AN ENLIGHTENING RESEARCH EXERCISE
When did it become so socially acceptable to lie in the world of business? What mechanism broke in humanity that encouraged us to ignore the normal rules of social interaction when dealing in economics? It’s as if economics is a system bigger than humanity, even though (in its current form at least) humans created it.
I recently conducted a research exercise for one of my clients, Midpoint, a company that has developed a patented peer-to-peer foreign currency matching engine. Rather than having to use banks or other intermediaries to make international payments, the engine is capable of netting multiple currencies and directly matches businesses and individuals with off-setting currency needs. It sounds complicated, but actually it’s very simple. You are exchanging your currency with the marketplace, or more accurately with an online network of other currency sellers, rather than one individual or intermediary. Through the network, Midpoint is able to provide SMEs and individuals with the same exchange rate the big banks offer to large multinationals, and they do it without any pain, in a transparent and honest way.
The exchange rate for currencies is set at the interbank rate, which is the rate at which the banks transfer money between themselves. It is the very midpoint of the market, because all markets have two poles: the buy and sell rate. You can find out what the midpoint is simply by splitting the difference between the buy and sell price, and on a much larger scale that’s effectively how the banks agree on the interbank rate. You can work this out easily enough for yourself. The next time you’re at the airport look at the GBP-USD rates for travel money. There will always be a difference of around 20-30 cents to the pound, which is the margin the broker makes for facilitating the exchange.
I’m digressing a little bit here, but I wanted to highlight that you can explain how foreign exchange works in a relatively short paragraph. Yet for years financial institutions have managed to pull the wool over the eyes of their consumers. I used to work in a so-called boutique FX brokerage as a salesperson, and at the time I thought the deceitful techniques being taught to me were as a result of bad management by my firm, and not as a result of endemic dishonesty in the industry. How naïve I was.
The research task was simple. My team and I, seven of us in total, were asked to call our banks and get an answer to a simple question. We had our eyes on a property in Spain and exactly £10,000 in the bank. We wanted to know if that was enough money to put down as a deposit, so we needed to find out the exact amount of Euros that would be deposited to an account in Spain following an exchange with them. It’s a simple question, so you would expect a simple answer.
In fact what we got was seven different ways of failing to answer the same question truthfully. The information we got back was so useless that I had to run the exercise again a few days later with a more comprehensive briefing to my team. Without fail all the banks told us the amount we would receive but not one included the fees on top. To be clear, a fee can be defined in three ways for a foreign exchange transaction:
1) The “hidden” fee that’s tied up in the margin (which would have resulted in us getting fewer Euros for our Pounds)
2) The bank’s commission
3) Any additional transfer or transaction fees we might incur
All very different ways of charging and all relevant to the amount of funds that would actually appear in our account when we tried to make a payment. The information given to us was wrong in every instance because our £10,000 would have had to be between £10,004 and £10,060 (depending on who you bank with) to amount to the already devalued sums they quoted.
What hope does the layperson have if a former FX salesperson can’t even get an honest answer from a bank?
So fast-forward a few days and the results are in (although we still needed a couple of attempts of asking with at least two of the banks). The first finding of note is that banks seem to have two departments that deal in foreign currencies, the Travel Money department and the International Payments department. Some have online offerings, and others will only deal over the phone or in branch. The rates seem to differ depending on who you call or how you prefer to transact, as do the associated fees.
You can see below how we arrived at the true value of our £10,000 after it’s been chipped away at during the exchange. In the case of NatWest our hypothetical £10k was devalued by a total of £410. This is an extortionate amount for something that is facilitated electronically. Yet people continue to pay these fees because of the industry’s smoke and mirror techniques.
FeesTotal EurosTrue value after feesDifference to Midpoint
Lloyds1.2511.2255£60 €12,255.00 £9,736.16 £213.84
Lloyds online1.2511.2255£17.50 €12,255.00 £9,778.66 £171.34
£4 (to non-HSBC account)
€12,287.00 £9,755.33 £194.67
HSBC phone1.2591.2287£30 €12,287.00 £9,729.33 £220.67
Currencies Direct1.2541.2418n/a €12,418.00 £9,902.71 £47.29
Travelex1.2541.1545n/a €11,545.00 £9,206.53 £743.47
NatWest1.2551.2048£10-£30 €12,048.00 £9,590.00 £360.00
First Direct1.2521.219£4-£25 €12,190.00 £9,732.42 £217.58
Halifax online1.2551.2154£9.50 €12,154.00 £9,674.96 £275.04
Halifax phone1.2551.2255£19.50 €12,255.00 £9,745.44 £204.56
There were further instances of outright dishonesty and deceit. One of our team members banks with Halifax. He could see the rate via their online facility, and was told over the phone the fees are £10 less by exchanging online. Sounds like a good deal, right? In fact the rate was so much worse online that he was actually paying more for the automated online service.
Despite paying £10 more in fees for phoning his bank he would have saved £70 by having a vastly improved exchange rate. He was told to transact online because it would be cheaper, an outright lie. To make matters worse he had to complete the exchange online because they limited over-the-phone transactions to £5,000.
As a result of extortionate exchange fees charged by banks a vast number of boutique brokerages have sprung up. They still trade through the banks but use their buying power to exchange close to the midpoint, and they pass these savings on to their customers. This is a chance for the industry to redeem itself, for alternatives to come along and break the monopoly, therefore driving down the ridiculous cost of foreign exchange.
Nope. Not a chance.
All they do is perpetuate the underhand tactics used by the banks. In some cases they are even more ruthless.
For the purposes of fairness we contacted two of the bigger brokerages, Travelex and Currencies Direct. The Travelex website is full of rhetoric about “avoiding hefty charges” and yet they quoted a rate that devalued our currency by a staggering £793.47. I made my team member call back to check because it didn’t seem right. They confirmed the original amount quoted was indeed correct. We explained our situation very clearly and yet they were charging us travel money rates, not international payment rates.
Even more worrying is the technique employed by Currencies Direct, which brings to mind the method used by drug dealers to hook their clientele with a first-time freebie. Because I didn’t have an account with them they quoted me a relatively good rate, which only devalued our £10,000 by £97.29. Just out of curiosity I asked a family member who happened to have an account with them to call and ask the same question, because I knew my old company quoted preferential rates to hook new customers. I can only talk about it anecdotally because she didn’t call under the strict parameters we set for our research, but she was quoted a rate that gave her €230 fewer than me. I checked the historical rates to make sure there hadn’t been a huge fluctuation in the interbank rate during the gap between our calls. There hadn’t, so she had just been ripped off, or I’d been quoted a honey trap rate they never intended to give me. Neither option is particularly palatable.
So in summary, I advise you to avoid banks or brokers at all costs. Peer-to-peer banking methods are the future, and the future is already here. Exchange your currency with the network because that is the only way you will get an honest answer as to the true cost of foreign exchange.
And as human beings let’s change the paradigm and stop lying to each other when it’s under the guise of business. This behaviour isn’t acceptable in the playground so don’t accept it in the real world.
If you have a foreign exchange requirement and would like to use Midpoint, simply visit www.midpoint.com. Setting up an account is quick and easy, and you will save a lot of money over using a traditional bank or broker, and even over the other peer-to-peer providers that are available.