What is the best way to pay for transactions in foreign currency? Is it best to use a foreign exchange broker? Should you use a service that charges a percentage of the cash sum or just stick to your bank’s flat conversion fees?
If you’re sending money overseas, there’s a good chance that you’ve asked yourself at least one of these questions. With so many options on the market, finding the best obtainable exchange rates can be a daunting task.
To help you navigate the costs and potential savings of different foreign exchange services, we’ve put together a comparison of the fees involved in some of the most popular foreign currency payment options.
What are the Costs of Paying in Foreign Currency?
The main costs when paying with a foreign currency are foreign exchange margin, currency conversion fees, and everyday transaction fees. The foreign exchange margin, or spread as it is sometimes called, is the difference between the exchange price (i.e. the exchange rate) and the spot price. Currency conversion fees are an additional cost levied by providers to cover the service and infrastructure expense of converting your home currency to a foreign currency.
Of course, depending on your provider, all of these costs can vary depending on whether you’re making a large lump sum payment or small, recurring transactions.
To give you a better idea of how foreign exchange rates compare across providers, we’ve put together a brief breakdown of the cost of paying with foreign currency for PayPal, Skrill, debit card payments, point of sale (POS), and banks
- PayPal
PayPal is a popular online payment service that allows you to send and receive money, pay for goods online, and pay bills. When sending a payment overseas, customers will need to account for PayPal’s foreign exchange rate mark-up (usually 3.00% above the wholesale exchange rate). If you need to account for the currency received fee, you’ll also need to factor in PayPal’s fixed fee for personal transactions (i.e. 0.30 USD for receiving American dollars).
- Skrill
Skrill is a digital wallet that allows you to send and receive money, make online payments, and send money overseas. Skrill transactions requiring currency conversion are subject to a 3.99% hike on the wholesale foreign exchange rate. An additional exchange rate mark-up fee (up to 4.99%) applies to international transfer transactions.
- Debit Card Payments
Debit cards are a simple and speedy way to exchange a foreign currency when shopping online or traveling overseas. Unfortunately, this convenience often comes at a steep price. While specific rates will vary between debit card providers, you can expect to pay a 3.00-4.00% fee on the overall foreign currency transaction value. If you’re making a large purchase in a foreign currency, this can quickly add up to a significant amount.
- Point of Sale
Foreign currency payments can sometimes be processed at POS vendors. This is especially common at airport currency exchange kiosks and popular tourist stores. Unfortunately, because of their high overheads and lack of independent payment infrastructure, these vendors often charge a very high foreign exchange rate mark-up and excessive currency conversion fees.
- Banks
There are advantages and disadvantages when using a bank for a foreign currency payment. Because banks typically set and use wholesale exchange rates, they can generally offer a narrower foreign exchange spread than POS vendors or international payment providers like PayPal and Skrill.
However, banks also have a reputation for saddling foreign exchange transactions with a ton of administrative, conversion, and account-keeping fees. If you’re thinking of making a foreign currency payment through a bank, make sure to do your research to avoid paying more than you need to.
How do Foreign Exchange Brokers Compare?
Foreign exchange brokers are an increasingly popular alternative when it comes to making cost-efficient foreign currency payments. Because brokers are effectively a dedicated foreign exchange service, you can usually shop around to find bank-beating exchange rates.
While currency conversion fees will depend on the size of your foreign currency payment and the currency you’re exchanging to, you can typically expect a broker to offer exchange rates as competitive as, or better than, those offered by banks.
To further sweeten the deal, foreign exchange brokers can support significantly more currencies than banks or money transfer providers, often offering 100+ currencies and currency trading pairs.
The Bottom Line
If you’re planning to make a foreign currency payment, you need to do your research. Foreign exchange rates fluctuate frequently, so make sure to shop around for the best possible exchange rate.
If you’re looking for a cost-effective alternative to your bank or online services like PayPal, a foreign exchange broker may be a good choice for you. No matter what provider you choose, make sure to weigh your options carefully and be mindful of the potential for high foreign exchange mark-ups and unnecessary fees.
