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Beware of currency mark-ups in international fund transfers – Mint


In the past few months, banks have refined their online platforms to make outward remittances as simple as transferring funds to someone within India. Kotak Mahindra Bank, for example, recently enabled outward remittances on its mobile banking app. It’s the first bank to do so.

Even the RBI is evaluating new technologies via its regulatory sandbox. It has accepted entries from fintech firms working on new tech in the remittance space. You can also use newer companies such as Transferwise, which charge a fraction of what banks do.

There is a difference in regulations and charges when you receive money from another country than sending funds abroad. The RBI tightly controls outward remittances.

When sending money to another country, a person can use banks’ online platforms only if the transfer is under the liberalized remittance scheme (LRS). The scheme allows an individual to make international transfers only for specific purposes. You can freely send up to $250,000 in a financial year under the LRS for maintenance of close relatives, education, medical treatment, emigration, employment, investment, gift or donation and travel.

But if you are making a transfer online under the LRS, there is a cap of $25,000 each FY. Some banks could have restrictions on the daily transfer amount. For higher amounts, the sender needs to visit the branch.

For commercial transfers such as payment to freelancers, you first need to submit the required documents at a bank’s branch.

But if you are buying goods online from another country and paying using your card, you are free to do it without paperwork. It’s the card company and the merchant that have to fulfil the government’s regulations in such cases.

Inward remittances are not as tightly controlled. The sender can use any service as long the money is coming into the bank account. For inbound transfers, most banks don’t charge a fee. However, they have a forex mark-up. It is the difference between the prevailing currency exchange rates and the bank’s rates.

For example, if the exchange rate for $1 is 72.55, the bank would convert it at, say, 71.85. If the sender transfers $100, the beneficiary should receive 7,255 based on the exchange rate. However, due to the forex mark-up, the beneficiary gets 7,185—a difference of 70. On a smaller amount, the mark-up may look small. But on higher amounts, the difference is significant.

The remittance charges are high due to costs that banks incur. “They use the traditional transfer mechanism called SWIFT, wherein they have to park money with foreign banks in Nostro accounts. If someone from India sends money to the US, the bank there will deduct money from the Nostro account. That money depreciates due to exchange rates and doesn’t earn any interest, which is a cost to the bank,” said Navin Gupta, managing director of South Asia and MENA, Ripple.

Ripple is an alternative service to SWIFT that banks use for international money transfers.

You can send money on banks’ remittance platforms or via net banking websites. You need to add a beneficiary to the bank account and transfer funds.

As of now, only Kotak Mahindra Bank has outward remittances via its mobile app. “When some of our customers were stuck abroad due to covid, they had requested for such a service,” said Phani Shankar, president and co-head – treasury and global markets, Kotak Mahindra Bank.

The bank charges 1,180 (including taxes) irrespective of the transfer amount. There are also forex mark-up charges. There is no minimum limit—the sender can transfer as low as $1.

Most banks charge a fee in the same range. Customers need to watch out for the forex mark-up. “If you consider overall charges, including forex mark-up, a sender will end up paying 2-4% of the transfer amount through banks,” said Sudarshan Motwani, CEO and co-founder, BookMyForex.

But these charges are for popular currencies only. Most Indian banks have a list of 16-20 currencies where these rates apply. According to Motwani, if a person is sending money to, say, a small country in Africa, the charges would be much higher as multiple banks are involved.

In some cases, using platforms other than banks could work out cheaper even though they use the same banks for remittances. However, as they transfer larger amounts, banks offer them lower mark-ups. Take an example of someone who wants to transfer 1 lakh to the US. When writing this, Transferwise charged 72.56 for $1 and 2,283 in fees and taxes. The receiver would get $1,347.

On BookMyForex, the dollar rate was higher, at 73.05, but the fee and taxes were 446. The receiver would get $1,363.

Bigger private banks were charging 73.44-73.97, and the fees were upwards of 800.

Non-bank platforms could offer a better forex mark-up but may charge a higher service fee. Before you remit money abroad, look at the service fee as well as the forex mark-up. Once you add up the two, it will give you a clearer picture of which mode is cheaper.

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