Small businesses are “ignorant” of how much overseas money transfers cost, a new study has found, as banks are accused of hitting companies’ profits with hefty “hidden” foreign exchange fees.
A survey of 565 senior decision makers in small businesses with less than 50 staff found that more than 80% didn’t know the true cost of foreign exchange through their banks, which charge between 3% and 6% for money transfers.
Directors of small financial services firms were even less likely to correctly identify the correct costs of money transfers through high street banks than their counterparts in other sectors.
Taavet Hinrikus, co-founder of money transfer site TransferWise, which commissioned the research, said: “When even financial services firms don’t understand the true costs of international money transfers, what chance has the average entrepreneur got?
“The fact is, the hidden foreign exchange fees charged by banks are hitting companies’ hard won margins. Six in every ten small businesses mistakenly believe their bank charges less than 4% for processing international payments. The real cost is higher than they think, and ultimately is eating away at their profits.”
Almost half (43%) of the respondents said they would find international trading more attractive if foreign exchange fees were more transparent and easier to understand, the research revealed.
This figure was even higher among manufacturing and technology businesses: 54% and 58% respectively said they would find overseas work more attractive if foreign exchange was transparent.
Only one in four (27%) senior decision makers said they thought UK banks make it “clear” how much bank charges for handling overseas money transfers.
Mr Hinrikus added: “Two years ago, the Office of Fair Trading told banks to make their fees for overseas transactions easier for consumers to understand by clearly showing them all the charges that apply. They need to do the same for small-business owners. Banks are making it almost impossible for small businesses to understand overseas money transfer costs.”
TransferWise, which was founded by Mr Hinrikus, a former Skype director, and consultant Kristo Käärmann in 2010 and provides a ‘peer–to–peer’ service which bypasses the traditional international bank payments system and directly matches consumers and companies in different countries who want the opposite currency. This means it can offer significantly cheaper and more transparent money transfers – just 0.5% of the fee being transferred, while banks charge between 3% and 6%.
Following a recent $6m (£3.9m) investment from Peter Thiel, the co-founder of PayPal and influential Silicon Valley venture capitalist, TransferWise is transferring more than £1m a day for consumers and small businesses.
TransferWise has also launched a new ‘pay button’ service to allow freelancers and small companies to cheaply and easily invoice and receive payment from overseas clients. For more information, visit: https://transferwise.com/blog/tagged/pay+button