Making payments overseas - what are the options?
There was a time when the most usual way to get foreign currency for a holiday or business trip was to go down to the post office or bank.
There you would hand your sterling over the counter for the currency of your choice and then physically take the money with you.
The slightly more sophisticated might have opted for traveller's cheques.
Companies which needed to pay their foreign currency invoices would turn to their friendly bank manager for assistance.
But times change.
Some UK consumers and businesses have increasingly looked for a better deal.
That applies when purchasing foreign currency for use on holiday, when sending a wire transfer to a cash-strapped young relative on a gap year in South America or, if a business, for paying an invoice associated with the import of goods and services.
Alternatives to banks
Some customers no longer see their bank as the first point of call for their foreign currency payments.
Independent firms, taking advantage of regulatory and technological changes, have been quick to come up with effective and innovative solutions.
They beat the banks hands down in terms of lower fees, better exchange rates and speed and efficiency of currency delivery.
The range of options around foreign currency purchase and international payments is increasingly diverse.
In terms of travel abroad, many consumers are now opting for specialist credit cards and pre-paid cards rather than carrying cash.
This is not least because there is now a legal requirement for the traveller to declare at UK customs if he is taking a large amount of cash currency out of the country.
Fast changing scene
The past 10 years have seen the growth of hundreds of independent money transfer companies in the UK.
Specialist money transfer and foreign exchange (FX) firms focus on payment services, domestically and internationally, and in all the associated aspects, including foreign exchange.
As a country which has so often been in the forefront in terms of innovations around financial services, it is perhaps no surprise that the UK has the largest number of independent payment companies in Europe.
It is estimated that as many as 1,200 Payment Institutions (PIs) will be in regulation by the FSA by the time the Payment Services Regulations (PSRs) come into full force from 30 April this year.
This is many times more PIs than in all the other European Economic Area (EEA) states combined.
The service these firms provide can broadly by divided into two areas: provision of FX and provision of money transfer services.
As we know, many UK citizens are purchasing and selling homes overseas, and are making regular mortgage and utility payments or receiving back in the UK the funds generated by a foreign sale.
Most will now opt for a specialist currency payments firm rather than the bank.
They know they will get a better exchange rate and it is likely that there will be no fee for the payment at all.
Well known names in this space include Caxton FX, TTT Moneycorp and Travelex.
Sending money home
Independent payments companies often operate online and are easy to access and to use.
They may not require customers to open an account, which explains why they are popular with recently arrived migrant workers.
They need to send money home to family and friends in the country of origin, but may not be able to provide sufficient evidence of residency in the UK to open a bank account.
Ten years ago, the only option for this type of consumer was Western Union (on the High Street) and Moneygram, available at the Post Office.
But now, migrant workers in the UK wanting to send money are served by a range of specialist firms.
Typically, they are run by natives of the community concerned and with strong roots both in the relevant UK community and the home country.
Based on those already regulated with the FSA as Payment Institutions, we believe there are at least a thousand companies focusing on the "send money home" market.
Well known names in this arena include Riaz (Pakistan), Jamaica National (Jamaica), AN Express (Bangladesh) and Giros Seguros (South America).
The size of the market in person-to-person money remittances is phenomenal.
The UK government estimates about £4bn was sent in personal money transfers in 2006.
The growing diversity of payment service providers creates a dilemma for consumers.
How do they know their money is safe - and what can they do if something goes wrong?
The most obvious precaution which the consumer can take is to verify how the company is regulated.
The first check is to see if the payments company is on the FSA register.
The customer must also understand whether the PI has been authorised by the FSA or is only a registered PI.
Payment firms which have authorised status have been through a higher level of FSA scrutiny than a registered PI.
In particular, authorised PIs have to demonstrate that they have adequate capital reserves, so that they can cope if they encounter a financial difficulty.
Also, the firm will have to prove that it is properly run by suitable people who have not been convicted of financial crimes.
Authorised PIs are also obliged to have procedures in place to safeguard client money.
Effectively, the authorised PI must keep the money paid across from customers for payment services in separate client accounts.
This means that, in the unlikely event that the firm goes out of business, the funds are protected.
They would be returned to the customer, rather than being taken by the receivers to pay general creditors.
By comparison, registered firms have to comply with a lesser burden of checks, namely:
- that none of the people running the firm have been convicted of financial crimes
- that it is based in the UK
- and, if it is choosing to safeguard customer funds, how it is doing this.
Further than that, it is important that customers understand what services the firm is being regulated to provide.
Here the law is less helpful.
While FX and money transfer firms are regulated for the payment services, they remain unregulated for the associated foreign exchange services they typically offer.
So, for example, if the customer is making a money transfer to a relative in France, that is a payment service and, as such, it is covered by the regulations.
But, if a consumer is using a Payment Institution to purchase currency for return to his own account, that is an FX transaction and not covered by the law.
From customers' point of view, the new law does give them somewhere to complain if something goes wrong.
All PIs are now subject to the jurisdiction of the Financial Ombudsman Service (FOS).
So, if the money does not arrive and the firm fails to sort the problem out in a timely manner, the customer can ask the FOS to intervene.
Another thing to bear in mind is that companies which seek to serve their customers well, and keep up to date with the evolving law around payments, are likely to be members of the UK Money Transmitters Association.
While the MTA does not audit its members (that is the job of the FSA), those who have joined will be aware of industry best practice on issues such as client funds holding, conduct of business, complaints handling and anti-money laundering procedures.
Another sign of good business practice and commitment may be demonstrated by firms which have signed up to, and display, the Remittances Customer Charter, which has been developed and promoted by the World Bank.
In summary, consumers can have every confidence in using the independent payments sector for their FX and money transfer needs.
But they do need to make sure that the firm is FSA regulated to an appropriate standard.
And it just plain common sense to be wary of deals that may look too good to be true.
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