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.

You buy US$25,000         You sell US$25,000    
your NZD cost     Fees   NZD you receive   Spread
  $     $     $   bps
0.6463 38,694   ANZ 9/15   0.6722 37,179   259
0.6461 38,704   ASB 15/15   0.6717 37,209   256
0.6478 38,602   BNZ 15/15   0.6721 37,187   243
0.6490 38,521   Kiwibank 12/20   0.6761 36,977 * 271
0.6420 38,951   Westpac 15/20   0.6761 36,967   341

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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

10 Comments

I'm using OFX at the moment.
BNZ was really stinging me with a huge spread. I talked to them and got the usual story. Can't do anything better for me.
I said OK listen carefully "O F X ", that was all it needed, but I went on to tell them either the bank gets into the 21st century or i'm going to by using an app to convert my USD.......suddenly, lo and behold everything changed and BNZ were able to offer me a comparative rate.
Just like that.

Been using them since they were OzForex. Was working in Japan for a while and they slipped under the Japanese regulatory radar (the Japanese financial industry hates seeing customers getting an advantage) with a local HSBC account. Unfortunately, they shut that down so no joys for converting JPY anymore.

I used CraigsIP to get me the market rate to convert EUR to NZD and they didn't charge me a cent.

I have tried negotiating with banks to convert a material amount of forex and all quotes still had insane spreads.

In the end I used a third party forex company and got much better rates. Spreads of 50bps or so from memory. The banks were not even in the ballpark. Not even remotely close.

Transferwise. Much cheaper than any of these rip offs. Easy to use as well.

Yes, you're right.

Another vote for Transferwise. Been using them exclusively since 2016. Not a single complaint and always best prices around.

As per ANZ's website their international transfer fee is $9, not $12 as indicated here. https://www.anz.co.nz/auxiliary/rates-fees-agreements/foreign-exchange-i...

I think the convenience of using mobile phone applications and online banking trumps the set up process for irregular users. Businesses or individuals making frequent transfers I'm sure would find the worth using their time to look at all options, but for the average Joe that wants to send small sums overseas on infrequent intervals, the convenience wins every time.

Yep, just checked my statement, and it was $9 to send money to the USA with ANZ, and the rate was similar to other banks at the time. As you say, for smaller and irregular transfers the spread isn't so relevant, it'd cost me more in time to go hunting around for the best rate than the few extra points on the spread does. If it was high 5 figure or 6 figure amount then it'd be worth chasing around.

Edit: also, in my case a third party wouldn't have worked, due to AML/KYC rules the money had to be transferred from an account in my name. Another lock-in for the banks.

Yes I use Direct FX, good service, prompt action, GREAT! ASB challenged me a while back and I told them to make me an offer. they finally admitted they couldn't match it. When travelling though, the Banks offer a MasterCard Passport credit card which specialises in specified currencies. the biggest problem is that you can't buy your currency before you go and load it on the card. What we need is a Debit Card that allows the currencies to be preloaded before travelling and is accessable around the world. The rates on the Mastercard are the same as the banks and are a RIPOFF!