Choose the Cheapest Way to Send Money Home

[Fairman]

Choose the Cheapest Way to Send Money Home

Scenario: you want to send 500 dollars to a country where the mid-market rate is 1,500 local units per dollar. Three providers: P charges a 5-dollar fee and gives a rate 1.0 percent below mid. Q charges no fee and gives a rate 2.5 percent below mid. R charges 10 dollars and gives a rate 0.3 percent below mid.

Provider P. After the fee, 495 dollars are converted. At mid, 495 dollars is 742,500 units. Less 1.0 percent: 735,075 units.

Provider Q. 500 dollars at mid is 750,000 units. Less 2.5 percent: 731,250 units.

Provider R. After the fee, 490 dollars are converted. At mid, 735,000 units. Less 0.3 percent: 732,795 units.

Ranking by amount received: P, 735,075; R, 732,795; Q, 731,250. The difference between best and worst is 3,825 units, about 2.55 dollars at the mid rate. That sounds small, but across a regular monthly transfer it adds up.

Notice the trap. Q advertises "zero fees," yet it is the most expensive for this amount, because the hidden margin is larger. R has the lowest margin but the highest fee, so it is better for larger amounts.

Test the break-even amount between P and R. The fee difference is 5 dollars, and the rate difference is 0.7 percent. Equating: 5 equals 0.007 times the amount, so the amount is about 715 dollars. Above that, R is cheaper.

Exercise: compare your own providers for your usual transfer size.