A competitive exchange rate can help you save money on your overseas transfer.
While a bank may be the most obvious option for sending funds overseas, a peer-to-peer transfer with a reputable company can help you save on fees and get the best rate.
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How do money transfers work?
As an example, let’s say Ryan wants to transfer $50,000 to China for a down payment on a new apartment. How does that work?
Boiling it down to the basics, three big things happen when Ryan sends money internationally:
- Ryan transfers his money to a financial institution (for example, his bank).
- Within the financial institution, Ryan’s $50,000 is converted to Chinese yuan (CNY).
- The money is transferred to a financial institution in China, where Ryan can collect his money.
While Ryan understands the process, he’s concerned about how much it’ll cost to transfer his money. To make the best decision, he’ll want to look at a few key factors.
The exchange rate
The exchange rate is what one country’s currency is worth in another currency. For example, U.S. dollars might be converted to euros at the following exchange: 1 USD = 0.95 EUR.
PRO TIP
If you’re exchanging dollars for euros, you can see what the dollar is worth by looking at its mid-market rate. For example, according to the worldwide market, 1 USD = 0.95 euros.
Put simply, the mid-market rate is the “real rate” your money should be exchanged for. Get as close to that rate as possible.
Let’s suppose that at the mid-market rate, $1 is worth 6.94 Chinese yuan. You might find a nice currency-exchange business to convert money at that rate, but more likely that business would want to be paid for helping you exchange your money. It might offer to exchange money at a rate of $1 to 4.88 Chinese yuan instead.
That means:
- Instead of $1,000 converting to 6,940 Chinese yuan (or 1,000 x 6.94),
- Your $1,000 will convert to 4,880 Chinese yuan (1,000 x 4.88),
- And the business will effectively profit 2,060 Chinese yuan — or nearly $300.
This is one way that currency-exchange services make money. That said, carefully note the mid-market rate for the currency pair you’ve chosen. The mid-market rate will be the benchmark on which you’ll know if you’re getting a good or bad deal.
Fees
If someone asked you to put $50,000 in cash into a suitcase and fly it to China, doing so would take some effort (as well as break a few laws). You’d want to get paid for your trouble.
In the same way, it takes some work for financial institutions to exchange money and make it available to someone overseas. They don’t exactly fly cash over in suitcases, but they charge fees for their time and effort.
On the flip side, your goal is to pay as little in fees as possible. Factor these fees into your decision on which financial institution to use.
Compare the cost of three methods of transfers
Speed of transfer
It generally takes one to four business days for your international money transfer to be completed. If the speed of the transfer is important to you, speak with your financial institution to confirm how long it will take.
Let’s look at a few options Ryan can use to transfer his money. For our examples, we’ll suppose that Ryan’s $50,000 is worth 347,000 Chinese yuan at the mid-market rate: 1 USD = 6.94 CNY. That’s the baseline Ryan will use when evaluating the strength of his options.
What are the tax implications of sending a large transfer?
Option #1: Transfer through a bank
Ryan’s first thought for transferring money is to do it through his bank. What might the costs be for that option?
Exchange rate
Ryan will first want to check the exchange rate he gets on his money. Let’s say his bank sells Chinese yuan at a rate of 6.85. That means if Ryan converts $1, he’ll receive 6.85 Chinese yuan.
PRO TIP
When a financial institution sells currency to you, it is exchanging foreign currency for your local currency. For example, if you’re flying to China, your bank would give you Chinese yuan for your U.S. dollars.
When a financial institution buys currency from you, it is giving you local currency for your foreign currency. For example, after you return to the United States, your bank would give you U.S. dollars for your yuan.
Ryan checks the mid-market rate for USD to CNY and finds that it’s 6.94. Let’s compare that to the bank’s rate of 6.81.
- What Ryan’s money is really worth, according to the mid-market rate: $50,000 x 6.94 = 347,000 CNY
- What Ryan’s money is worth when converted by the bank: $50,000 x 6.81 = 340,500 CNY
From the difference in exchange rates, Ryan will lose 6,500 Chinese yuan — or about $937.
Fees
In addition to the exchange rate, Ryan takes a look at his bank’s fee for international money transfers. According to his bank, he’ll incur a $35 fee to send money abroad.
Ryan will be receiving the funds at a Chinese bank, which charges a 220 yuan fee for incoming transfers. (At the mid-market rate, that’s about $32). He factors in this fee as well.
In total, Ryan should expect to pay at least $67 in bank fees.
PRO TIP
Keep in mind that banks on both sides may charge additional fees for handling your international money transfer. Check with the banks to confirm what those fees might be. Also, confirm the details of your transfer before approving it.
Overall
After all is said and done, Ryan’s transfer through his bank will cost $937 (what he loses on the exchange rate) plus the $67 in fees assessed by his banks. That’s a total of $1,004.
With that in mind, Ryan’s $50,000 less the exchange loss and fees would be worth $48,996 on arrival in China.
Back to topOption #2: Forex
The next option Ryan considers is forex. It sounds scary at first, but he learns that it’s a pretty simple concept.
Forex is also known as foreign exchange. You’ve likely exchanged money on the worldwide forex market before: When you travel to another country and exchange your cash for local currency, you are buying the local currency with your U.S. dollars.
Forex for international money transfers: How it works
With forex, the transfer process is very similar to what happens through banks:
- You transfer your funds to a money-transfer provider (like OFX).
- The provider converts your currency.
- The provider transfers the new currency to your overseas bank account.
The main difference you’ll find between money-transfer services and banks is the exchange rates they offer. Many money-transfer services also don’t charge fees on transfers.
Ryan’s forex calculations
Ryan is looking at a money-transfer service that offers no fees and an exchange rate that’s close to the mid-market rate. He’s able to get a rate of 6.83, meaning he can trade $1 and get 6.83 Chinese yuan in return. Ryan does the math:
- What Ryan’s money is really worth, according to the mid-market rate: $50,000 x 6.94 = 347,000 CNY
- What Ryan’s money is worth when converted by the money-transfer service: $50,000 x 6.83 = 341,500 CNY
Not including any bank fees Ryan might incur for transferring or receiving money, Ryan’s money would be worth about $49,239 on arrival in China.
Back to topOption #3: Peer-to-peer money transfers
Finally, Ryan considers peer-to-peer (P2P) money-transfer services. These are services that match individuals who want to trade currencies.
For example:
- You want to convert $1,000 into Chinese yuan.
- On the other side of the world, someone wants to convert Chinese yuan into U.S. dollars in the same amount.
A peer-to-peer money service matches you and the other individual interested in converting cash. The service charges a fee for facilitating the exchange, and you “trade” currencies with the other individual. The converted currency is soon be transferred to a bank account of your choice.
Ryan’s calculations for peer-to-peer money transfer
Ryan looks into making a P2P transfer. He wants to convert his $50,000 to Chinese yuan, and it just so happens that someone else is offering U.S. dollars for the same amount.
- What Ryan’s money is really worth, according to the mid-market rate: $50,000 x 6.94 = 347,000 CNY
The P2P service charges a flat fee of 0.7% for the transaction. Then, it converts Ryan’s currency at the mid-market rate (1 USD = 6.94 CNY).
- Ryan first calculates the fee (0.7%, or 0.007 on a calculator): $50,000 x 0.007 = a fee of $350
- That leaves him with: $49,650
- Now, here’s what Ryan’s money would be worth when converted through the P2P service: $49,650 x 6.94 = 344,571 CNY
Not including any bank fees Ryan might incur for transferring or receiving money, Ryan’s money would be worth $49,650 on arrival in China.
Back to topWhat about bitcoin?
If you care to stick around for a long calculation … welcome to bitcoin. (Skip ahead to the next section for the summary.)
Bitcoin can be pretty complex, so we won’t cover all of its intricacies in this article. (Check out this guide to learn about bitcoin). To start, we’ll just say bitcoin is a digital currency, and it holds value just like dollars and euros do.
Bitcoin for international money transfers: How it works
| The basic process for transferring money overseas through bitcoin is: |
|---|
| You transfer funds to an online bitcoin platform (like CoinJar). |
| You use your local currency to buy bitcoin, which goes into your digital bitcoin wallet. |
| You sell your bitcoin for foreign currency. |
| You withdraw your funds from the bitcoin platform. |
| With each step, you may encounter fees to: |
|---|
| Transfer fiat currency (or government-regulated currency, like dollars and euros) to your online bitcoin platform. |
| Buy bitcoin. |
| Convert your local currency to bitcoin (it may be converted at less than the mid-market rate). |
| Sell your bitcoin for fiat currency. |
| Withdraw your currency. |
Other fees depend on the bitcoin platform.
As you can see, there are quite a few places where fees can be assessed. Understand all of the fees for your bitcoin transactions and do the math before proceeding.
Ryan’s bitcoin calculations — and a lot to digest
Using a service like BPAY, Ryan would make a $50,000 deposit to an online bitcoin platform. Ryan finds a platform that offers no fees for BPAY deposits.
Ryan looks at the exchange rate from U.S. dollars to bitcoin (XBT). Let’s say it currently stands at 1 USD = 0.0013 XBT.
- What Ryan’s money is really worth, according to the mid-market rate: $50,000 x 0.0013 = 65 XBT
Ryan needs to factor in the 1% fee the bitcoin platform charges for buying bitcoin.
- Ryan calculates the fee (1%, 0.01 in a calculator): $50,000 x 0.01 = $500. This fee is added on top of Ryan’s original amount of currency. We’ll factor this fee into our calculations at the end.
Through the online bitcoin platform, Ryan gets an exchange rate of 1 USD = 0.0012 XBT.
- When converting through the bitcoin platform, this is what Ryan’s $50,000 is worth: $50,000 x 0.0012 = 60 XBT
Now, Ryan needs to sell his bitcoin for Chinese yuan. He needs to factor in the 1% fee the bitcoin platform charges for selling bitcoin.
- 1% fee (0.01 in a calculator): 60 XBT x 0.01 = 0.6 XBT
- That means he’s actually selling: 60 XBT – 0.6 XBT = 59.4 XBT
Through the online bitcoin platform, Ryan gets an exchange rate of 1 XBT = 5,381 CNY.
- When converting through the bitcoin platform, this is what Ryan’s 60 XBT is worth: 60 XBT x 5,381 = 322,860 CNY
Good News:
Withdrawing the funds from the bitcoin platform comes with no fee.
Lastly, we need to factor in the $500 fee for buying bitcoin that we calculated at the beginning.
- After subtracting the $500 (or 3,468 Chinese yuan) fee, this is what Ryan’s 322,860 yuan is worth: 322,860 – 3,468 = 319,392 CNY (or about $46,052)
Not including any bank fees Ryan might incur for transferring or receiving money, Ryan’s money would be worth $46,052 on arrival in China.
Back to topComparing all of the options
After looking at the various options, these are the calculations Ryan made for how much his $50,000 would be worth in China:
| Peer-to-peer money transfer | $49,650 |
| Forex | $49,239 |
| Bank | $48,996 |
| Bitcoin | $46,052 |
Here’s how much each transfer option would cost him:
| Peer-to-peer money transfer | $350 |
| Forex | $761 |
| Bank | $1,004 |
| Bitcoin | $3,948 |
So, what does Ryan choose?
To Ryan, peer-to-peer is the cheapest option. On the other side of the spectrum, the bitcoin and bank choices are quite a bit more expensive. In the end, Ryan chooses peer-to-peer, the lowest-cost option by his calculations.
Ryan transfers his money and hops on a flight to China. When he lands in Shanghai, he checks his Chinese bank account and sees that his money has arrived safe and sound.
It’s been a successful international money transfer for Ryan. Now it’s time to buy that apartment he’s always wanted.
Back to topPicture: Shutterstock
