Banks are bleeding you dry on your money transfers. A new startup wants to disrupt that

I get my salary in Singapore dollars, which is sent to my bank account in India. When I joined Tech in Asia, I had looked up the conversion rate from Singapore dollars to Indian rupees. But the amount coming into my account monthly was lower than what I had expected. Until now, I simply assumed it was because of currency rate fluctuations. But now, sheepishly, I realize that it’s my bank quietly gulping down a hefty portion as ‘FX spread’.

“You’re not alone,” says Mumbai-based fintech expert Prajit Nanu, who has just started up a company called Instarem to tackle exactly this issue for millions around the world. “I have a 60-year-old uncle in the US who sends about US$150,000 to India every year. I asked him, ‘How much money do you lose in the transfer?’, and he said, ‘My bank charges me just US$35 per transaction’. He had no clue that his bank was taking a much bigger cut off each transaction,” Prajit (he prefers to use his first name) tells me over dinner at a mall in Jakarta, after meeting at our recent Startup Asia Indonesia conference.

My head starts buzzing as I hear just how much money banks and money-transfer agents siphon off when ordinary people like you and me – or small startups – send or receive money from one country to another. These remittances, as they are called, have hidden costs. That’s because a lot of people do not understand the FX spread. They only see the currency conversion rate and transaction fees. I was one of them. Now I know better.

Fxxk FX

FX spread is the difference between the wholesale inter-bank FX rate and the rate quoted to you by the bank or international money transfer company. What you get is an inter-bank rate minus an FX spread. Some banks or agencies may claim to offer low transaction fees, or a good rate – what matters in the end is how much you lose in the transfer, compared to the inter-bank rate of conversion.

Prajit explains how this affects me: “Today, the US dollar conversion rate is INR 62.31. But if you go to a bank in the US and tell them you want to send some money to India, they won’t give you the rate of 62.31, they will give it at 58 or 59. That is where banks make their money – not on the transaction fee of US$10 or 15 but on the FX spread from 62 to 59 per dollar.”

Big multi-national corporations and high net worth individuals can negotiate hard with banks for wholesale inter-bank rates for their money transfers and also get reasonable transaction fees. The inter-bank rate at which banks send money between themselves is free from FX spread – that is, it is the same as the currency conversion rate. It’s the ordinary people and small businesses sending or receiving money who get socked with a lower rate, which is actually the inter-bank rate minus an FX spread, and that’s besides the transaction fees. The deductions vary from 3 to 7 percent, and can even go up to 10-12 percent of the transferred amount in some corridors such as Africa, when everything from fees to spreads are added up.

The cold logic in this is that banks are more interested in the big transactions. Many banks don’t even do international money transfers because of the numbers of transactions involved, while others make hefty cuts and take days to wire the money.

This is where Instarem wants to be a disruptor. By partnering with banks that don’t have a remittance business or global scale, it can slash the costs of these transactions, and make them more transparent too.

“For example in India, ICICI Bank will never want to work with us. They are a strong player in the money that comes into India and will see us as a potential rival. So we have chosen banks that don’t have a large global presence but have a good distribution network within India,” explains Prajit.

A partnership made in Australia

In November, Instarem got a license to do remittances in Australia, and tied up with an Indian bank. Now, if you want to send US$1,000 from Australia to India, you deposit that into an Instarem account in Australia, which in turn credits the equivalent of US$990 in Indian rupees (INR 50,005) to the receiver’s account in India the very same day or the next. The currency movement is at inter-bank rates, and the US$10 deduction – due to Instarem’s 1 percent cut – is the fee.

Everyone wins. The remitter pays just 1 percent of the amount, instead of the 3-7 percent they would have on other channels. Instarem is happy with the 1 percent because there are huge volumes of money transfers to do. And the partner bank, which did not have a large remittance business to begin with, now has a new revenue stream while leaving all the nitty-gritty to Instarem.