Why is it so difficult to move money across borders?
Greetings everyone, welcome back to Plain English, the best podcast for learning English. I’m Jeff, JR is the producer, and this is episode 186. You can find a full transcript of the program, translations into seven languages, a video lesson, flash cards, and a fast version of the program on the episode web site, PlainEnglish.com/186.
If you travel abroad, do business overseas, or support a family member in another country, you’ve probably encountered a frustrating problem: it’s slow and expensive to send money to across international borders. In today’s episode, we’ll explore why that is, and we’ll see whether there’s any hope for a better answer in the future.
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Not so SWIFT: moving money abroad is slow and expensive
In almost any major city in the United States, if you go to the right place, you’ll see an array of shops all offering money transfer services to other countries. A lot of these shops are specific to destination countries. Just here in my neighborhood, you can find money-transfer shops specializing in payments to Mexico, Ecuador, Colombia, El Salvador, and Guatemala. That’s in addition to the branches of bigger money transfer agents Western Union and MoneyGram. Every day, people line up inside these shops to send money back home to support relatives.
The word in English is remittances: when workers go to another country to work for higher wages, the money they send back home is a remittance. Worldwide, the total amount of remittances per year is about $600 billion, or about the same size as the entire economy of Argentina or Sweden. I can tell you from observing with my own eyes, and from people I know, that they work extremely hard for the money they send back home. Unfortunately, though, a large part of what workers send back is lost to fees, sometimes up to ten percent.
If you can send a message in an instant and for free, from anywhere to anywhere in the world, why can it still cost ten percent and take a week to send $200 across borders?
One big reason is that not everyone uses a bank account. If you, the sender, or your recipient doesn’t have a bank account, then you rely on networks like Western Union or other small transfer agents, which need to maintain expensive shops. They have to pay rent; they have to pay agents to sit in the shops; and they need to pay for all the security necessary to handle cash. They also need to have enough money on hand in all their destinations in order to serve their customers. Having that money always available is expensive in its own way, too. Western Union is one of the most expensive ways to send money, and they know it. But they also know they are one of the only choices you have if your recipient needs to pick up money in cash.
But let’s say both you and your recipient both have bank accounts in your respective countries. You still pay a minimum of five percent, even if you work with a big commercial bank. Banks still send money across borders using a system that was established in 1973; it’s called SWIFT, which is a bit of a misnomer. SWIFT is a messaging system in which banks send instructions to one another. There are 10,000 financial institutions that are part of SWIFT: they can’t all have individual relationships with one another. So they send the instructions through the SWIFT system. And to make things more complicated still, your instructions might have to go through several different mini-networks within SWIFT in order to get to your recipient’s bank. Everyone involved in the SWIFT process—the sending bank, the receiving bank, and any banks in between that need to act as brokers—they all charge a little bit of a fee.
Banks and money transfer agents will tell you how much they’re charging for the service. But they won’t tell you another way they charge you: the exchange-rate markup. This sounds complicated, but it’s fairly simple. There is no “official” or “legal” exchange rate between two currencies, in most cases. The exchange rate is simply the amount buyers and sellers of currency are willing to pay one another. Practically speaking, if you look up the exchange rate online, you see the best rate that the biggest financial institutions give each other. You and I, as consumers, we don’t get the very best rate, but if we try hard enough, we should get pretty close. Unfortunately, when it comes to sending money abroad, money transfer agents and sometimes big banks give you a bad exchange rate, and they pocket the difference.
We haven’t even begun to talk about the time it takes to do all this. One of the big delays in sending money has to do with anti-money-laundering regulations. Most governments have “know your customer” regulations, often abbreviated KYC. Banks are required to take measures to protect against money laundering and other illegal activities. This slows down your transfer all along the SWIFT network. Depending on the number of stops along the network, your money could take up to a week to arrive.
Is there any hope that this can get better? Slowly but surely, new financial technology companies are starting to disrupt the dinosaurs of money-transfer. One new firm called Remitly, based in the United States, is taking an innovative approach. It gives customers the chance to choose whether they want the lowest fees or fastest delivery times. They can also deliver the cash to your recipient’s address via a network of destination-country partners. Another relatively new firm, TransferWise, has already captured 15 percent of all outbound money transfers from the UK. They are the one that I personally use and they tend to have the lowest fees and best exchange rate, at least to the countries I’ve had to send money to.
Some of the new money transfer agents are getting faster, too. The old way of sending money was to, you know, send the money. Take it from your account and give it to the recipient’s account. There is another way to do it. Let’s say you’re working with a transfer agent that has money in both locations. Let’s pick the US and Mexico, since that’s a very popular corridor for remittances. A company like TransferWise will have bank accounts in both places with a lot of money in both accounts. If I want to send money to someone in Mexico, I can give TransferWise $200 right here in the US. Instead of sending the money through a network of banks, TransferWise can send my friend $3,900 pesos out of the account they already have in Mexico. Presto! The money gets to my friend right away, no bank transfer, no bank transfer fees. Obviously there is more money going to Mexico than the other way around, so the transfer agents have to manage the balances via traditional bank transfers, but they can do that with bigger amounts and they can plan it in advance.
I know this audience is a very international audience. You’re moving around—going from Brazil to Australia, Colombia to the United States, Venezuela to Peru, China to Germany, France to Canada, Morocco to the United Kingdom. If you send or receive money across borders, try your best to make sure both parties have a bank account and try using a company like Remitly or TransferWise or similar startups. PayPal can sometimes be a good option, and maybe even Libra someday. Get the right exchange rate and pay a competitive fee. You work too hard for your money to pay three bank fees and a currency markup just to send money in 2019.
Speaking of international payments, I asked some of my contacts on WhatsApp if they’re comfortable paying in US dollars and one of the things I found is that in Latin America, a lot of credit cards aren’t international. That means a lot of people in Mexico, Brazil, Colombia—they can’t pay for things in dollars even if they wanted to. In Europe and Japan, people are pretty used to paying in other currencies, but for some reason in Latin America it was different. So that’s why when we were setting up Plain English Plus+, we made sure to partner with a local fintech company called Ebanx.
What Ebanx does is, it lets customers in Latin America pay in their own currency via a local bank transfer or a local debit or credit card. Although I get paid in dollars, the customer gets to pay in reais or pesos. It’s a little extra work on our end, but we wanted to make sure that these crazy international bank rules didn’t stop anyone from joining if they wanted to. If you live in Latin America and you’d like to learn how to join Plain English Plus+ with your own currency, just visit PlainEnglish.com/pay to learn more.
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