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Banks charging what they like on money transfers

Published on 29 June 2017 in News - Pages by Raffick Marday

In an article appearing in the Guardian, when in January this 2017 senior Santander executives assembled in the principality of Andorra, the group's “innovation director” warned that a big part of its profits was facing risks. This was due to the fact that stimulus margins it earns on money transfers might be whittled down by new competitors.

Leaked Document Reveals Profit Margins

The documents which support the claims have now since been leaked to the Guardian Money, and they indicate that Santander made some €585m from money transfers. This is equal to almost one-tenth its €6.2bn 2016 global profit. Santander charges 6 times as much as competitor TransferWise for sending from the UK to Spain £10,000.

What these documents reveal is the amount the big banks make from providing clients poor exchange rates, and with a big chunk of their profits originating from the so-called “FX” margin, as opposed to the fees charged directly. The FX-or foreign exchange-margin is described as the difference between the available exchange rates in the money markets, and the rate which a bank provides a client.

High street banks charges for overseas money transfers

New Entrants Having a Slice
In a warning that was flashed up on screens, the executives were told that 10 percent of Santander’s profits face potential risk if international transfers repricing happens. They were also informed that while TransferWise, which is a relatively new entrant in the currency transfer business market was charging its clients €64 to transfer from the UK to Spain €10,000, Santander, on the other hand, charged €394. This is 6 times as much. The start-ups are attacking profitable slices of its currency transfer market if it charges similar amount as TransferWise, its stream of revenue might collapse from a massive to €95m, representing a fall of 84%, according to the documents.

The exact breakdown of figures indicates that the group made from FX margin €163m it earns from the normal fee. Also, it reveals that, when transmitting money abroad, there’s another stream of revenue which a bank may earn, known as “correspondent banking”. In Santander’s case, it is worth €132m since the bank must hold less capital because of its transfer business.

The bank doesn’t deny the documents’ authenticity. However, it says it charges are explained clearly, and are in line with other banks, adding that the documents may be misread easily.

huge profits earned by big banks on overseas money transfers

Reaping Big From Clients?
It says the document is only for illustrative purpose and shows revenue ( and not profit) made by the group via international money transfer ( or IMT) from all commercial and retail business worldwide. Less than 10 percent of its international transfers are made in the UK alone, it says.

The statement adds that the slide is proving the point that their profits would reduce by 10 percent if clients ceased doing IMTs with the bank and all other factors like costs remain constant, adding that this is a wholly hypothetical scenario and that, of course, in reality, this would never be the case since their costs also would reduce were this to occur.

It’s not saying, it went on, that their profits came from IMT because that would entirely ignore the costs they incur when they provide the service. The costs include operating their international branch network from where a large number of their clients choose to visit to make a transfer.

But these figures are likely to stoke fresh debate and controversy over the extent to which clients are being overcharged by the traditional banks when they are sending money overseas.

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