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How banks and money wire services are fooling us

By Nishu Thukral

Consumers have spoken: 43 percent have negative feelings about the banking industry, and it is not surprising.

Banks and wire services have long dominated the money transfer space, and up until the recent fin-tech boom, have remained largely unchallenged.

As a result, consumers have been forced to accept unwieldy processes, navigate complicated fee structures and jump through hoops to move money.

No sector of the financial market has experienced these challenges more than the nearly $590 billion international money transfer market, especially in Mexico and Latin America.

Though sizeable, this sector is still largely ignored by recent payments innovation.

With little competition, the incumbent legacy firms have comfortably cornered the market, using astronomical pricing tiers and making the money transfer process time-intensive and overly complicated, especially for the millions of immigrant workers who are, in many cases, unfamiliar with the inner workings of money transfers.

This needs to stop.

Lack of transparency around fees
Thanks to a lack of clarity in pricing structures, banks and traditional wire services have been pressing users for years.

The existing fee structure is complex and constantly fluctuating. Even the slightest change in location, amount of money sent or the sending and receiving method can send fees sky-high.

For those needing to send money to friends and family abroad, this proves to be both challenging and baffling, as there is no concrete way to anticipate the costs.

A 2014 World Bank report found that the average wire transfer service fee is 8 percent, while commercial banks charge 12 percent – significantly higher than the global average and any other remittance service.

These substantial fees eat away at the often-minimum wage salaries migrant workers earn.

For example, to send $500 could easily result in $40 to $50 in fees. And that is not all. There are often unforeseen costs that arise during the process.

For example, there can be extra charges associated when switching over to a different currency, which, as you can imagine, is common when sending funds internationally.

These charges do more than just diminish the amount of money immigrants can send home. They are lucrative for money transfer operators (MTOs).

Western Union reported its margins on remittances were more than 28 percent in many of its largest markets.

With numbers like that, it makes you question just how fair the system is.

Antiquated settlement methods and delayed timeframes
In many circumstances, family and friends back home rely heavily on remittances for food, shelter and medical needs. Because these funds are so critical in daily life, it is important that they can be sent and received quickly. Unfortunately, that is not always the case.

It can take anywhere from four to five business days to transfer money from one bank account to another. These delays can mean all the difference for a family member or friend in need, especially in the case of an emergency.

To expedite the process, senders are subject to rush fees, and even then, sometimes have to wait for next-day delivery.

And the inefficiencies do not stop there.

Even though we have seen an influx of new transfer companies enter the market, there has not been a focus on simplifying the way loved ones receive remittances.

Currently, if a transfer is sent in cash, the receiver is forced to wait in line for up to an hour to pick it up.

With all of the technological advancements we have today, it seems reasonable to expect MTOs to consider customers’ needs and deliver convenient, immediate transfer solutions without overcharging.

Laborious processes that make sending money difficult
Filling out paperwork is a thing of the past, or so you would think.

In the digital age, we have become accustomed to streamlined processes and simple ways to share information, but wire transfer services have not made the jump.

Instead, MTOs require senders to provide extensive bank account information on both themselves and the receiver.

Because of communication limitations ranging from time zone differences to limited access to the Internet, this can hold up the process and make it challenging to move money.

As a result of the processes in place, senders are left to wade through paperwork and search for hard-to-find bank details before being able to send money to loved ones abroad.

What can be done about it
It is clear that the money transfer market is overdue for a transformation.

Commercial banks and MTOs have dictated the way we move money across international lines for too long without providing sufficient information and service.

But changes in money transfers will not happen overnight.

As we have seen in other payment sectors, innovation happens through evolution, not revolution.

To improve the money transfer experience, incremental changes need to be made with the user in mind.

Rather than fall back on traditional methods, banks and money wire services should look for ways to simplify the process and be more transparent with customers.

For example, instead of using dynamic pricing tiers that can change unexpectedly, MTOs should consider offering flat fees so the fee structure is crystal clear.

Or, because studies show that Hispanics rely on mobile-first, MTOs should tailor their services and offer mobile sites and apps to easily enable users to send money via mobile, instantly.

THE REIGN OF legacy firms is coming to a close.

With digital startups slowly entering the space and gaining market share, traditional MTOs should be prepared to compete on the level of transparency, price, speed and overall customer service of their transfers. Their famous names and conventional services will not cut it anymore.

Nishu Thukral is president/CEO of Pangea Money Transfer, Chicago. Reach him at [email protected]