Long reads

Why are fees on international payments so high?

Scott Hamilton

Scott Hamilton

Contributing Editor, Finextra Research

Survey shows American consumers disgusted with ‘junk fees’ and hidden costs; bank fees for international payments and foreign exchange, especially hidden or unexpected add-on charges, were among the most cited irritations in modern consumer transactions, according to a recent survey.  

The study, commissioned by fast-growing international payments and financial management fintech Wise and research firm Morning Consult, revealed that just over one-quarter of respondents cited unexpected or unclear financial services expenses right alongside those of other industries as being in the cross-hairs of this fast-rising wave of customer indignance.

The main objects of their discontent? Surprisingly high ‘extra’ fees – often hidden or loosely defined – raising the tab on goods and services purchased. The other areas of commerce receiving greatest ire from consumers included hotels, utility bills, credit cards, and event tickets.

Of the 2,000 adults polled in the survey in November 2023, many also identified such junk fees as causing “emotional consequences” along with financial hardship. Extra or opaque fees associated with specific banking and payments services appear to be undermining consumers’ trust in financial institutions – and may even impact voting patterns in a presidential election year.

President vows crackdown on “unfair” fees is coming

The Biden administration recently drew attention to this issue in an October 2022 address and accompanying statement. The president has vowed to use the ideas and proposals of his Competition Council and the power of U.S. agencies like the Consumer Financial Protection Bureau (CFPB) to create and enforce rules to crack down on what he called “unnecessary hidden fees — known in the parlance as ‘junk fees’,” which “are hitting families at a time when they can’t afford it”, adding, “They shouldn’t be paying [the fees] anyway, in my view.”

Wise is highlighting the results of its survey to sharpen the focus on financial services fees, especially those connected to cross-border payment transactions. The company served 16 million people and businesses in 2023, processing £105 billion ($132 1/3 billion, according to the company’s own online currency converter calculation) in cross-border transactions during the year. Wise has steadily increased its presence and operations in the U.S. in the past few years, and urges further citizen and government action on the issue of junk fees in its press release accompanying the report on the survey’s findings.

International payments charges and choices a key focus of consumers, says report

One key question Finextra asked Wise was: if 76% of survey respondents said junk fees have influenced their choices of companies to do business with, and only 42% have actually changed providers due to these practices, what’s holding more than a third of them back from changing?

Rina Wulfing, Wise’s U.S.-based senior policy lead for North America, outlined one possible reason as being it takes anyone time to figure out just what’s occurring, what they have really been charged, or they simply might not be ‘experienced’ enough with payment practices to understand.  “They don't have a choice the first time right? If it's a hidden fee, then by definition, you are not noticing that fee. How much did I have to pay for an overdraft as a 21-year-old? How much do I have to pay in foreign exchange to live in Senegal (receiving an international payment there) before that choice (arises) to move on (to another provider)? I think hiding those fees on such transactions takes that choice away from the consumer…which is why at Wise we are very, very actively supportive of transparency […) especially in not hiding any exchange rate markup.”

Not all fees are alike, some are deterrents to risky banking practices

One common theme affecting banking customer behaviour beyond the difficulty of changing core financial services relationships is that some of the fees consumers and others, like Wise, call ‘junk’ might more aptly be termed ‘extra’ or even ‘necessary’ by some of the companies assessing them on customers.

This is because for many years, overdraft fees for non-sufficient funds (NSF) cheques presented for payment, or on ACH transactions or outgoing wire transfers (usually only allowed for business clients) were considered either attempts at behaviour-changing or ‘credit-based’ products – with the former including high enough fees to be considered punishment for breaking the rules outlined for depository accounts, and the latter being added to business transactions to deter indiscriminate use of the bank’s money, often called ‘daylight overdrafts’ in customer agreements and institutional and industry regulations. Credit card interchange fees are another example.

All of these fees charged by financial institutions are under increased scrutiny for one reason or another. Yet some of the overdraft fees imposed by banks could certainly be viewed as ‘excessive’ in certain cases, especially when piled on top of each other in one incident, such as when a customer forgets to deposit a large cheque payable to them, or doesn’t receive an expected deposit to their account yet has written several cheques in advance that alone or in combination with others all begin hitting what’s soon an empty account – one getting emptier and further in the red with every new returned item and ‘bounced’ cheque fee charged. Even so, such charges are required to be disclosed up-front in standard account agreements, so to claim them as completely unfair or unexpected shows a lack of clarity and/or care on the part of the consumer or business customer (if applicable) when establishing the account.

Overdraft fees being shelved, international payment charges next target

Fair or not, overdraft fees are definitely now falling out of favour with many financial institutions. President Biden, in his October 2022 address proudly noted the work his team had done to encourage American banks to reduce or remove such charges on consumer accounts. “Thanks to our efforts so far, three quarters of the country’s 20 largest banks are getting rid of fees for bounced checks.  The average fee for a bounced check was 50 bucks. They’re getting rid of them, and that matters.”

Moving the discussion back from long-imposed account fees to international payments, the issues get much murkier, or significantly clearer, as Wise would characterise pricing practices in the present and fast-growing global transaction marketplace.

The company’s main focus in publicizing the survey and promoting their campaign is to reduce the costs involved in their main business area. They point to one statistic from their survey in particular to show “alignment” by all Americans on the topic:

“81% agree that a hidden fee included in a currency exchange transfer (i.e. currency exchange markup) is a junk fee. And given that, Americans lost $5.8 billion in hidden exchange rate markups during 2023, it’s imperative that action is taken.”

Transparency will encourage more commercial opportunities for all, say proponents

Wise views disparate, confusing, and often opaque international payment pricing practices as a problem to be fixed to help improve commerce - and encourage more individuals and companies to take part in market opportunities - through driving down what they view as excessive, often undisclosed or tough-to-find transaction fees and costs.

They point out in a previous global remittance practices review, that this isn’t the first time the issue of unfair or non-transparent pricing on financial transactions has arisen in American policy debates. “The Dodd-Frank Act of 2010 created fee disclosure rules for remittances (yet) banks and providers can still inflate the cost of remittances through hidden fees in the exchange rate.”

“At Wise, we have been fighting for transparency in international payments, and across financial services, since our founding, because we know how much junk fees have an impact”, says Harsh Sinha, chief technology officer for the company. Wise actively encourages its clients and prospects to compare (regularly researched) pricing on international payments from various providers up-front, before transactions are completed, in some cases before they have established a relationship with the company at all.

In many instances, the differences in net cost can be substantial – as much as several percentage points of the transaction value or dozens or hundreds or more of local currency units in expense straight off the top or lopped off the receiver’s end of the transaction. These expense variances can be traced to the actual fees to initiate transfers or other payments (usually disclosed up-front), but also to other per-transaction fees, higher exchange rates charged, intermediary routing charges to process payments through correspondent banks, and fees to beneficiaries for receiving and depositing payments routed across currencies or borders.

With all of the talk about such expenses being examples of ‘junk fees’, just like charges tacked on to a hotel bill for ‘resort fees’ that simply pay for bottles of water or basic internet access for guests, or ‘convenience fees’ that add $10 or $15 or more to the price of a concert ticket (bought via credit or debit card, then sent electronically, which does seem convenient, albeit much less expensive for all parties concerned than exchanging cash in person, then printing and securely sending paper tickets to concertgoers), what really qualifies a fee as ‘junk’? Wulfing said it really is all about that transparency, or lack of it, pointing out that it’s not inherently a bad thing to charge a fee, or even to price a transaction higher from a foreign exchange standpoint.

Anyone associated with international payments knows that there are a myriad of costs and risks associated with holding, hedging, maintaining, and trading on local and foreign currency accounts, not to mention providing the technology and operations, service, and compliance teams to support payment transactions as they flow to and fro across the globe in ever-increasing volume, frequency, and value. Wulfing reiterated that if the customer is informed of actual pricing up-front, then it’s up to them to make a decision on how to proceed – if not the first time, then certainly for future transactions or situations when they have time to consider other providers, or even other banking relationships.

“Wise charges fees, right? Unfortunately, it's not free to send money across borders. For many reasons, like you mentioned. But also, for unfortunate reasons like the old system that we currently have to navigate where there are a lot of banking intermediaries in a traditional payment.”

Forging new ground as a payments company, and not a bank, in the American marketplace, not an easy task, she said. “In the United States, we still don't have direct access to the central bank system. You know, every other G7 (organisation of most of the world’s top seven economies) country in the world is now or is planning to allow direct access to Central Bank systems for approved risk-assessed payments companies. This is something that the United States should be doing because it would make payments a heck of a lot cheaper. And this is something that the G20 (global organisation of the top 20 economies) Working Group on cross border payments also advocates should be done.”

Lower costs for foreign payments are a worthy goal

“Cross- border payments are expensive right now, and we're doing all we can to bring that cost down”, Wulfing concludes, noting that nonetheless “providers should show their fees.” This is important not just to large multinationals, she asserted, but also smaller companies and entrepreneurs attempting to expand their businesses into the global marketplace.

On the consumer side, sending money back home is only one common application for international payments now. “It’s not just remittance centers. It's also small businesses trying to compete on that global scale (and they are) losing billions of dollars, each year, just on exchange rate markup.”

Wise would like their customers to join them in the fight against what they deem hidden and unjustifiably high payment costs and while they are urging American consumers to contact their legislators and the CFPB to encourage new rules, they are also hoping for further administration action on the topic. Their survey audience would surely agree that junk fees – as they define the term - must go. Over half of its respondents said that such charges negatively impact their financial situations, and 51% “reported a negative influence on their emotional well-being.”

If the CFPB doesn’t act to take up the cause, Wise can look to the survey’s reflection of strong discontent with ‘junk fees’ as a potential political talking point. With the 2024 presidential, congressional, and senatorial election campaigns looming, they note the fact that 74% of the survey’s respondents said junk fees are “an important issue” – and support of reform aimed to remove them would be a factor in determining who gets their vote.

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