Introducing Monito’s Cheapest Available Option (CAO) index: Sending money from Europe is much cheaper than previously believed
Our in-depth analysis of the cost of sending money online from the Eurozone and the United Kingdom, based on more than 10,000 observations collected simultaneously.
It is a well-known idea that sending money abroad is expensive. We in the industry have a collective duty to work on reducing the costs of remittances. But how expensive is it really?
The most used reference points are the figures published four times a year by the World Bank, whose latest estimates from March 2017 put the average cost of sending money from the United Kingdom and from the Eurozone countries between 6% and 8%.
These figures are simple unweighted averages, which don’t take into account the size of the money transfer flows or the market share of the sampled providers. With this methodology, the cost of a small bank’s service for sending money from Italy to Nepal will have the same effect on the average as the cost of Western Union’s service from the UK to India.
We wanted to study the cost of international money transfers from a different perspective, leveraging the massive amounts of data we collect through our real-time price comparison engine to gain insights into the cost of sending money online from Europe. We present our Cheapest Available Option (CAO) index.
Evaluating the cost of the cheapest available solution – our methodology
For this first report, we limited the scope of our analysis to money transfers from the Eurozone and from the United Kingdom. We also decided to focus on the 50 largest corridors by World Bank-estimated 2015 remittance flows for each of these regions, covering 92% of remittance flows from the Eurozone and 97% from the UK.
For each of these 100 corridors and for three different amounts (EUR/GBP 200, 500, 1000), we collected the fees and exchanges rates for the online bank to bank service of a large panel of money transfer providers, from giants such as Western Union to a range of online providers including TransferWise, CurrencyFair, Azimo or WorldRemit (see more here).
For each service and amount, a total cost was calculated in the same way as in our comparison table, i.e. by summing the fees and the exchange rate margin. The exchange rate margin is defined as the difference between the provider’s exchange rate and the prevailing mid-market exchange rate, multiplied by the send amount.
We then defined the cheapest available option within a corridor and for a given amount to be the service with the lowest total cost as calculated above. Finally, our CAO index for a given amount is calculated as the average total cost of the cheapest available option by corridor across all corridors, weighted by each corridor’s remittance flow according to the World Bank’s 2015 bilateral remittance matrix.
Here are the first results of our CAO index.
The graph above shows that the cheapest available option is between 1.38% and 1.10% of the amount sent, depending on how much you transfer. For a EUR 500 transfer, you’ll pay on average EUR 5.60 of transfer fees and exchange rate margin.
The average CAO index for the three amounts is 1.21%, a figure around five to six times lowerthan the World Bank’s global unweighted averages of 6-8% mentioned earlier.
The information captured by our CAO index is highly interesting. This 1.21% figure is what the average cost of sending money from Europe could be if everyone had access to and was using the cheapest option for all of their transfers. If we consider 1.21% to be a fair cost for transferring money, the two biggest challenges to effectively reduce the cost of money transfers are therefore:
- Financial inclusion: so that everyone can have access to the cheapest money transfer services, which often require a bank account or debit card to pay for the transfer and a bank account to receive the money
- Transparent information: so that everyone can find the cheapest available option for their specific needs
In the next sections of this report, we dive into more details about the composition of the total cost of money transfers and present breakdowns of the CAO index by destination countries. Make sure to also read our section about the limitations of this first CAO index and how we aim to improve it in the future.
Also, if you’re interested in getting access to the data we used to build this or if you need a specific data set on money transfer costs, don’t hesitate to reach out to us.
Decomposing the cost of a money transfer
Money transfer providers have two ways to generate revenues when transferring money abroad. Fees, typically transfer fees but these can also include payment fees (e.g. credit card fees), and the margin taken on the exchange rate when converting the customer’s money between the sending and receiving currencies.
The transfer fees are usually clearly and transparently communicated upfront. However, a very high proportion of customers are unaware of how much they pay in exchange rate costs (as found by World Bank research, see e.g. studies in the UK and France). This is of course an important problem, as our data shows that the exchange rate margin represents between 27% and 82% of the total cost of a money transfer.
For smaller amounts, the share of transfer fees in the total cost is higher. This is due to the fact that many providers have fixed transfer fees and/or minimum fees, while the exchange rate margin is always a variable cost component that becomes more important with larger amounts.
Money transfer providers have very different approaches when it comes to pricing. While most providers will apply both transfer fees and exchange rate margins, some providers choose one of both sides of the spectrum. TransferWise for example only charges transfer fees, and no exchange rate margin. Foreign exchange companies on the other hand, which specialize in sending large amounts, will only apply an exchange rate margin.
We calculated the value of our CAO index for money transfers from the Eurozone and the UK to be 1.31%. Breaking down this composite index by region gives a more detailed picture and yields additional insights.
The first distinction to make is between UK and the Eurozone as sending regions, which makes it clear that sending money from the United Kingdom is much cheaper on average than from Eurozone countries.
Two main factors explain why money transfers from the UK are cheaper. First, a lot of the innovative digital players in the industry are based in the UK and started their activity there, where they usually have their largest customer base. The increased competition means there is a higher pressure on costs.
Second, the biggest remittances corridors from the UK (India, Pakistan, France, Germany Poland) are all very competitive corridors for which the cheapest option is between 0.5% and 0.7%. It should be noted that Nigeria, the secondest largest corridor from the UK, has been excluded from the analysis due to the fact that the parallel market for exchanging Nigerian naira makes it complicated to make a fair assessment of the cost. In comparison, the biggest corridor from the Eurozone is Morocco, where the cheapest option is between 1.4% and 1.5%.
In terms of receiving countries, the countries for which Monito couldn’t find a solution costing less than 2% are in South America (Colombia and Peru), in Northern Africa (Algeria, Tunisia, Egypt), as well as the Balkan countries (Serbia, Kosovo, Albania) and Ukraine. Emerging economies receiving important flows of remittances, such as India or Brazil, have very competitive pricing with the cheapest option costing less than 1%, a figure close to the cost of sending money to Australia or Eastern European countries. The US, Sweden, Poland, the United Kingdom and the Eurozone are among the cheapest countries to send money to.
Current limitations of the CAO index
While this first CAO index calculation provides great insights into the cost of sending money abroad from the Eurozone and the United Kingdom, there are some limitations to keep in mind.
For this study, we only took a snapshot of the exchange rates and transfer fees at one particular point in time. As costs tend to change quickly and often, a more robust approach would be to consider average values over different periods of time.
We also limited the scope of our analysis to the largest remittances corridors from the Eurozone and the UK. While the coverage of corridors from the UK and Eurozone is already quite high, it is obvious that expanding the analysis to other major sending regions (e.g. the US) is necessary to build a global CAO index.
Our current CAO index calculations are based on money transfers paid from a bank account or debit card, and delivered to a bank-account. While these payment methods are often the cheapest options available for sending money internationally, this is not always the case. To better understand the impact of payment methods on money transfer costs, we intend to add more pay-in and pay-out options in our future analyses (cash transfers, mobile transfers, etc.).
Similarly, we limited our dataset to eleven hand-picked digital money transfer providers (Azimo, CurrencyFair, MoneyGram, OrbitRemit, PayPal, Small World, TransferGo, TransferWise, Western Union, WorldRemit, Xendpay). While these providers represent a broad sample of both the incumbents in the market and some of the most innovative providers, increasing the size of the sample would improve the robustness of our index.
Finally, a more complicated limitation is the fact that we don’t have access to a dataset allowing us to build a histogram of the typical amount sent on each corridor. This means that we are able to calculate the CAO index for specific amounts or range of amounts, but we cannot weight our averages by the actual distribution of the amounts sent on each corridor.
We believe that the CAO index is a great way to monitor the cost of remittances and the progress of the international money transfer industry.
The CAO index doesn’t illustrate how much people sending money abroad are actually paying in transfer fees and exchange rate margins, but it does show how little they could be paying if they had access to the cheapest available option for their transfer.
This analysis is only one example of the many insights we can gain from the data we collect on a daily basis. We look forward to look deeper into our datasets, and if you’re interested in getting access to our data to make your own research, don’t hesitate to get in touch with us.