Revealed: the huge profits earned by big banks on overseas money transfers

[JHan]

sharing because I love a good dig at Santander.

When senior Santander executives gathered in the principality of Andorra in January this year, the bank’s “innovation director” warned that a large chunk of its profits were at risk – because the juicy margins it earns on money transfers could be destroyed by new competitors. The documents supporting these claims have since been leaked to Guardian Money, and reveal that Santander made €585m from money transfers – equal to nearly a tenth of its 2016 global profit of €6.2bn – and that it charges six times as much as rival TransferWise for sending £10,000 from the UK to Spain.

What the documents expose is just how much the big banks are making from giving customers poor exchange rates, with the bulk of their profits coming from the so-called “FX margin” rather than the fees directly charged. The FX (foreign exchange) margin is the difference between the exchange rates available in the money markets and the rate that a bank offers a customer.

In a warning flashed up on screens, Santander’s executives were told: “10% of the group’s profits at risk when international transfers repricing takes place.” They were told that while TransferWise, a relatively new start-up in the money transfer business, was charging €64 to move £10,000 from the UK to Spain, Santander charged €394 – six times as much. New entrants were “attacking the profitable slices” of its money transfer business, and if the bank charged the same as TransferWise its revenue would collapse from €585m to €95m, a fall of 84%.

The precise breakdown of the figures shows that Santander made €290m from its FX margin, or nearly 80% more than the €163m it earns from the standard fee. It also reveals that, when sending money overseas, there is another stream of revenue that a bank earns, called “correspondent banking”, which in Santander’s case is worth €132m. This is because the bank has to hold less capital as a result of its transfer business.

*snip*

Taavet Hinrikus, an Estonian tech entrepreneur, set up TransferWise in 2011 after moving to London to work for Skype, and becoming increasingly infuriated at how much he was being charged to send money home. TransferWise now employs 600 people and claims to have grabbed an 8% share of the UK international money transfer market, shifting £800m a month.

Hinrikus says he was pleased to see Santander namechecking TransferWise in its internal documentation as one of the leading “disrupters” of the current money transfer market, although he says that all the main banks are overcharging.“It’s a massive consumer rip-off, but the Santander document doesn’t surprise me. What does surprise me, is how long they’ve been able to get away with it. This is a major issue – three-quarters of consumers who regularly send money abroad can’t work out the final cost when fees are factored into the exchange rate. Consumers and businesses are losing £5.6bn a year in the UK because of rate mark-ups.”

https://www.theguardian.com/money/2017/apr/08/leaked-santander-international-money-transfers-transferwise

[Ghost Dog]

1. When I still had UK accounts

I would carry cash to Spain and exchange it here, getting a much better exchange rate and lower commission than in UK, in a Spanish Santander branch for example. It seems Santander in UK merely participates in UK banking culture in general: poor service rip-offs.