International payments complete a complex and often long journey to make way to their required destination. In fact, more often than not, you could reach your destination by plane faster than your payment arrives. The payment’s journey will be safe and secure but inevitably slow and pricey. In some cases up to five different banking counterparties could be involved, each skimming an intermediary or beneficiary bank fee in the process. In this article we break down exactly why this is and some of the tricks implemented by specialist international money transfer providers to avoid paying the often unnecessary Recipient fees.
**Before reading on, it’s worth pointing out that in almost all cases a specialist international money transfer provider will provide a lower and more transparent fee structure than regular banks. Try out some of our best rated money transfer services who will provide a clear indication on fees you could incur before initiating the transfer.**
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Domestic vs International Payments
First, to understand the difference, let’s look at how a standard domestic payment works.
When making a local payment between banks in the same country, each bank is required to have joined that country’s local payment networks. For example, in the UK, there are a number of payment schemes (BACS, CHAPS, Faster Payments) and the Bank of England acts as a settlement agent for these schemes to enable financial institutions to make payments to each other. Therefore the two banks will have an established relationship so transfers between the accounts can be made directly, just like the example below where Baz with a Barclays account is looking to transfer £250 to Dave’s HSBC account .
- Baz submits £250 to Dave via Barclays Internet Banking.
- Barclays take the instruction and credit their designated bank account held at HSBC with £250.
- HSBC credit Dave’s account with £250.
Just as you or I are required to go through an onboarding procedure when registering for a new bank account for compliance purposes the two banks should have conducted an onboarding procedure for each other when they opened a settlement account for the other. There are no intermediary bank fees to incur in the payment process and there should be no beneficiary bank fee applied to the customer.
But what about a US dollar payment from a bank account held by a domestic UK bank to a domestic Singapore bank account? If both banks are only domestic providers to their own market then the chances are they will both have a relationship with a correspondent bank who manages international payments on their behalf. If these are different banks then that’s four banks added to the equation. If these two international correspondent banks don’t have a direct relationship? Then a final intermediary bank can be found who does have a direct relationship with both of these intermediary banks. Taking our total to FIVE banks involved in the wire process. More on this with an example later.
It’s also worth considering that international wire transfers must be cleared in the country the currency represents too. The US dollar is the world’s premier reserve currency and it is used as a settlement currency for international payments all over the world, all the time. Factor in that all international payments in US dollars have to be settled through the US, and we’re looking at three different countries involved in this transaction with different settlement schemes in each country.
SEPA & SWIFT
There are two major international wire networks, one specific to Europe and one global network – SEPA and SWIFT.
- SEPA stands for the Single European Payment Area. A common banking network and system of shared guidelines for 34 European countries, including the 27 EU member states. It’s specifically for euro transfers and ensures all international banks of these 34 countries are connected to the network. For those who don’t have direct access they are required to be part of an established network of larger intermediary banks. Payments are settled through the European Central Bank and transfers work similar to domestic transfers. Standard SEPA transfers allow for up to one day for funds to arrive while SEPA Instant Credit Transfers are near-instantaneous.
- SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications and has been the globally recognised payment network since the 1970’s. It’s payments routed via SWIFT that are often the most costly and slow.
The Cost of Recipient fees on International Transfers with SWIFT
Intermediary and Beneficiary Bank Fees are EXPENSIVE
The SWIFT platform allows banks from virtually all over the world to send messages between each other in a standardised and secure manner. Various types of messages can be sent, such as the end of day balances on your account and a request for funds transfers. The issue lies because SWIFT will not automatically process transfers. Banks will connect their own software to the platform, often with many manual processes still involved in the processing of a payment. Funds are settled through a number of banks who are unlikely to be willing to offer a service for free.
You can imagine the grand plans the pioneering founders of the SWIFT network had almost 50 years ago with an attempt to financially connect the world but you have to wonder if SWIFT has kept pace with the times.
Now let’s look at the example where up to five different banking counterparties could be involved and Baz is looking to make a $250 US dollar payment to Dave, based in Singapore.
- The UK domestic bank A has no relationship with Singapore domestic bank B so sends funds to its bank account held with its normal correspondent bank that it commonly uses for payments to Singapore.
- The UK correspondent bank A receives funds into their account for Domestic Bank A. It holds no relationship with the Singapore correspondent bank B, therefore it must send funds via an intermediary bank that holds a relationship with both. For assisting domestic bank A, the correspondent bank takes a $3 fee.
- Intermediary bank receives funds into its account for Correspondent Bank A and holds a relationship with Correspondent Bank B so sends funds onwards. For processing it charges a $5 fee.
- Correspondent Bank B receives funds into its account held specifically for the intermediary bank and sends funds onto the domestic Singapore Bank, charging a $3 fee.
- Finally, domestic bank B in Singapore receives the funds in its account held with its Singapore correspondent bank and transfers this to Dave’s Account. For receiving an international payment the domestic bank charges a $2 processing fee.
In total there are $13 in charges meaning Dave only actually receives $237. What’s worse, the nature of the correspondent and intermediary banking model means it can be difficult to know exactly what fees will be incurred too. Each intermediary bank will have its own set of fees and different intermediary banks will be used depending on the currency/country payment destinations. They’re likely to have different fee structures for different banking counterparties as well.
How Do Specialist International Money Transfer Firms Escape the Intermediary and Beneficiary Bank Fees?
The answer to this one sounds straightforward – minimise the amount of intermediary banks involved of course. But in practice this will not always be possible. Their preference for making your international payment would be as follows:
- If you’re sending money to another customer on their platform, process the payment themselves. Many of the major IMT providers have developed a complex payment network for payments made within their own ecosystem. A distributed ledger would work to real time exchange rates and transfer money instantly. WorldFirst, Revolut and Western Union all offer this if payments are made to another digital account they hold.
- The IMT provider holds a local account in both the sending and receiving country. The firm will allow you to send funds to a local account they hold, thus keeping payments to a minimum on your behalf and then dispatch currency from an account held in the destination country, minimising the receiving bank fees. The chances are the IMT provider will still incur payment costs through this route but may be more likely to waive them for their client.
- Ensure your payment gets sent via the most efficient delivery method possible. As SEPA is a standardised European settlement network that brings down costs then in almost 100% of cases your IMT provider will route your payment via SEPA if it’s a Euro payment to one of the 34 designated countries.
- Send via SWIFT. Although the International Money Transfer firm should have strong working relationships with its major banking counterparties. If the IMT company provides a bank with a lot of business it might be possible the bank absorbs the intermediary bank fees on behalf of its client.
There are a whole multitude of methods the best rated international money transfer firms can look to reduce the payment fees involved with an international money transfer, it’s in their best interests to reduce their own international payment fees after all. Their main objective will be to drive clients to their cheapest delivery method as well of course – within its own ecosystem. The largest international money transfer provider in the UK Transferwise now holds over £1billion in borderless account deposits with customers able to seamlessly send money internationally between each other. So however the payment is sent, if you’re looking to make an international money transfer soon it’s best just to be sure you’re aware of as many, if not all of the payment costs upfront before agreeing to the transfer.