online currency transfers have become increasingly popular, offering individuals and businesses alike a cost-effective way to send and receive money across borders. Fintech companies—such as Wise (formerly TransferWise), Revolut, and Rutland FX—have revolutionized the industry, making it easier and cheaper to move money internationally. But why are these online currency transfers so cheap compared to traditional banks?
The answer lies in several factors, including access to wholesale exchange rates, the ability to apply smaller margins, and the difference in operational costs and business models between traditional banks and fintech companies. In this article, we’ll explore how fintech companies can offer such low-cost solutions and why traditional banks often struggle to compete.
Wholesale Exchange Rates: The Key to Cheaper Transfers
One of the primary reasons fintech companies can offer cheaper international transfers is because they have access to wholesale exchange rates. Wholesale exchange rates, also known as interbank rates or mid-market rates, are the rates that banks and large financial institutions use when trading large amounts of currency with each other.
These rates are typically much better than the retail rates that consumers are offered when they exchange money at banks or currency exchange bureaus. Traditional banks and currency exchange providers often mark up these rates significantly—sometimes by 3-5% or more—to increase their profits.
Fintech companies, on the other hand, operate differently. They access the same wholesale exchange rates but apply only a small margin to cover their costs. For example, a fintech company might apply a margin of 0.5% to the wholesale rate, which is still much lower than the markup applied by most banks. This means that customers using fintech services get a rate that’s much closer to the actual market rate, resulting in significant savings.
Lower Operational Costs: The Fintech Advantage
Another factor that allows fintech companies to offer cheaper currency transfers is their lower operational costs. Traditional banks have extensive physical infrastructures—branches, ATMs, and large administrative offices—that are expensive to maintain. These costs are ultimately passed on to customers in the form of higher fees, worse exchange rates, or additional service charges.
Fintech companies, by contrast, operate primarily online, often without the need for physical branches. This digital-first approach dramatically reduces their overhead costs, allowing them to pass the savings on to their customers.
Moreover, fintech companies don’t just benefit from lower fixed costs. They also use cutting-edge technology and leaner business models that are designed for efficiency. By automating many processes, such as currency conversion and payment processing, fintechs can reduce the need for manual intervention and costly human resources, further lowering their operational costs.
Tailored, Bespoke Solutions for Modern Users
Fintech companies are also able to offer cheaper and more flexible solutions because they are built to be customer-centric and adaptable. Unlike traditional banks, which often rely on legacy systems and rigid procedures, fintech companies use modern, cloud-based infrastructure that allows them to be agile, customizable, and responsive to customer needs.
These tech-driven platforms are designed to be scalable, meaning they can handle increasing transaction volumes without a significant increase in cost. They can also offer more personalized and bespoke solutions based on user behavior and preferences, which gives them an edge over the one-size-fits-all approach used by many banks.
For example, some fintech companies allow users to set up alerts for exchange rate fluctuations or lock in rates in advance, ensuring that they can transfer money when it’s most cost-effective. Traditional banks often lack these kinds of sophisticated tools, or if they do offer them, they come at a higher price due to the extra overhead involved.
Transparency and Simplicity: How Fintechs Build Trust
One of the reasons fintech companies are so successful in providing cheaper currency transfers is their commitment to transparency. Traditional banks often hide their fees in the form of inflated exchange rates, which makes it difficult for consumers to understand the true cost of their transfer.
Fintech companies, by contrast, pride themselves on being transparent about the costs involved. They typically show customers the actual exchange rate (often very close to the mid-market rate) and the exact fee they will charge upfront. This clarity builds trust and helps users feel more confident that they’re getting a good deal.
In contrast, many traditional banks use complex pricing structures that include hidden fees and unclear exchange rates. This can lead to unpleasant surprises for customers who think they’re paying a small fee, only to realize later that they’ve lost a significant amount of money due to poor exchange rates.
Innovation and Reduced Risk: The Fintech Approach
Traditional banks are often slow to innovate, in part because they are risk-averse institutions with decades or even centuries of history. Their size and complexity make it difficult to quickly adapt to new technologies or business models. Additionally, their internal systems are often outdated, which increases both their costs and their inefficiency.
Fintech companies, however, are technology-driven from the start. They invest heavily in innovation, using the latest software and payment processing technologies to reduce costs and improve user experiences. For instance, they often use blockchain or peer-to-peer models to facilitate money transfers, cutting out middlemen and reducing fees.
Moreover, fintechs tend to be more open to risk-taking and experimentation, allowing them to explore innovative approaches to currency transfers that banks might avoid. This adaptability means that fintech companies can often find ways to further lower costs and streamline processes.
The Network Effect: P2P Transfers and Shared Resources
Another reason online currency transfers can be so cheap is the peer-to-peer (P2P) model used by some fintech companies. Instead of directly converting currency for each transaction, P2P platforms like Wise match users who want to send money in one currency with users who want to receive money in that same currency.
For example, if someone in the U.S. wants to send $1,000 to the U.K., and someone in the U.K. wants to send £800 to the U.S., the platform matches the two transactions internally. This way, the company minimizes the actual foreign exchange that needs to happen, and they can pass on the savings to their users.
Additionally, fintech companies often benefit from economies of scale. As they grow and attract more users, they can negotiate better rates with currency providers and payment processors. This allows them to further reduce the margins they apply to currency transfers, making them even cheaper for their customers.
Fintechs Offer Cutting-Edge Security at Lower Costs
Another area where fintech companies have an advantage is in security. Traditional banks invest heavily in security and compliance, but they also carry the burden of maintaining older, less efficient systems. This increases their costs and limits their ability to innovate quickly.
Fintech companies, on the other hand, are able to build their platforms from the ground up using modern security protocols and encryption technologies. They can integrate with regulatory technology (RegTech) tools that automate compliance processes, reducing the manual work needed to meet legal standards. This allows them to stay secure and compliant at a lower cost.
Conclusion: The Future of Currency Transfers
The rise of fintech companies has fundamentally changed the way international money transfers work. By accessing wholesale exchange rates, keeping operational costs low, and offering cutting-edge, customer-focused solutions, fintechs can offer cheaper and more flexible currency transfer services than traditional banks.
While banks are burdened with higher overhead, outdated technology, and more conservative risk management approaches, fintechs are agile and technology-driven, making them well-positioned to continue disrupting the market.
As more consumers and businesses become aware of the advantages of using fintech services for currency transfers, traditional banks will need to innovate and adapt or risk losing a significant share of the market. For now, however, fintech companies are leading the charge in providing low-cost, efficient, and transparent currency transfers, offering a glimpse of what the future of international finance could look like.
