How using bank apps locks you into excessively high spreads & fees when you convert money from or to NZ accounts & why direct negotiation will save you a bundle

Mobile phones are the wonder of the age. High levels of computing power in your hands, bolstered by cloud resources.

But the power of all that access and convenience comes with a serious downside. The access channels are being captured by a small set of providers.

Further, we are addicted to the convenience. It is an addiction that has real costs.

Chances are that you use your banking app intensively. You make increasingly small payments either through it or via contactless card swiping. The convenience is so pervasive, you probably find you do very little outside the comfortable closed world of your banking app.

But the costs for this convenience are enormous. And 'competition' is minimal in this world.

You know the costs are high and the capture total when the core institutions report record profit results.

A great way to see this is in the way foreign currency payments are handled by banks.

There is a stunningly easy-to-use feature on your banking app for that. A few clicks and you are done, with very little extra effort making such payments as making a local payment.

It is so easy, chances are you won't compare costs of alternatives. But you should; you really should.

First, you need to understand the ways banks make money with these transactions.

There are fees - and spreads.

Fees are easy to understand, they are clearly disclosed. You probably think they cover the cost of making the transaction happen. They may well do; after all there is consumer law saying fees finance must be supportable by the costs involved. Small lenders get into trouble with the Commerce Commission regularly on this point.

Fees are usually expressed as a percentage of the transaction with a minimum (often $12). But fees are not where the action really is.

It is the spread where you can get seriously burned, where the serious money is.

Currency rates are talked about in the news as the mid rate. To sell you currency a bank adds a margin to this mid rate (in basis points) for the rate they charge. To buy currency off you, they deduct a margin in basis points. This is fair enough; they are not a charity and the margins involved both generate their profit and pay for the intricate systems behind the scenes to move the funds seamlessly to where they need to go.

But unless you investigate you may not believe how wide that spread is.

Preparing this story, we set up two example US$25,000 transactions and have applied them to all the main banks.

The rates above are taken from each bank's online resources as at 10:55am on August 15, 2018 (except for the Kiwibank one marked * where we got a phone indicative quote).

These spreads are handsome and will generate substantial margins.

A key to reducing them is to negotiate. Yes they will usually negotiate, but you are in fact in a very weak position. It is not because you can't switch to another institution for the transaction (because you can), it is because of the time constraints. FX rate offers last at maximum two minutes. This is understandable because the currency markets are 'live' with rates changing all the time. You can get a rate from one institution but only have 120 seconds to check anything else. Not many people can't handle that pressure so just accept it.

But there are two things you can do. And both need you to put away your banking app.

Firstly, a day or so before your transaction, do a comprehensive check. Start with using our 'live rates' pages, then call most of the bank currency dealers, tell them what you wish to convert, and get an indicative rate. Be clear this is a competitive situation so you want their 'best rate' offer. That should enable you to identify the two or three likely best offers. Compare their competitive offer to the publicly posted rates on our pages, here and here. That will give you a clear sense of you should prioritise when you do the real transaction the next day. (If you misplace this story, those links are in our Currency section menus.)

But much more importantly, contact some non-bank currency dealers. You will find they will have very much sharper pencils. The 'spread' at XE (HiFX), OFX (NZForex), or DirectFX won't be anything like 250+ bps, it will be more like 100 bps and sometimes less - and there will likely be no fees!

In the example transaction above you could save hundreds of dollars. The savings mushroom as the amounts involved rise. In the example above, we estimate you would save at least $318 if you buy your funds from a non-bank transfer agency rather than the best bank (Kiwibank), and you will get $362 more if you sell your funds compared with the best bank (ASB). These benefits or costs will be different at different times and with other banks.

But there is work involved - you will need to set up a full account relationship and a funds transfer process before you can access these savings. It is not hard, but it has to be done. Once set up however, working with non-bank currency dealers will be just as easy (but different) to working with your friendly bank.

We have a simple tool that can estimate the savings. It uses the online rates published by the banks (and because currency trading isn't available in the weekends, using this tool on weekends may give unreliable results - the time of each bank quote can be checked in the (?) point). That tool is in the right hand sidebar.

Good non-bank international payments companies (like the ones mentioned above) will be licensed as a derivatives issuer and their dealers work for a Qualifying Financial Entity. They also transact the funds through a separate trust account. You should verify that this is the case when you set up an account with any of them.

The key to any foreign exchange trade is to negotiate. It is work and outside your banking app, but the payoff can be substantial.