Paving a Path for Payments Transparency

Americans are getting ripped off when they send money abroad and many do not even realize it. That is because banks and remittance providers often advertise “free” or low-cost services, and then jack up the exchange rate as high as 5 percent or more. The result is billions of dollars lost in hidden fees.

This impacts not only migrant workers, but also vacationers, foreign exchange students, people buying property and small businesses buying and selling internationally.

Here’s how it works today when you send money to another country: You are shown both an upfront fee and the exchange rate used. There is an incentive for banks to keep the fee as low as possible but inflate the exchange rate far beyond what you would see on Google or Reuters. This way, consumers are in the dark about how much they have been charged without conducting a complicated calculation.

Here is a real example: You need to send $10,000 from the United States to Canada for a tuition payment. You open your money transfer app, click on “send money abroad” and see a listed fee of $4.99. The small fee makes sense since the payment is to another country. What you don’t realize is that the exchange rate was inflated by 4.35 percent. Pricing from your bank might look similar too. This is standard industry practice.

That is why governments around the world, like the European Union and the United Kingdom, and international bodies like the World Bank, are seeking to change the way banks show fees. In April, new price transparency rules came into force in the European Union that should result in consumers seeing upfront a single “total cost” that combines fees and exchange rate margin.

Price transparency has the potential to increase competition and decrease prices. It is also key to delivering financial education and inclusion. Without hidden fees, consumers can easily shop around for the best deal – just as they do in other areas of personal finance.

There is a significant detriment to consumers and small businesses that don’t realize how much they are charged. In the United Kingdom, government-commissioned research found that nearly 66 percent of first-time consumers were unable to choose the best option under typical disclosures. But once those consumers were presented with transparent pricing, the number choosing the best option doubled.

American consumers and small businesses could save billions on international payments. Unfortunately, the United States is going in the opposite direction.

Rather than improving remittance pricing practices, the Consumer Financial Protection Bureau instead rolled back existing rules last month and exempted most community banks and credit unions from existing rules. As a result, even fewer Americans will understand the true costs of moving money abroad.

The timing of this regulatory rollback is especially troubling. Consumers are economically vulnerable right now. And there is significant exchange rate volatility due to the COVID-19 pandemic. That heightens the risk of price gouging as consumers lose any sense of normalcy when converting currencies. Sadly, it was not surprising to observe several examples of competitors further skewing their exchange rate margins recently.

It is frustrating that the United States is weakening consumer protections as other countries are strengthening theirs.

However, it is not too late. Now that small banks are largely exempt from the remittance disclosure rule, the CFPB should turn its attention to the pricing practices of big banks.

We agree with the World Bank that “the single most important factor leading to high remittance prices is a lack of transparency in the market.” The United States can help combat this problem. We encourage the CFPB to make a small change that will have an outsized impact.

Nick Catino is the Head of Policy & Campaigns (Americas) for TransferWise and previously spent a decade specializing in financial services policy for three members of Congress; while staff director of the U.S. Senate Banking Subcommittee on International Finance, he was lead negotiator for the first major U.S. banking law in a decade (The Economic Growth, Regulatory Relief, and Consumer Protection Act).

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