Consumers should pay less than one per cent in fees to exchange currency thanks to changes in financial infrastructure that are gathering pace, says the head of one of Europe’s biggest payment infrastructure providers.
That compares to up to 10 per cent still being charged by some of the market’s biggest players.
Chief executive John Sharman’s Tuxedo Money Solutions specialises in the payments platforms and technology that link different banks, networks like Visa and Mastercard and consumer companies and retailers.
It has also helped design some of the pre-paid card schemes that have cut the costs of spending abroad over the past decade.
Sharman told Reuters the new models being rolled out by financial technology entrepreneurs in London and New York are seeing the lowest costs available in the market falling below 1 per cent.
The problem remains persuading ordinary consumers to move away from traditional providers like high street banks, or cash transfer companies like Western Union and Moneygram.
“There are new disruptive technologies coming out that are going to hammer the price,” Sharman said. “Getting consumers and businesses to adopt them, as ever, will be the challenge.”
“On cross-border transactions broadly speaking [now] you will pay about five per cent whether it’s in fees or FX costs. We’re generally targeting about one per cent and the card solutions are cheaper than that.”
Sector heavyweight Travelex’s “Supercard” scheme, for which Tuxedo built infrastructure, follows a handful of other “e-wallet” models that aim to take around one per cent of the transaction value as payment. But the sector on average is still charging more than the maximum five per cent the World Bank targeted a decade ago.
For Supercard, Tuxedo’s programmers created infrastructure that takes a request for payment by Travelex at, say, a diving shop in Thailand, converts it at competitive exchange rates and then checks if the British-based bank or credit card to which the Supercard is linked has sufficient funds.
In doing so, it avoids the two-to-three per cent fees normally paid for such transactions to Visa or Mastercard.
Sharman declined to discuss the card companies’ attitude to this change, but says the big players in the sector accept they will eventually have to swallow lower margins.
However, he says it may take years for the new models to threaten the dominance of the banks, Western Union and others.
“You have to have the disruptive technology, the ability to go for low margins, and the ability to drive high volumes. If you’re a startup you can tick the first two boxes but not the third and that’s where someone like Travelex doing this is important.”
“The retail footprint of a Western Union gives them a huge advantage. They have huge margins to rely on and that will give them plenty of protection as the market tightens up.”