For a long time, the currency exchange market was dominated by firms like Western Union or local banks, who would charge exorbitant commissions and fees. Fortunately, Americans sending money outside of the United States have a variety of options.
LOCAL BANKS
Many Americans will use a local bank (either in the country where they are or in the United States) to handle their currency exchange. Shockingly, this is– in many cases– the worst possible option, as local banks frequently charge a fee of more than 1% for currency exchange (or work a bid-ask spread that costs as much as 1%). Such a fee doesn’t include additional costs for wire transfers, wire receipts or other charges. Many Americans also hold “multi-currency” accounts with large international banks such as HSBC and they are shocked to learn that the exchange rate is very poor even with the large amount of cash they are required to hold on hand.
ONLINE SERVICES
Like a great deal of banking, the growth of the internet has led to efficiencies in the currency trading market. Such online services provide a great deal of convenience and are frequently less expensive than banks. For instance, the fees at Transferwise are generally below .8% (lowering as the quantity of money increases). These fees include wire costs, which are generally 25 USD to 50 USD per transaction at larger banks. Consequently, in most cases, particularly for smaller transfers that need to arrive quickly, these online services are an outstanding option.
In addition to Transferwise, there is OFX and Xoom (offered by PayPal). Nerdwallet has a detailed description of these options as well with a clear compare and contrast for the advantages of each.
BROKERAGES
For larger transactions, many people may look to use their brokerage account to handle the wire transfer, particularly if they work with a financial advisor or are living off of their investments. The fees from brokerage accounts vary widely– some can rise to as much as 1%. Additionally, many brokers (such as Charles Schwab, which generally charges between .4% and .6%, and TD Ameritrade, which has fees around 1%) will charge an additional 25 USD for wire charges. Additionally, large brokerages don’t allow you to spot-price the transaction– generally, you call in the transaction and the brokerage gives you the price when they process the order, meaning there isn’t as much transparency about when the trade is placed. These traditional brokerages, unfortunately, cannot generally handle foreign currency deposits as they will require a correspondent bank to convert the currency for them.
On the other hand, Interactive Brokers generally has the best exchange rates as they charge a trading cost of about .1% per trade and for individual accounts of greater than 100,000 USD (or advisory accounts) will allow one free wire per month. On a 10,000 USD transfer, this can equal savings of up to 75 USD over even lower priced options such as Transferwise. Finally, Interactive Brokers can accept wires, checks and cash deposits in foreign currencies, allowing investors to keep their funds in local currency and buy assets in that currency without incurring any currency transfer costs.
Should you have questions regarding currency conversions, or other questions, contact me at keith@walknercondon.com. Further educational materials can be found at our U.S. expat focused website.
Keith Poniewaz