I often get this question – are new (or not new) entrants to the person-to-person payments scene, such as Paypal or the emerging mobile phone payment schemes, a threat to the banks?
My opinion is yes – they are. And I was looking for a way illustrate easily and clearly why I think it is so.
That’s why I imagined the following experiment.
I have a bank account in the Unites States. Recently I wired some money to an account in a bank here in Belgium. The sending bank charged me $40 for this. It’s a flat fee, not dependent on the wired amount. I know what SWIFT charges for a message (a tiny fraction of this amount), so you can understand I find this amount … outrageous. BTW, the whole process takes 3-4 business days and there’s no information at all as to its status and progress. Finally, the FX rate that was used was far from the best.
There must be a better way. So the experiment is: use alternative payment options to reduce the transfer fees, and find the best FX rate.
The goals of the experiment are – prove my point that new payment entrants are disruptive to the banks, and also more practically to find a better solution for transferring my hard earned cash.
Chapter 1 – Paypal
I have a Paypal account in the USA, linked to the above mentioned bank account in the USA. I also have another BE based Paypal account, linked to my BE bank account.
Here’s how I imagined this –
Step 1 – I’ll transfer money from my US bank account to my US Paypal account. There’s no information on paypal.com as to the charges for this. The worst case is that this be considered by my US bank as a domestic transfer, for which they charge $25 (yeah, yeah, another outrageous fee). Paypal says this process should take 3 business days.
Step 2 – I’ll send the money from my US Paypal to my BE Paypal account. This should be instantaneous. The Paypal site it is not clear at all as to what the charges will be.
Step 3 – I’ll then transfer the money from my BE Paypal to my BE bank account. Paypal says there are no charges for this, and it should take 3 business days.
Net effect – it may take longer (up to 6 business days) but I hope to save 50% of the charges or more.
Here’s what happened (this particular transfer was done on Sunday, May 27th, at 6pm CET) –
Step 1 – I figured very quickly step 1 is not required. I can just go ahead and send money directly from paypal.com, as my US bank account is linked to the Paypal one – so Paypal directly debits my bank, at 0 cost.
Step 2 – I login to my US Paypal account, and use the “Send Money” option. I enter my BE Paypal email as the recipient, enter the amount, choose the “Personal” option, click in the “payment owed”. Then there is the question of whether I want to send Dollars or Euros. I can let Paypal convert my Dollars to Euros and transfer that. Or I transfer the Dollars and let my bank in BE convert it to Euros. Paypal helpfully provides a currency converter, and it shows €1= $1.2884. I compare this to the exchange rate (for buying Euros) on my BE bank’s site (€1= $1.2983) – the Paypal rate is better so I tell to Paypal to go ahead and convert and send Euros.
Fees pertaining to this step:
– from my US bank to Paypal US: 0
– from my Paypal US to my Paypal BE: 0.5% of the amount transferred. I simulated several amounts, and it seems this fee applies to amounts below €5,000. Above that, they apply a much higher fees (for example, 3.9% for €6,000), I don’t really understand how they are computed. But I never transfer above €5,000, so fine for now. I’m really happy with the 0.5% fee, much lower from the flat bank fee of $40 (as long of course as I transfer below $8,000, or more specifically below the €5,000 limit where another fee scheme applies)
Time elapsed so far: minutes. The amount appears in my BE Paypal immediately.
Step 3 – I login to my BE Paypal account. As it is linked to my BE bank account, I can select “Whitdraw” tab, “Transfer to bank account” option. Enter the amount, click a couple times, easy enough.
Fee for this step: 0. Time elapsed for this step: 3 business days.
Interesting post experiment note:
Two days after I first tried this experiment, I got a call from Paypal on my BE mobile phone (which I have entered when I created my BE Paypal account). They were calling because they have noticed the unusual international transfer activity, and were curious if this would be a repeating pattern in the future. I was impressed by the very pro-active support call.
For transferring money, Paypal is cheaper and faster than an international bank wire as long as you transfer under €5,000. The FX rate is better.
I wonder –
– where does the “magical” $40 bank flat fee come from? Is it something the bank uses to incentivize their customers to use it only for larger amount transfers? If so, why? BTW, domestic wires in that same US bank are charged $25 flat.
– what is the fee structure of Paypal for larger transfers (above €5,000)? Their site is not clear about it.
Conclusions on the experiment so far
The point of this experiment is to show that –
a. banks charge high fees for international transfers, in an opaque process.
b. the new entrants are sort of not attacking (yet) on this business, but you can use them, with a little creativity, to improve it.
c. imagine what’s going to happen when the new entrants start to actually focus on international transfers……..
But – you know the eternal optimist that I am – I think that there’s a way for banks to embrace this rather than fight it. But before that, banks and all of us need to understand exactly what’s happening.
I’m sure there are ways to get better FX rates. And there’s still the 0.5% charge that maybe I can further reduce. So, more experiments ahead.
I want to use some mobile payments schemes – suggestions welcome. Also at Sibos I got to know some other interesting possibilities and companies (such as UKForex), that would perhaps get me a better FX rate.