Sending money: the main operators and routes
The cost of sending remittances differs from one operator to another because each is allowed to set its own fees. But how much does it really cost each operator to send a remittance? Naturally this is an impossible question for us to answer. However, it’s important to know that one of the main factors influencing the cost of remittances is the route the money has to travel to get to its destination. It could be useful, then, to take a look at the various possible routes.
Money Transfer Operators
The Money Transfer Operator takes your money and sends a message through an internal system to his agent in the destination country. This message contains all the necessary information concerning your remittance. The money you handed over in Italy is deposited in a current bank account that acts as a container for all the remittances from Italy or from any given area. At the same time, the agent in the destination country has his own current bank account from which he can withdraw money. So he is able to hand over the exact amount of the remittance immediately to the person who comes to collect it. That same agent, in turn, receives money being sent to other parts of the world (including Italy) and deposits it in his account. So there are two accounts, and periodically the MTO calculates the difference between the total that has to be sent from Italy and the total that has to be sent to Italy. (This operation is technically known as “compensation”). This means that the MTO does not have to send a sum corresponding to your remittance each time, and his costs are therefore reduced.
The mechanism is more complex for banks. All the world’s banks use an automatic money exchange system called SWIFT. The bank enters all your remittance data into the SWIFT system, and the bank in the destination country receives that data. But it has to wait until the money arrives before making it available to the person collecting it. If there is an interbank agreement between the two banks, the mechanism is quite simple and fast, because the two banks know each other and have a common current account that they can put money through. But if the two banks do not have an agreement, the system is more complicated. The Italian bank may need to use one or more banks (known as “correspondent banks”) in order to reach the destination bank, because they don’t have a common account to put money through. Let’s say you want to send money to South America. Your money might have to go first to a US bank that has a common account with your Italian bank and another common account with the bank in the destination country. The US bank would then send the money on to the destination bank. This makes waiting times longer and could involve additional service commissions applied by the intermediate bank or banks. This ends up reducing the final sum of money actually collected at the other end.
In the case of prepaid cards, the company that manages the cards (the same one that manages credit cards: VISA or MASTERCARD are the main ones) handles the flows of money for all the countries of the world. A prepaid card allows you to spend or withdraw money, up to a maximum daily or monthly limit. You can use the card in any country and in any Italian or foreign bank or shop where the card is accepted. The card company then collects the money from your card or bank account and sends it to the shop where you used the card. With so many cards in circulation, the card company is able to keep its costs very low.
Cost of Remittances
The overall cost of remittances is equal to the difference between the sum of money the sender hands over in Italy and the sum the recipient (friend or relative) collects in cash in the destination country. If, for example, you send 100€ and 80€ is redeemed at home, the overall cost is 20€, which is 20% of the amount you wanted to send. The cost of remittances is therefore different from the simple commission charged at the time of sending. In general, the total cost of sending a remittance can be broken down into several parts. These are explained in the “Commission”, Exchange Rate Spread and “Other costs” pages.
Commission belongs to the category of explicit costs. It can be a fixed amount or a percentage of the amount sent. The commission is not the same for all transactions: it depends on the operator and the amount of money to be sent. In general a certain commission rate applies to sums within a given range.
In most cases there is only one commission charge, paid when you actually send the money. In some cases, however, another commission charged is applied when the money is collected in the destination country. It is important to know about all the commission charges before you make your remittance.
We have included information on this kind of commission on our website, whenever the information was available, and called it “recipient commission”.
It is also important to check that the commission declared (in advertisements or when you send the remittance) corresponds to the amount you actually have to pay.
Reduced commission rates are sometimes offered at certain times of the year. It is important to remember that these commissions are only valid in certain time periods so it is a good idea to check the expiration date on these special offers.
Exchange Rate Spread
This is an implicit cost associated with the exchange rate used to change your money into the currency of the destination country. Currencies are exchanged every day at an official exchange rate, but each operator applies his own rate. The fact that the operator sending your remittance uses a different exchange rate from the official one is obviously a cost you pay for using the service. Each intermediary applies a daily rate of his own. Unfortunately, this cost component is hard to calculate and check. To do so, you have to know both the official exchange rate and the one applied by the intermediary and then calculate the difference (this is called the “spread”). This information is not always easy to find and is not always declared openly. The spread is different for each operator and sometimes doesn’t exist at all, as in the case of credit cards or rechargeable cards, for example. These cards automatically apply the official exchange rate of the day. A chart illustrates the exchange rate and how to calculate the spread.
It is not unusual for operators to apply other costs in addition to the declared commission and the spread applied to the exchange rate. These additional costs are linked to the way the money is sent or collected in cash in the destination country (see Main Operators and Money Routes).
When choosing a channel and an instrument to send money you also need to consider these possible additional costs. Not all intermediaries or instruments can give you a guarantee that the initial costs declared will be the same as the final ones actually applied. This too is an important element to evaluate. For example, some operators offer very attractive commission rates. But they might not be able to guarantee that there won’t be added costs when the money is collected in the destination country, or when it is changed into that country’s currency. That’s why it is always very important to find out the actual sum received at destination. That way, you can calculate whether any additional costs were applied. If so, you can ask the intermediary to explain them or else choose a different operator or instrument for your next remittance.
Finally, there are some costs that cannot be quantified or easily expressed in money. But it is important to evaluate these costs when you choose which channel and intermediary to use for your remittance, the amount you want to send and the frequency of your remittances.
First of all, you need to consider security. Money that doesn’t arrive or only arrives in part because the channel or instrument is not secure means that all or part of your remittance could be lost. So this is surely a cost to be considered. It may not happen, but if it does it will certainly be much more expensive that any commission. Sending money for people you don’t know can also be risky. The person sending the money is responsible for that money in the eyes of the law. Since money is not always used for legal activities, you could be accused of the crime of money-laundering (see “Anti-Money-Laundering Law” in the Saving money explaines section, which provides some important information). So here too, the risk can be very high and very costly.
You also need to consider that you could deposit the same sum of money, or part of it, for a certain amount of time in a current account in Italy. Or you could invest it in another financial instrument. Doing this could make you eligible for additional products or services—like a loan, for example. So reducing the amount or the number of times you send money could offer some advantages that you would otherwise miss. Ignoring possibilities like earning interest on your Italian current account is certainly an indirect cost(which in economics is known as “opportunity cost”). It is a cost you should evaluate along with other costs in relation to your own needs and the needs of your family/friends back home.
Do lower costs always mean better value?
Lower costs do notalways mean better value. The commission the intermediary declares and applies to the money sent is not the only cost involved in sending a remittance. But it is also important to consider all the other factors that determine whether a price is good value or not. For example, more and more often remittances are linked with other financial services offered at a lower price. Sending money with that operator could mean saving money not so much on the remittance itself but on one or more other services offered at the same time.
What elements should I consider before sending remittances?
Before sending a remittance it is a good idea to consider various elements that could make one channel or instrument better value than another.
First of all, you need to establish the amount (the sum of money) that you want to send, how fast you want it to arrive and how often you want to send money.
Once you have these things clear in your mind, the next step is to choose the channel you want to use to send the money. Lastly, you need to choose the operator who is most appropriate and offers you the best value in terms of factors such as cost, security or convenience.
The amount you decide to send changes from one situation to another. In some cases, you have to send a specific sum of money to meet a specific need or deal with urgent circumstances. But when you are able to choose the amount, it is important to know that the amount you choose can change the cost of your remittance. It could also make it advisable to use one operator rather than another. Sending one particular amount could mean that you will miss out on opportunities (opportunity cost) in Italy.
Frequency is the number of times a year you send money home. It could be the result of need, habit or choice. Your choice of frequency could have an effect on the cost of the remittance. It is possible, for example, to combine smaller sums sent several times a year into bigger amounts sent less often (once or twice a year, for instance). This could give you the option of using different channels with different costs. Or else you could keep your money in Italy for a longer time and gain access to other financial products or services from a bank or other financial institution.
Speed measures the time it takes for your money to travel from the operator to its destination, ready for collection. Speed varies from one operator to another, and also from one instrument to another. In some cases the money is immediately available at the destination (this is the case with some operators, or with rechargeable credit cards). In other cases it can take some days (with banks, for example). Very often you need your money to be transferred quickly because it is needed urgently, so speedy –even immediate – transfer is very important. But when urgency is not an issue, speed is just like all the other elements you compare when choosing the best channel or operator—such as cost, security and the possibility to access other services.
Total cost of remittances
When considering all the costs involved in sending money with a particular operator or instrument, we can distinguish between:
All the costs that you have to pay when sending money and that you know about at the time of sending. Commission is an example of an explicit cost.
All those indirect costs that are applied, often without your knowing about them, and which are not very transparent. Exchange rate spread is an example of an implicit cost.
The risks associated with using a particular instrument or channel for sending money are often underestimated. It is important to consider these risks in making your choices. Not all operators or instruments can guarantee, with the same level of security, that your money will arrive at its destination. And not all can guarantee that the costs declared at the time of sending will not change or increase by the time the money is collected. There are also risks connected with persons involved in illegal activities. Price is not always the best factor to consider when making a decision! There are some very simple rules you can follow to reduce risk.
First of all, use a specialised operator, whether it’s a Money Transfer Operator, a bank or the Postal System (there is a special list of authorized MTOs). Second, carefully read the contract and conditions for sending money. Each operator is obliged, if you ask, to give you the contract that applies to your remittance. That way you can check if and how he guarantees that the exact sum you are sending will arrive at its destination and that the same sum can be redeemed there (with no unpleasant surprises). Finally, never send money on behalf of other people if they aren’t family members.
Convenience: is it easy to send remittances using this operator/instrument?
How simple it is to send and redeem money is another factor to consider when choosing a channel or instrument. Factors that anyone sending money needs to consider include:
- how close the operator is to your home or workplace;
- its business hours and waiting times;
- the simplicity and clarity of the remittance operation;
- whether you have to carry the money on your person.
But when the money arrives at its destination it also needs to be relatively easy to collect. So you need to consider whether the operator has a number of offices or agencies in the country of destination. And are these agencies not just in major cities, but in more remote parts of the country as well? Is the agency relatively close to the person who needs to collect the money, and is it easy and safe to do so? These are all factors to consider when making your choice. A rechargeable card, for instance, is very simple and quick to recharge in Italy at a low cost, and the money is immediately available at the other end. But if there aren’t enough automatic teller machines (ATMs) or point-of-sale devices (POS) in the country where the card is to be used, and the person has to travel a long way to use it, then that makes it a less convenient instrument.
Other opportunities associated with the channel or operator
Money is certainly sent home for a wide variety of reasons and, in many cases, as a matter of necessity. When choosing how much money to send, how often to send it and what channel to use, it is very important to consider other elements that might help you to make a better choice. For example, the money you send, or part of it, could be deposited for a certain amount of time in a current account in Italy or in another financial instrument (like an accumulated savings product). This temporary use of your money could allow you to earn interest (which means your money grows). And, most importantly, it could give you access to other products and services such as loans, credit cards and payment or other banking services. So choosing carefully the amount, or the number of times you intend to send money, could lead to advantages that you would otherwise have missed. Giving up those advantages, like earning interest or having a current account in an Italian bank, is what economists call an “opportunity cost”. And this is a real cost that needs to be evaluated along with other factors, in relation to your own needs and those of your family/friends back home.
The exchange rate is an important element in calculating the cost of sending remittances, and is often not an easy piece of information to find or to understand. It is important to know what the exchange rate is, how it works and, above all, how it influences the final cost of sending a remittance.
What is the exchange rate?
The exchange rate is the price of the currency of each different country on the international market. A price is fixed every day for each currency and that is called the “official exchange rate”. It is published in major newspapers (for the most important currencies) or on specialized websites (such as the Bank of Italy website).
The official exchange rate is the international reference price at which banks (and every intermediary) exchange currencies among themselves. When intermediaries (banks, MTOs, exchange desks, etc.) change money they charge their customers a commission on top of the official exchange rate. This commission is called the “spread”. So when you send a remittance or change money, the price you pay for exchanging the money is equal to the official exchange rate of the day plus the spread that each intermediary decides to apply. There is no fixed rule, each intermediary is free to set its own spread.
So it is very important that the intermediary states the exchange rate being used each day. Some intermediaries, such as banks, also provide information on the spread applied compared with the official exchange rate.
What is the spread applied to the official exchange rate?
The spread applied to the exchange rate is the difference between the official exchange rate and the rate applied by the operator carrying out the transaction. It is a commission that the operator charges for his services and is added to the official exchange rate. Operators do not usually declare the spread they apply to the exchange rate of the day.
Why is the spread applied?
The exchange rate varies from day to day. However, the intermediary cannot change money on the international market at the exact same moment he receives it, so he keeps a certain amount of currency readily available. In doing this, he takes a risk. The currency he bought at a certain price to have it available whenever it is needed could go down in price and lose value. This would mean a loss for him. (Of course, the price could also increase and earn him a profit). To limit this risk, which is technically known as exchange risk, the intermediary sets a spread that allows him to cover the potential average loss resulting from normal fluctuations in the price of the different currencies. Naturally, the spread could also be a major source of income for the intermediary, in addition to being a form of “insurance” against currency risk.
How is the spread calculated?
The spread applied to the exchange rate varies, depending on whether you buy money from an intermediary (when you change euros into a foreign currency) or sell money to an intermediary (when you change a foreign currency into euros).
In the case of remittances sent from Italy, you are buying foreign currency from the intermediary, so the spread is calculated as the difference between the exchange rate applied by the intermediary and the official exchange rate:
Exchange rate applied – Official exchange rate = Spread
Let’s say, for example, that the exchange rate on a specific day says that 1$ USA costs 0.783€ (so in order to send 100$ you have to pay 78.30€) But the intermediary charges you 0.853€ for every US dollar (so to send 100$ you have to pay 85.3€). The spread is the difference between these two amounts: 0.853 – 0.783 = 0.07€.
That means that for every US dollar exchanged the intermediary has added .07€ So it will cost you an extra 7€ to send 100$, the difference between 85.3 and 78.3.