Santander memo warns cash-transfer profit at risk from new rivals
A leaked internal memo from Santander reveals senior execs believe that 10% of the firm’s global revenues – those generated by foreign exchange margins - is at risk from new competitors like Transferwise. The bank is said to charge six times more than Transferwise to transfer £10,000 ($13,000) from the UK to Spain. The documents expose how much traditional big banks make from giving customers poor exchange rates rather than the fees charged for services.

When senior Santander executives gathered in the principality of Andorra in January this year, the bank’s “innovation director” warned that a large chunk of its profits were at risk – because the juicy margins it earns on money transfers could be destroyed by new competitors. The documents supporting these claims have since been leaked to Guardian Money, and reveal that Santander made €585m from money transfers – equal to nearly a tenth of its 2016 global profit of €6.2bn – and that it charges six times as much as rival TransferWise for sending £10,000 from the UK to Spain.

What the documents expose is just how much the big banks are making from giving customers poor exchange rates, with the bulk of their profits coming from the so-called “FX margin” rather than the fees directly charged. The FX (foreign exchange) margin is the difference between the exchange rates available in the money markets and the rate that a bank offers a customer.

In a warning flashed up on screens, Santander’s executives were told: “10% of the group’s profits at risk when international transfers repricing takes place.” They were told that while TransferWise, a relatively new start-up in the money transfer business, was charging €64 to move £10,000 from the UK to Spain, Santander charged €394 – six times as much. New entrants were “attacking the profitable slices” of its money transfer business, and if the bank charged the same as TransferWise its revenue would collapse from €585m to €95m, a fall of 84%.

The precise breakdown of the figures shows that Santander made €290m from its FX margin, or nearly 80% more than the €163m it earns from the standard fee. It also reveals that, when sending money overseas, there is another stream of revenue that a bank earns, called “correspondent banking”, which in Santander’s case is worth €132m. This is because the bank has to hold less capital as a result of its transfer business.

An excerpt from the leaked Santander document.

Santander does not deny the authenticity of the documents, but says its charges are clearly explained, are in line with other banks, and that the document can be easily misread.

“The document is for illustrative purpose only and shows the revenues (not profit) generated by Santander Group through international money transfer (IMT) across all our retail and commercial businesses in all countries. Less than 10% of [our] international transfers are generated in the UK,” it says.

The Santander document doesn’t surprise me. What does surprise me is how long they’ve been able to get away with it

“The slide is making the point that our profit would reduce by 10% if customers stopped doing international transfers with us and all other factors remained the same (costs etc). It is an entirely hypothetical scenario and in reality, of course, this would never be the case as our costs would also reduce were this to happen. It is not saying that 10% of our profits come from IMT as that would ignore entirely the costs we incur when providing the service – including, for example, the cost of operating our international branch network where the vast majority of the customers choose to go to make transfers.”

But the figures are likely to ignite fresh controversy over the extent to which consumers are being over-charged by traditional banks when sending money overseas.

Taavet Hinrikus, an Estonian tech entrepreneur, set up TransferWise in 2011 after moving to London to work for Skype, and becoming increasingly infuriated at how much he was being charged to send money home. TransferWise now employs 600 people and claims to have grabbed an 8% share of the UK international money transfer market, shifting £800m a month.

Hinrikus says he was pleased to see Santander namechecking TransferWise in its internal documentation as one of the leading “disrupters” of the current money transfer market, although he says that all the main banks are overcharging.

Taavet Hinrikus set up Transferwise after becoming infuriated at how much he was being charged to send money home. Photograph: Martin Godwin/The Guardian

“It’s a massive consumer rip-off, but the Santander document doesn’t surprise me. What does surprise me, is how long they’ve been able to get away with it. This is a major issue – three-quarters of consumers who regularly send money abroad can’t work out the final cost when fees are factored into the exchange rate. Consumers and businesses are losing £5.6bn a year in the UK because of rate mark-ups.”

Research by Guardian Money in August last year confirms how expensive it is to use a high street bank to transfer money overseas. We found that when transferring £200 into US dollars NatWest would give us $229.31, but TransferWise would offer $260.95 – nearly 15% more. Our survey of the main operators found that TransferWise, UK Forex and the Currency Account were cheapest to transfer small (£200) and medium-sized sums (£2,000) abroad, while HiFX and the Currency Account were best for large sums.

Santander says price is not the only factor that customers consider when moving money. “Our aim is provide not only a price competitive service, but also a secure and convenient one for our customers, leveraging our international branch and ATM distribution channels. TransferWise are a ‘digital-only’ proposition.

“Further, when a client sends money from his or her Santander account in the UK, to a Santander account in Spain, through Santander’s network, it is protected by either the deposit protection scheme in the UK, or the ‘Fondo de Garantía de Depositos’ in Spain. That is not necessarily the case with other providers,” the bank says.

TransferWise’s business model is different to traditional banks. It is a “peer-to-peer” service that matches up people in different countries who want to change money. It doesn’t actually transfer much itself – instead it matches users based on the currency they have and require. So if someone wants to convert their pounds to euros, TransferWise finds someone who wants to transfer money in the opposite direction. It is regulated by the Financial Conduct Authority, but money is not protected by the Financial Services Compensation Scheme. In all international money transfers, Guardian Money recommends that readers first send a small sum, to verify that the cash is reaching its intended destination, before using an online transfer service.