People have many reasons to send money across borders, including conducting business, buying property, or supporting a family.
Online money transfer platforms make the process easy and cheaper than alternatives offered by big banks. And the best part? It is 100% online so you never need to leave your home.
Money Transfer Platforms 101
Online money transfer platforms allow customers to send money from their personal or enterprise bank account to mostly anyone across the world with a bank account of their own. Many of the large and reputable platforms can handle transactions involving dozens of currencies to more than 160 countries.
The process of opening an account shouldn’t take more than a few days and requires 10 minutes of work to fill in regulatory and legal forms and submit ID for verification. The beauty of online money transfer platforms is it can be used 24 hours a day, seven days a week, 365 days a year.
Each transaction requires the user to input the currency they wish to exchange for, the amount they wish to transfer and where the money will be sent to. That’s it. The user will then confirm the total cost of the transaction and wait anywhere from less than one day and up to four working days before the funds are credited in the recipient’s account.
Online money transfer platforms earn a profit by charging a “commission,” or a spread on each transaction. The spread refers to the difference between the price a platform charges customers versus what it actually costs the company to finalize the transaction.
Money transfer platforms have a global presence and oversee billions of pounds a year. As such, they have access to better rates than customers can get on their own and they pass on some of those savings to steal market share away from rivals.
Foreign Exchange Fluctuations Means Less Money
The foreign exchange market operates 24 hours a day and has seen its fair share of volatility throughout early 2020 due to the coronavirus outbreak. This makes it more important than ever for users to save as much money as possible when they need to send money internationally.
Some currencies have lost 10% or more in a span of a few weeks due to the coronavirus. This is mostly the function of global investors re-allocating their assets away from countries they believe will be more hard hit to safer regions.
The British pound, in particular, sank to a multi-decade low against the U.S. dollar.
Stuck in the middle of all this is ordinary people who are trying to do their best to support their elderly parents during a difficult economic time. Under some circumstances, foreign exchange rate fluctuations mean loved ones will receive less cash than usual compared to more stable and normal circumstances.
The only way to offset lost money is through doing proper research and finding the online money transfer that charges the lowest spread. On average, international money transfer companies keep anywhere from 0.5% to 2%.
For the most part, these rates are much better than traditional banks and global payment processors where fees can be 5% or more.
Set The Rate You Want
Since foreign currencies trade every second of the day, their value can drastically change by the second. Users who can wait a day or longer before sending money can do so by placing a transaction with a limit order.
Under normal circumstances, an exchange takes place at the “market rate.” That is, the transaction occurs instantly at the best price available at a given time.
But instead of accepting a “market rate,” a user can place a limit order in which they dictate the terms of the transaction, namely the foreign exchange rate they want. Only once their desired target exchange rate can be satisfied will the transaction finalise.
Not every online transfer platform will allow users to input a limit order. For some, it may not be a necessary option but for others, it would be an invaluable tool that can’t be replaced.
Hedge Through Forward Contracts
A forward contract gives online money transfer customers the ability to protect themselves from potential foreign exchange fluctuations. Specifically, a forward contract consists of an individual agreeing to buy or sell a currency at a future date at a pre-agreed exchange rate.
Forward contracts are very important for anyone who knows in advance they will need to transfer foreign funds in the future. By entering into a contract, the individual will know today what the cost will be for future transactions.
Here is an example. Suppose an individual working in London sends £5,000 a year to help support their elderly parents in Romania. Based on current exchange rates, the parents will receive 27,300 Romanian Leu.
Given ongoing uncertainties related to the coronavirus and a Brexit environment that has yet to be finalised, it is possible their parents would receive, for example, 24,000 Romanian Leu next year due to natural foreign exchange fluctuations.
A forward contract through an online money transfer platform will permit the user to enter into a transaction to exchange £5,000 to 27,000 Romanian Leu in one year, regardless of what the exchange rate will be. The only downside to a forward contract is if the currency moves in a favorable direction, the parents won’t participate in any of the upsides.