frustration cross into exploitation? And what are the roles innovators and policy-makers could play?
Often it’s not a traveller who is victim. Perhaps your salary has been shrinking while posted abroad. Or maybe you’ve been forced to hand over cash to banks when it was meant for relatives back home. Whatever the case, you’re not alone. From the poorest households to the 1%, anyone who sends or spends money across borders is at risk of growing cross-continental currency cons.
For the first time, however, this short-changing tradition is, coming under sustained fire. The band of disruptors – led by TransferWise ($90 million in venture capital across five funding rounds) and a swag of mPayment services in Asia and Africa – are intent on spreading their philosophy of “money without borders” and “payments for all,” and they are starting to win.
Currency exchange used to be associated with innovation. Sending money over telegraph lines was a revolutionary concept in the 19th century. Traveller’s Cheques simplified and secured travel abroad for generations of 20th century tourists. But like all effective monopolies (think of the torturous relationship between mobile roamers and their phone providers) the going was too good for the providers to keep their hands out of the cookie jar.
Retail banks and the global brands of currency exchange such as Western Union, Moneygram, Travelex and Moneycorp, will routinely charge an extra 50 dollars or pounds on a 1000 dollar/pound transaction compared to online providers like TorFX.com and TransferWise. Travelex is charging 9% above the mid-market rate for US dollars and Euros as I type this article.
These companies brand themselves as “exchange experts,” when all they do is store cash in drawers and over-charge you for it. Over-engineering and mystifying currency transfers does not add value: it merely increases profit margins.
This insight is driving the success of TransferWise – who are picking up faster than any company since Uber. Co-founded by Taavet Hinrikus, Skype‘s first employee, TransferWise is evangelical and hyper-transparent.
Offering their services at around a third of the cost of the retail banks, TransferWise has picked up a 2014 Financial Times Boldness in Business award, and a suitably cult-like following. You won’t find fake claims of “0% commission” anywhere near them.
It’s a welcome contrast to browsing moneycorp.com, where one can end up tripling the fees simply by browsing options in the ‘wrong’ order. It’s less Groundhog Day and more Alice in Wonderland.
When I sought a quote to change 300 pounds for euros, I was first offered the exchange for a fee of 7 pounds for airport collection. The fee doubled to 14 pounds if I wanted “free home delivery” instead, and went up again to 22 pounds if I wanted it stored on a card rather than in cash. When I changed my mind and went back to the cheapest option, the website continued to try to charge me 22 pounds (not 7).
It’s no better sending money on from a street corner. But the social costs are much higher. At the individual level, high fees for remitting money are effectively a tax on the poor. The most vulnerable are ripped-off and told to be grateful – which they no doubt often are when faced with no alternative.
The damaging effects of high fees are also felt at the macro level. The Remittance Economy (now greater than US$500 billion a year) has outweighed the value of official development assistance since the start of the millennium. It has a major impact on poverty levels in the recipient countries. Indeed, remittances make up to 35% of GDP in some nations and were the difference between recession and growth in Europe’s star-performing economy Poland, following the collapse of Lehman Brothers.
Policymakers are unlikely to intervene – the financial impacts of a 20% remittance fee may be unjust, but they are less devastating than the usurious rates of payday lenders such as Wonga, who recently offered loans at interest rates of 5,853%.
The good news is that economists from the World Bank and International Monetary Fund have found that competition makes a huge difference to the fairness and efficiency of remittance corridors. Leaving the burden of change to market-shakers like TransferWise and comparison websites like MoneySupermarket is not a lost cause, it seems.
The infrastructure for further competition and change exists thanks to mobile phones and internet. The leading example here is M-PESA, the domestic mPayments system now operating in several African markets and countries such as India, where transaction costs are as little as 0.16%. If the cost of sending remittances were lowered to something close to what TransferWise charges (around 2%), tens of billions would flow to some of the world’s poorest households each year. If the margin were ever reduced to M-PESA’s range the figure would be hundreds of billions. Find out more here in the World Bank’s remittance database.
What can regulators do (or not do)?
European regulators have made small dents into payments injustices. The establishment of SEPA, the Single European Payment Area, has reduced some categories of fees (inter-EU transfers must not cost more than a national transfer, no matter which currency is used.) Competition regulators have also spent a decade chasing credit card interchange fees, which failed to reflect the cost or the value of the transaction. Here the European Commission succeeded in both increasing transparency and capping fees. However, in these cases it was easier to demonstrate a likely or definitive abuse of a dominant position in a cross-border market.
The markets are far less clear when it comes to currency exchange. The monopolies that exist are in specific locations such as transport hubs, not pan-EU. The prices are unreasonable, but not cartellised: they change every minute according to markets the service providers do not control. And by definition there is now competition between online providers and high street retailers.
In such cases the clearest role for regulators is in ensuring transparency and fostering the type of competition that new Internet-based players are bringing to the market. Competition thrives on a level playing field, so any regulation that favours established banks should be avoided in the payments field, for example in the EU’s Payments Services Directive. And services such as currency exchange and Dynamic Currency Conversion (where consumers are offered the chance to pay in their home currency when purchasing online and through in-shop merchant terminals) should be subject to strong consumer information rules.
Only the foolish would doubt that the winds of change are coming to money transfer markets. There is 70% smartphone ownership among migrants, a fact not lost on Western Union. Western Union never got around to letting customers use credit cards to access their services, but have suddenly leapt forward to let customers transfer money via Apple Pay. This happened in the same week that TransferWise raised their last $58 million. Bitcoin advocates such as CoinRepublic also claim they can get the job done for 1.05% to 1.55% in total fees.
Now the pressure is firmly on retail banks to respond; they may lose a generation of customers forever if they fail to pivot quickly. The internet generation wants more than convenience – it expects transparent convenience at competitive prices. And the internet generation is global; those services are demanded not only in advanced economies but globally.