Q. What is the best way to exchange currency?

Q. What is the best way to exchange currency?


A. One of the many nice, and probably under-appreciated, advantages of the European Union has been the introduction of the Euro, removing the need for those in the Euro zone to convert currency when moving funds from one country to another.

For those with funds in pounds, dollars or crowns, it is unlikely the euro coins and bank notes sitting in a drawer at home from the last holiday in Italy will suffice to purchase a property in Italy.

Fortunately there are multiple options available. A few will be highlighted here. The reader is encouraged to use this as a starting point for further research before making a decision. The author is not an expert on currency exchange and is not qualified to offer advice on this topic. Consultation with a trusted independent financial adviser versed in currency exchange who doesn’t actually offer currency exchange services would be an excellent idea – if such a figure can be found. Experience does dictate that when choosing how to transfer funds, among the obvious factors to consider are safety, speed, cost and ease of transfer. Where to transfer, and not transfer, funds for a real estate purchase in Italy is an important topic which is, however, outside the scope of this article.

For any service, the reader will want to know the costs, timing, safety, etc, of a transfer before committing and will want these points documented in advance of the transfer.

1. Bank to bank wire transfer

In the good old days, the solution was simple: ask one’s bank to make the transfer. This can still be done, and for some it may well be the easiest choice. It may be the safest. It may also be the most expensive.

The bank will need the obvious information such as the amount to transfer, the target currency and when to execute the transfer. The bank will require the destination bank BIC/Swift code and the specific account number at the destination bank. Banks world-wide participate in a clearing network called SWIFT which assigns a Bank Identifier Code (BIC) to each of its member banks. The BIC / Swift code (the name is interchangeable) for the destination bank should be either 8 or 11 characters long. The first 4 characters are usually taken from the bank’s name. The 6th and 7th characters in the code are the country code. The 9-11th characters are for the branch. They are often omitted. The Italian bank Intesa San Paolo, uses the code BCITITMM, probably inherited from the now defunct Banca Commerciale Italiana. Note there are no spaces, no punctuation. Apparently XXX can be used to refer to the head office if a system requires an 11 character swift code, e.g. BCITITMMXXX.

For many a bank to bank transfer may be the easiest option as a friendly bank teller will take care of all of the details. This generally comes at a significant cost however. Banks are known for handsomely rewarding themselves for their services, in part as what they do remains vague and nebulous to so many of us… and in the past we didn’t know we have choices. Normally a bank charges for its service directly, through a currency exchange fee, and indirectly, by adding profit to the exchange rate it actually has to pay to perform the transaction. The recipient bank may charge a fee as well for the “receipt of funds” from the foreign bank, even if the currency exchange has already been performed. Taken together it might cost 5% or so to transfer cash when currency exchange is involved.

In many countries banks participate in insurance schemes so if a bank fails, clients will be protected, at least up to a certain amount. This insurance may be a benefit to using a standard bank.

Bank to bank transfers can be speedy (and technically they can be instantaneous); sometimes they are slow as banks sit on the money and make interest on it before transferring it, the so-called float period.

2. Foreign currency exchange brokers

The alternative to using a bank is to use a firm specialized in foreign currency exchange. Ideally they should be headquartered in a stable country. They should be registered with the appropriate financial services regulator. They should have a good track record and years of history. There should be a mechanism in place to protect client funds if the company goes bust. It appears that for those based in the UK, they should be “authorised” by the Financial Conduct Authority; if so, they are apparently keeping client funds separately from their own pot of money.

A currency broker may be willing to provide additional services, such as making a transfer only if a certain rate is met.

2.1 Online services: TransferWise

Tired of paying what they considered excessive bank fees to exchange currencies, two Estonians founded TransferWise in 2011 to provide an alternative to bank services. TransferWise matches transfer requests between its own customers, changing them the inter-bank mid exchange rate rather than less favorable buy and sell rates offered by banks. TransferWise adds a fee to the exchange, but the overall cost should still be significantly less than what a normal bank would expect. Transferwise also offers additional “consumer friendly” services, such as “borderless” bank accounts.

Transferwise says its clients money is safe even if they fail as they separate or “ring fence” a client’s money from their own operating funds, as foreseen by the UK Financial Conduct Authority (FCA). Judging from a non-scientific analysis of online expat forums, Transferwise is well known and appreciated by those who have used it.

2.2 Full-service currency brokers: Key Currency

Key currency is full-service foreign currency broker in the UK. They seem to focus on larger transactions, such as those associated with a property purchase, promising personal assistance at a more favorable cost than a traditional bank and perhaps with more certain timing than TransferWise. FCA info on Key currency.

2.3 Full-service currency brokers: Smart Currency Exchange

Smart Currency Exchange also positions itself as a full-service provider of currency exchange services, particularly useful for those transferring larger amounts associated with a property purchase. FCA info on Smart Currency Exchange

There are undoubtedly other solutions available; the intent of this guide is to provide the reader with an idea of some of the things to consider and a panorama of some of the known options.