Sending money abroad – Are you being cheated?
Sourab Singh’s entire family was pleased as punch when he broke the news - he’d gotten into one of the top universities in the USA. The entire family was thrilled and a little anxious at the same time. The thought of sending their son to a completely different country was daunting.
As the preparations began, the first task on the list was paying the tuition fees. Sourab and his family were clueless about how to go ahead with it. They had never sent money from India to the USA.
When Mr. Singh asked for help, their neighbor suggested that they use a local money exchanger’s services. Without any research, they agreed and went ahead with the procedure to send money from India to the USA through the local money changer.
The money went through and the task was ticked off the list. However, they were absolutely clueless about what they had ended up paying for this ‘easy’ foreign money transfer service.
All he knew was that he had to pay $30,000 in tuition fees. He had no idea what this amount translated to in INR. The money changer asked for INR 22.46 Lakhs and Mr. Singh paid up without thinking twice (See break-up below)
Not knowing that he was paying a mark up of Rs.51,000.
How could he have known? He was neither aware of websites like XE.com (helps checking live foreign exchange rates) nor was he an FX trader. When the USD/INR rate was 72.30, he was actually charged 74, that is ~2.5% higher.
Sadly, this is the state of most Indian parents sending money abroad. The mark-up varies based on how ill informed the consumer is.
This is the case both with neighborhood money changers and banks. The worst part - these fees are not always discussed upfront and most customers are unaware of it. These fees can sometimes be as high as 3%-4%.
Considering the advancements made in domestic payments, international money transfer from India is still stuck in the rut. To fill this gap between domestic and international payments, newer, cost-effective methods of sending money abroad are being introduced.
Before we dive into the details about the newer, cost-effective methods, let us understand the different ways we can do a foreign money transfer.
There are two instruments which you use to transfer money abroad:
Foreign Currency Demand Draft is physical paper drafts that can be carried physically to an international destination or mailed/couriered to the beneficiary abroad. These drafts can also be encashed at a correspondent foreign bank with which the issuing bank has an agreement.
How Long is a Foreign Currency Demand Draft valid for?
As per the RBI guidelines, a foreign currency demand draft’s validity is for 3 months from the date of issue. After the third month, the foreign currency demand draft has to be revalidated upon written request to the issuing bank. You can revalidate it only once a year. After a year, the foreign currency demand draft is canceled by the bank and a new one is issued after paying the fees associated with the process.
Wire transfers are money transfers that take place between two banks. In a wire transfer, the money from the sender is directly transferred to the beneficiary’s bank account abroad. Wire transfers are known as the most convenient way to send money internationally. This method is probably the most secure and hassle-free way to send money abroad. Wire transfer is also referred to as Telegraphic transfer.
Wire transfer and demand drafts are two different ways to send money abroad. Now, let's look at the various players in the field:
Using banks to send money abroad is a safe method. With the increase in the use of technology, you can now make an international money transfer online and also by visiting the branch. Even though banks are a secure and convenient way for International money transfers, their charges are high and a majority of them expect a branch visit for physical verification. Something that is neither convenient, nor recommended during COVID-19 times. Typically, the paperwork involved is also quite extensive resulting in a very poor user experience.
Money exchangers that have an AD-II license are authorized by the Reserve Bank of India for carrying out money changing activities like currency exchange and international fund transfer. Transferring money abroad through a money exchanger can be very expensive. AD-II license holder entities are eligible for remitting payments which fall under ‘Current Account’ transactions and are typically transactions such as college fees payments, maintenance of close relatives abroad, medical expenses, etc. Business-related transactions typically categorized as ‘Capital Account' transactions are routed by the money changers through an AD-I license holding bank.
These service providers may or may not be regulated entities. They typically work as funnels or lead generators for AD-II and AD-I banks. When you use local money exchangers for international fund transfers, you end up paying very high fees. This is because there are many middle men involved in the process.
The online services provided by financial technology – or ‘FinTech’ – companies are different and more cost-efficient compared to the other facilitators. Some offer low exchange rates while others don’t charge a transfer fee. The time in which the money is delivered may also vary. Regardless of their USP, they offer the ease, convenience, and security that no other channel of transfer does.
To combat the fees charged by Indian banks, these services use technology to cut down costs and pass the money saved back to the customers in the form of lower fees. The process to send money abroad through fintech companies is simple - register on the website and conduct a digital KYC. Once verified, the user can enter the beneficiary bank details and proceed to make an online international money transfer.
FinTech companies provide transparent services making it easy for you to find out how much the international money transfer from India would cost you in advance. These companies typically work in collaboration with RBI approved AD-I license holding banks and hence have an ideal mix of the convenience and agility of a new-age company and the security and reliability of the bank.
In the COVID-19 times, these services have picked up a lot of prominence due to the contactless and paperless nature of their transactions. Due to the efficient technology process established by these companies, the exchange rates provided are also very competitive.
International money transfer providers charge various fees that the users are not informed about. Learning about the various charges involved in sending money abroad will give you a better understanding of what you are paying.
A markup fee is an amount that international money transfer service providers charge their customers when a foreign currency transaction is made. This is the difference between the interbank rate (or purchase price) and the exchange rate offered to the customer. Markup fee is also known as ‘currency conversion fees’. So, you must do your research before choosing who you use to send money abroad.
Transfer Fees/Bank Fee refers to any charges imposed by financial institutions on their customers for routing the money to an international beneficiary. Traditional currency transfer service providers charge a transaction fee for every international fund transfer.
A Nostro account is an account that banks use for holding foreign currencies. For example: an Indian bank opens an account in a foreign bank (say: JP Morgan) to route all its $ transaction through. In this case, the foreign bank is the facilitator bank. In short, Nostro accounts help in simplifying the process of settlement of the foreign currency transaction.
When we send money abroad, banks process the transaction through their Nostro accounts. They charge the users a Nostro charge for facilitating this transaction. Nostro charges may vary between $15-$30 per transaction.
GST on an international money transfer from India is determined by the value of supply. As per GST Act 2017, the invoice value is the taxable value and the tax is computed as a percentage of the value of goods and services. However, for some businesses, the GST Act prescribes different valuation rules. The tax rates are as follows:
Let’s recall what happened with Sourab - He had to send $30,000 from India to the USA. The money changer asked for INR 22.46 Lakhs and Mr. Singh paid up. He paid a markup of Rs.51,000. When the USD/INR rate was 72.30, he was actually charged 74, that is ~2.5% higher.
Had Mr. Singh used a Fintech company's services to send money from India to USA, he would have paid way lesser fees. Let us have a look at the difference between the fees charged by fintech companies like HOPRemit and other wire transfer service providers:
|Money Transfer Service|
|Other International Money Transfer Providers (Rs.)|
|Markup Fee||6,000 (Rs. 0.20 per $)||51,000 (Rs. 1.70 per $)|
(For e.g. Intermediary bank charge)
|Total Fees for sending 30K USD||13,525||77,200|
INR 63,675, that’s a huge difference, right?
Now that you know how international money transfer providers cheat their customers, stay informed and always compare the prices before choosing a provider for your foreign money transfer.
HOPRemit is designed to send money abroad in a paperless, presenceless and convenient manner. Complete international money transfer online with ease and confidence – offering low cost and speed of a FinTech and the peace of mind and security by being backed by a global bank.
HOPRemit offers real-time exchange rates and provides a full breakdown of the costs, so nothing’s hidden! With HOPRemit, all of this information is available upfront so that you have a clear understanding of the total cost of your international money transfer.
Once you’ve set up your HOPRemit account, just enter the amount you would like to send, the recipient’s bank details, and currency. When this is done, HOPRemit shows you the exchange rate and fees before confirming your transaction. Also, if you have any doubts, our support executives are available 24*7 to help you via call, chat, or WhatsApp. Head to https://moneyhop.co/send/ for more information.
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