A Dollar is Not A Dollar: The Hidden Costs of International Payments
You are in a market, eyes on a cookie. You took the cookie and handed out a dollar bill.
“That is not enough. A dollar please, ” the seller said.
“What? ” you asked, incredulous.
“That is not a dollar. I need a dollar, ” replied the seller, glaring.
The earth crust melted. You sank into the sweltering lava beneath, hands still weaving the dollar bill in the hot air.
…am I the only one who have nightmares about wrong currency rates and diminished-value dollar?
I cannot be. Because, if you are an international student, you are likely to have:
- paid for tuition
- carried out foreign exchange to pay for tuition
- transferred money to pay for tuition
- budgeted extra money in the transfer process to pay for tuition
- worried about a stuck international wire transfer to pay for tuition
We are charged for the privilege to pay. Our international transfer payments are subject to costs, often undisclosed, in every stage of the payment.
A dollar is not a dollar
We were used to thinking a dollar is a dollar. The truth is, where international payments are concerned, that is not the case. The value of a dollar comes out diminished after the international transfer process because there are costs in the money-changing-hands process. Here are a few of the associated costs:
1. Fixed processing fee:
This fee is typically levied for processing each transaction involving banks located in different countries. Transferring funds by banks typically incur fixed wire transfer fee. For example, HSBC Bank Canada charges $50 CAD for transfers in the same currency and mandatory $15 CAD for the receiving account, regardless of currencies. [1] If you opt to transfer with services like Paypal, then the fixed fee becomes $2.99 — $4.99 CAD per transaction. [2]
2. Fixed Currency Fee
This fee is sometimes imposed by services based on the types of currencies. The amount is usually small, for example, PayPal charges the equivalent of $0.30USD for most types of currencies, charged per transaction.
4. Foreign Currency / Currency Conversion Fee
This fee is levied by some institutions for transfers involving different currencies. This is different from the Fixed Currency Fee in that it is percentage-based. For example, a service like PayPal charges 3.0% — 4.0% of the final amount depending on the destination currency.
3. Transfer Fee
Services usually have fees charged for transfers between different accounts (same or different currencies). For example, PayPal charges a fixed percentage of 2.9% on the transferred amounts for all international fund transfer.
5. Foreign Currency Exchange Spread
Sometimes, financial institutions charge $0 for an international multi-currency fund transfer. That is wonderful, because now the only thing you need to worry about is the Forex spread, which is in essence what you are charged for converting a currency to another.
In a transcation, a spread is the distance between the ask (demanded) price and the bid (offered) price.
In Forex, exchange rates are the prices. Since the mid-market rates (as explained here) are the fairest price that a buyer could ask, you can measure the Forex spread with this formula:
This value could be negative. However, only the magnitude matters, so we usually take its absolute (positive) value.
At the moment, major banks usually go with a spread of around 2.15–2.95% for selling a currency, and around 3.2% — 3.7% for purchasing a currency. While not usually explicitly stated, this is a notable cost for the transfer.
6. Operation Complications
One hidden costs often not accounted for is complications in the banking process. For one, if you use foreign cheques, a dishonoured cheque can mean a few week’s delay in processing, adding onto the currency exchange depreciation risk. Secondly, any recall, mistake in routing, or other complications which must be resolved at a bank branch can land you hefty fees for processing, which in Canada is in the order of $40 — $50 CAD per transaction. Thirdly, some financial institutions only carry a handful of currency inventories, and use the USD as a base. Thus, a Russian customer hoping to pay Australian tuition fee, for example, will have to change the Ruble to USD then to Australian Dollar. As a result, while the fixed fees remain unchanged, the percentage based costs will be added onto each other, making it a whopping 5%-8% cost.
In addition, many banks restrict daily maximum transaction amounts for security, which often mean that customers have to perform multiple transactions to gather enough money for tuition payment. For example, Public Bank Malaysia has a daily transaction limit of RM10,000.00. A student potentially need to perform 3 transactions over 3 days to satisfy to gather $12,000.00 USD for tuition payment, or over 5 days if you are transferring living expense funds too. Thus, all fixed fees are charged multiple times.
How to solve these issues and save some money while paying? Consider using a service like Flywire, which can help you make payments in your local currency without routing through USD, and perform verified payment for education without transaction limits.
