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Expat Briefing Editorial Team
18 June, 2013
For some of us the foreign exchange (forex) market is something we only encounter when going on holiday abroad, and many of us will often be heard to grumble that our pound/dollar/euro doesn’t go as far as it used to. However, for expats living or working temporarily overseas, exchanging money from one currency to another is almost an everyday fact of life, and managing currency risk is therefore crucial to ensure that one’s hard-earned income is not gobbled up by volatile exchange rates and transaction costs.
Consider the example of the millions of British expats who suffered as a result of the fall in the value of sterling a few years ago. Towards the end of the last decade, sterling fell about 20% against the euro. This meant that people who had left the country to live in places like France and Spain, but who still received income in pounds from the UK, saw the value of their income reduced by a commensurate amount when converted. For those retiring to a country in the eurozone on a relatively meagre income, this could be the difference between living a comfortable existence or subsisting on much reduced income. Some expats were even forced to return home.
Sterling remains relatively weak against most of the world’s major currencies, and one still tends to get considerably less for the pound than a decade or so ago. It is not surprising therefore that fluctuations in exchange rates are one of the top financial concerns for expats. A survey published by Lloyds TSB International in June 2012 showed that well over half (57%) of expats are concerned about exchange rate fluctuations and the impact they could have on their finances. For those living abroad on modest incomes adverse exchange rate movements can be especially punishing, and an earlier survey by the bank found that almost nine in ten expats with annual incomes of GBP25,000 or less were worried about exchange rate volatility.
Furthermore, commission and currency conversion can further eat into a cross-border transfer, and all told it is said that British expats lose as much as GBP400m annually due to exchange rates and charges when converting their income into the local currency.
However, the foreign exchange conundrum works both ways and will obviously affect those who send money home, for example to service a mortgage or pay school fees, as well as individuals receiving income from back home while in their host country.
So, if you are an expat retiree, or a peripatetic employee who is sent on assignment to a number of different countries, what do you do? Well, as one would expect, the answers range from the simple to the complicated.
Transferring and Exchanging Money
First, we deal with the mechanics of exchanging and transmitting money from one currency to another, and a bank is likely to be your first port of call if you are intending to transfer relatively large sums of money on a regular basis.
Most of the major banks have international or expat divisions which offer specialised currency services to expatriates. Unfortunately, even these ‘expat’ banks have charged for transferring money from one currency into another, and therefore the fewer transfers you make, the cheaper this will be in the long run. In more recent years though, banks have increasingly begun to offer ‘fee free’ expat banking. Lloyds TSB International for example, introduced fee-free banking on May 31, 2012, while Citibank has recently removed transaction fees on cross-border money transfers.
Advances in electronic communications have made moving money from one place to another considerably easier than in the pre-internet era, and online bank accounts are now commonplace, including in the area of expat banking. Indeed, HSBC’s 2012 Expat Explorer survey showed that Online banking is by far the preferred choice for all banking transactions and interactions among expats with bank accounts, with 80% of expats doing their banking online when making a payment. In comparison, only a fifth (20%) of expats make a payment face-to-face in a branch. Interestingly “mobile” banking via mobile phones and other portable devices has yet to catch on, with only 5% using mobile apps to make payments.
For the less computer-savvy, or in the case of those who simply don’t trust the security of online transactions, international money transfers can still be made in more traditional ways. One example would be via telephone banking, although if this is going to be one’s preferred method of moving money around, it goes without saying that somebody needs to be on the other end of the line when you need it! Some banks, like HSBC, operate a 24/7 telephone banking service, but others may close for certain periods so this could be a problem if the country you are transferring funds to is outside of office hours . It is also possible to initiate a transfer in writing, and this will usually be facilitated by filling out a form and sending it to your bank, although this will obviously be slower, and could become tedious and inefficient if regular payments are being made.
One of the better ways available to shelter oneself from such currency fluctuations is to use a multi-currency account. These accounts enable you to hold your cash in a variety of currencies within a single account, and these facilities are now offered by many offshore banks, including the offshore branches of the major retail banks. As the name suggests, a multi-currency account may allow you, for example, to hold money in dollars, euros or pounds, and switch your deposits from one currency to another to take advantage of exchange rate trends. Multi-currency accounts also make life easier in terms of receiving income in one currency and paying bills in another; and by placing your currency needs all under one roof, so to speak, you will be charged only one set of fees, preventing you from racking up charges from holding several foreign currency accounts at once. What’s more, you could maximise interest income on your deposits by switching to the currency which attracts the highest interest rate.
As mentioned, banks are increasingly beginning to offer ‘fee free’ services for expats, but for those that are not it is worth knowing that levels of fees and service may vary depending on your typical account balance and the amounts of money you regularly transfer. Banks will often reduce or waive fees, and offer better exchange rates for those making regular and substantial transfers. Generally speaking, the higher your balance and the more you transfer, the better you will be treated! Like most financial services though, terms and conditions attached to expat bank accounts vary considerably from one bank to another, so it pays to shop around.
Another option to consider is using the services provided by a specialist foreign exchange broker. As these firms tend to specialise only in foreign exchange services, and mostly to deal in larger amounts of currency, they are usually able to secure much better exchange rates than banks and could be more cost efficient to use generally. And because they are more attuned to movements in the various foreign exchange markets, they are in a better position to offer advice on mitigating future risks stemming from exchange rate volatility.
A one-off transfer will probably be made at the spot exchange rate, or in other words, the current interbank rate at the time the exchange was made. This is fine until you realise a week later that the exchange rate has moved, and you could have saved yourself some money! However, exchange rate fluctuations obviously become more of an issue if you need to make a series of regular transfers between currency accounts, or if you plan to make a large purchase or investment, such as a house purchase. Fortunately, there are ways to “lock in” an exchange rate and hedge against unfavourable currency movements.
Many forex brokers and banks now offer forward contracts to cancel out the risk of future adverse exchange rate movements. These allow a stated amount of a given currency to be bought or sold at a specific price on an agreed date or range of dates in the future. Typically, a broker or bank will offer two types of contract: a fixed forward contract, where a client sells one currency, in exchange for a different currency, for a set amount, at a specific price, for delivery on a specific date in the future; and an option dated forward contract, where the customer sells one currency, in exchange for a different currency, for a set amount, at a specific price, but for delivery between two dates in the future. These contracts are, however, not an attempt to predict the rate at which two foreign currencies will be trading at a given point in the future. They are in fact calculated by taking into account the difference between the interest rates of the two countries involved. For example, on a six month forward contract, a bank may earn a lower rate of interest holding one currency deposit for the next six months compared with the rate of interest it is paying to borrow the other currency for the same length of time. The difference between the two is the interest rate differential and in this situation the difference is charged to the client by building it into the forward exchange rate itself. It must also be borne in mind that forward contracts such as these are legally binding on both parties.
So there are various ways in which expats can manage currency fluctuations to their advantage. But, as elementary as it sounds, it is crucial for expats to have an awareness of the problem in the first place. Although one individual can do nothing to change foreign exchange rates in their favour (it takes trades in the billions to move a currency even the slightest one way or another), a badly-timed transaction, or a series of them, could certainly have a detrimental effect on your financial health. Therefore, becoming more attuned to movements in the foreign currency markets will certainly help in avoiding such costly mistakes. Few expats will have the time or the inclination to spend every waking hour in front of a computer monitoring exchange rate movements, but there is a growing number of online tools and apps available to keep expats in the forex loop, and these are well worth researching. One notable example is an app called iAlert, developed by Barclays International. This free app allows users to track up to 75 pairs of currencies in real time, set exchange rate thresholds for their chosen currencies, and receive email alerts once these thresholds are hit. The iAlert app also comes with foreign exchange tutorials and Barclays International’s latest research on the currency markets.
In short, ignorance is most definitely not bliss for expats when it comes to forex!
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