EXPERIMENT: Is Revolut the Most Cost Effective Foreign Transfer Method?
Using only the higher exchange rate masks the higher fees. When the transfer fees are included, the higher exchange rate is no longer advantageous.
Highlights
How to compare fees and rates: Look at both transfer fees and exchange rates. Higher exchange rates can hide higher fees.
How to find the best transfer method: Calculate the total costs including all fees. Aim for a fee percentage close to zero for the most cost-effective transfer.
Transferring money directly from the originating bank to the destination bank in the local currency (Czech korunas) generally results in the lowest fees.
I will be your sacrificial lamb in making financial mistakes when transferring money from one bank account to a foreign bank account.
The two most popular financial-tech platforms that dominate expat social media when it comes to transferring money are Revolut and Wise (formerly Transfer Wise). Whenever a foreigner posts a question in a Facebook group about the best method to transfer money from one currency to another, arguments come to a boil between loyalists of Revolut and Wise.
In my fictitious world, I am building a financial empire, which means going beyond the borders of the United States of America and into other safe and stable countries, particularly the Czech Republic (CR). Since 2009, I’ve witnessed the growth and expansion of land, property, and pop culture. Even in the fires of Russia’s invasion of Ukraine, CR became a site of refuge. Within months, the increased population of Ukrainian refugees was quelled with minor political disruptions to Czech residents.
In 2022, my Czech wife and I purchased property near Brno, the second-most populated city in the Czech Republic. Over the course of two years, I’ve converted approximately 140,000 US dollars to Czech korunas (Kč), and I am currently converting $2,000 to korunas monthly for the mortgage.
My mortgage plan includes making monthly payments by converting US dollars into Czech korunas. If/when the exchange rate equals at least 1 USD = 26 Kč, I will make bigger lump sum transfers.
Presently, 1 USD = ~23 Kč.
In the financial experiment I ran for two weeks in May, the ultimate goal was to transfer money from my originating bank (OB) in the US to the destination bank (DB) in the CR. Sometimes, this meant using an intermediary institution like Revolut or Wise.
The factors I compared in making this transfer were: Amount Transferred (from OB), Foreign Exchange Rate (by OB), Transfer Fee (by OB), Transfer Fee (by DB), Amount Received (in DB), FX Rate (by DB), and Final Received.
Transfer Methods and Amounts
These were three scenarios applied during the transfer experiment:
Originating bank directly to destination bank in USD
Originating bank directly to destination bank in Kč
Originating bank to an intermediary to the destination bank.
In the above scenarios, the initial transfer amounts varied from $100 to $4,000. The more money transferred, the higher the fees assessed, resulting in the loss of purchasing power in the destination country.
Comparison
After the amount received was final, it was necessary to assess the Total Liability or the total amount of money needed to complete the transfer. Then, the last factor could be assessed: the Fee %, or the percentage of the transfer fees from both OB and DB to the Amount Transferred. This last factor became the ultimate judge in determining the most cost-effective method of transferring money.
Intermediary Fees
Revolut and Wise's transfer fees are nominally lower than the originating bank’s fees (compare Transfer Fee OB and Transfer Fee DB in the table above). In addition, when the destination bank receives payment instructions from an intermediary, it may assess a fee as well. This occurred when sending $500 and $1,000, but the transfer was waived at $100.
Blinded by the higher exchange rate
When exchanging currencies, the aim is to receive close to a 1:1 equality of US dollars to Czech korunas. If you transfer $1,000 from the originating bank, you want to receive $1,000 in the destination bank. Transfer fees and foreign exchange rates negatively impact this 1:1 ratio.
A popular approach when exchanging currencies is to go with whoever has the highest exchange rate. Compare Row 5, which lists the exchange rate of the originating bank, to Row 13, which lists the exchange rate of the destination bank. The originating bank has a lower rate, and therefore, less money will be received in the destination bank.
And this is where 90% of all financial mistakes are made.
Using only the higher exchange rate masks the higher fees. When the transfer fees are included, the higher exchange rate is no longer advantageous.
An originating bank uses a lower exchange rate because they are profiting off the rate. If the US government says that 1 US dollar equals 23.50 Czech korunas, then an originating bank may offer the rate to their customers at 22.50 Kč, thereby keeping one koruna for every dollar exchanged. While hidden, the lower exchange rate has a built-in fee.
To level the playing field and understand upfront and hidden fees, look no further than the Fee %.
And the winner is…
The winner is Column F, which transfers money in Czech korunas directly from the originating bank to the destination bank without intermediaries.
Here’s how the transfer worked:
Transfer $1,500 from the originating bank as Czech korunas, not USD.
In addition to the $1,500, add the transfer fee from the OB of 300 Kč (or approx. $13.45). The total amount needed to transfer is $1,513.45, or otherwise known as the Total Liability.
The exchange rate by the originating bank is 1 US dollar equals 22.30 Czech korunas.
The final amount received in the destination bank in Korunas was 33,150 Kč.
The rule of thumb when transferring money using foreign exchange rates is to keep the Fee % as close to zero as possible. In Column F, transferring money from the originating bank directly to the destination bank resulted in a 0.90% fee.
Second place belongs to Revolut (Column H), which serves as an intermediary between the originating and destination banks, because the Fee percentage was 1.71%.
Be bold and follow this formula
The next time you consider transferring money in one currency from an originating bank to a destination bank, calculate the total liability by adding the amount transferred and any upfront fees. Then, calculate the Fee percentage by totaling the transfer fees and dividing by the initial amount. Achieving a percentage of 2% or below is recommended, and the closer to zero, the better.
From Column H:
Total Liability = ($1,000 initial amount transferred) + ($4 Revolut fee) + ($13.09
transfer fee from destination bank) = $1,017.09
Fee % = ($4 Revolut fee + $13.09 DB fee) / ($1,000 initial amount transferred) = 1.71%
