The government pledged transparency in international payments, but there is no sign of action.
In 2009, Kevin McDermott asked his bank why there was money missing each time one of his Australian customers paid him. The business owner could never have guessed then that such a straightforward question would prompt a Kafkaesque exchange with the high street lender.
Eight years on and despite the intervention of his MP, countless calls and letters and an apology from Lloyds for its “poor service”, Mr McDermott is still far from satisfied.
The entrepreneur behind Biofresh UK, a Hampshire-based sanitary products company, simply wanted his bank to explain why there was a £12 discrepancy in every payment he received from his overseas customers.
In a 2012 letter optimistically called a “final response”, Lloyds said that the charge was its fee for accepting an international payment, but it had taken the “commercial decision not to provide this information on statements”. It added that it did not pay tax on the fees.
Various, conflicting explanations have followed. Mark Hoban, Mr McDermott’s former MP, wrote to António Horta-Osório, Lloyds’ chief executive, saying that the bank’s first formal response made “little sense”. Lloyds responded that in fact it wasn’t making the £12 deductions after all. It suggested that the Australian banks used by Mr McDermott’s customers might be deducting a “sender’s fee”.
Yet when he asked his customers to make up the shortfall by paying more so that he could receive the correct amount, £12 still went missing. The Australian banks also produced invoices showing that the correct amount was being sent after their fee, meaning that the money was disappearing somewhere else in the process.
In 2013, Lloyds said that “we should also have made it clear that there are no relevant tax implications because we have not made any charges”. Remarkably, that wasn’t quite right, either. The bank’s own website says that it charges £7 for receiving more than £100 from overseas.
After The Times intervened, Lloyds said that Royal Bank of Scotland had taken the £12 as a handling fee for its role as a middleman in some transactions, known as a “correspondent bank”. Where an overseas payment was made directly to Lloyds, it said that it charged £7.
It is not only Lloyds’ business customers who are exasperated by foreign exchange, however. Charles Roberts, chief operating officer of RVB Currency, a foreign exchange company, says that bank fees are wilfully opaque across the board and provide the client with only “the minimum necessary information”.
The lack of transparency partly stems from the inherent complexity of currency exchange, he argues. “Sending US dollars to Germany means that [money] goes from the UK through the US to Germany,” he offers as an example. When a “correspendent bank” acts as the middleman, it can be difficult to establish who in the chain made a turn from the transaction.
According to Ian Hughes, chief executive of Consumer Intelligence, a specialist banking market research agency: “Imagine your money is travelling along a global toll road. Some providers will take a little nibble out of your money along the way. Then when it arrives at the other end, some banks will also charge a fee just to receive money from a foreign bank.”
There is competition from a new crop of non-bank foreign exchange players, such as Transferwise, which claim to provide a much cheaper and more transparent service. Nevertheless, traditional banks still have 95 per cent of the small business currency market, according to Covercy, a money transfer start-up aimed at small companies.
A study last year by Accourt, a payments consultancy, found that small and medium-sized companies were being charged £4 billion in “hidden” international money transfer costs every year. Money Mover, the currency transfer business that commissioned the research, says that the vast majority of this is concealed in the exchange rate. Lenders add a margin to the exchange rate they receive from the money markets, known as the spread. This also is not disclosed to customers.
The average total transaction cost charged by a bank to a small business customer on a transfer of £75,000 is 2.43 per cent, or £1,822. Of this, £1,807 is based on the spread, Accourt found. Overall, small businesses will pay between 1.12 per cent and 3.68 per cent of the amount they transfer due to the spread. This is in addition to any upfront fees that banks disclose.
Roger Fenton, chief executive of Travelopo, an online travel agent, says that he switched from Barclays to Transferwise after having “all sorts of problems” with the bank when paying overseas suppliers. These included “delayed payments, missing payments and most importantly it was a case of dreadful exchange rates, high fees and it was very slow. The fees are not transparent, it is really just a rip-off. The banks will get away with it for as long as they can until someone comes along and disrupts the market.”
Mr Fenton says there are signs that this process has begun and that lenders are responding to the better service offered by competitors. Barclays, for example, notes that it reduced its international payment fees last year for all customers.
Yet though the government made an election pledge to end hidden fees on foreign currency, critics say there has been little evidence of action. European Union rules that mandate transparency in foreign currency transactions are being transposed into UK law, but Taavet Hinrikus, chief executive of Transferwise, fears they will be watered down. Indeed, draft regulations that have been released by the government for consultation until March 16 “omit any mention of transparency”, Transferwise says.
“[This] was the perfect opportunity for the government to do something for small businesses, given that the directive states that people should know ‘the real costs and charges’ of transfering money abroad,” Mr Hinrikus says. “The government has chosen to leave this out of the draft regulations, bowing to pressure from the banks. There is time to change the final regulations, but the government must act now. It will mean a fairer deal for the 59 per cent of British small businesses who deal in foreign currency payments.”
The consultation closes on March 16.
Change is paying off for overseas bookings
Punch Maughan, a holiday lettings operator, grew so exasperated with her bank’s approach to foreign exchange that she resorted to asking her guests from overseas to pay in cash (writes James Hurley).
On one occasion, that left the 53-year-old turning up alone for an intimidating handover with a group of French rugby fans. “I was unnerved, but mainly because I’d sold a £1,200 booking and thought they’d stand me up and end up staying in a Travelodge or something.”
When Ms Maughan was paid by her overseas clients for properties in Devon and Wales, she was left confused by a shortfall between what she had asked for and what turned up in her Lloyds account.
“There was a whole lot of jiggery-pokery,” she says. “We always ask for a £300 deposit, but when we received it, there would be money missing. When it came to paying the balance, my customers would have a different idea to me of what I’d already received. We ended up going around in circles.”
Ms Maughan estimates that she saved hundreds of pounds a year by switching to Transferwise, a venture capital-based start-up that claims to be up to eight times cheaper than banks and promises that its fees are transparent. “It is much easier and most importantly it meant we could avoid the embarrassment and irritation the issue was causing.”
Transferwise is one of several start-ups attempting to undercut high street banks and tackle the transparency problem that is synonymous with foreign currency exchange.