Thursday, October 29, 2015

In which we learn how to minimize high and hidden foreign money exchange fees while buying a house

We arrived at Pisa yesterday around noon, rented a car, drove to San Salvatore, bought a few groceries, and then went to bed for 12 hours in order to make up our sleep deprivation from the journey. I went to our bank in Pescia this morning to assure that the bank transfer needed for our final house payment had also arrived safely, and I not only confirmed the success of the transfer but also obtained four cashiers’ checks (called assegni circolari) to give to the four owners of the house after we sign the final papers tomorrow.

It’s always a bit stressful for me to have to do new things like going to an Italian bank when I still haven’t mastered the language, but in truth, such challenges are among the reasons I like coming to Italy. It helps me relate to the struggles that my grandparents must have faced in immigrating to the United States, and it furthers my goal of learning the language. It would have been easier to have had a bi-lingual Italian friend accompany me, but I need to stretch myself and put my lessons to practice.

And speaking of learning, I’ve discovered much about how to move money from one country to the other. We had to transfer an earnest money payment in April, and then we had to pay the balance in two even amounts in July and October. It’s not inexpensive to do this, but I did discover a new service that has saved me more than $5,000, so it’s worth mentioning in case anyone else reading this has to do something similar.

The first step involved opening a bank account in Italy. I am told that the normal procedure for this involves obtaining an introduction from someone who already has an account at the bank, a long-standing tradition in Italy, where word-of-mouth recommendations are still highly valued. Being an avid “do-it-yourselfer” when it comes to my Italy hobby, I first tried going to a bank myself last spring. It was the bank directly across the street from the house we are buying, so I sort of figured that the house itself was my source of introduction. I was offered the possibility of starting a bank account there, but the cost was about 100 euros a year. While considering this, I also tried to sign up with the online bank ING Direct, but I learned that I must be a resident of Italy to qualify as a customer there. Then our friend Elena Benvenuti offered to introduce me to her banker at the Banca di Pescia, a credit union. Besides having the advantage of Elena to translate, the fees were much lower than the first bank I had tried, so I signed up for an account.

Then came the issue of transferring the money. I first called my bank in Gig Harbor to ask about the cost of a transaction. It would only be a flat fee of $50 for an international transfer, I was told. Wow, what could be wrong with that? Let’s do it. But not so fast . . . I discovered that after the money goes from my bank, it hits an international bank that tacks on about 3.5 percent more than the actual dollar/euro exchange rate – all without actually mentioning this to the customers, who may never realize this is happening if they don’t compare the rate quoted by the bank with the actual exchange rate. I noticed this right away because I was checking the mid-market rate on Google almost daily so that I could do the exchange at a time when it was more favorable. I knew how much I needed to send in dollars to make the first payment in euros, but when my bank told me how many euros would be deposited into my Italian account, something was wrong with the math.

Well, my banker explained, the international banks use a different exchange rate. They don’t call it a fee, but basically they skim about 3.5 percent off of each exchange, and they do it so seamlessly that most customers either don’t realize it or don’t think there is any other way around this. We are paying 160,000 euros for our house, plus another 15,000 or so in taxes and fees to our real estate agency, notaio and geometra. Translate 175,000 euros into dollars and then add 3.5 percent, and that comes to around $7,000 I’d be paying in exchange fees. The same is true for Western Union, which says transfers have a fee of zero, but the exchange rate they use is about 10 percent higher than the actual mid-market rate.

After doing some research on the web, I found many people complaining about the hidden dollars that international banks are collecting on money transfers. I also found that there are new alternatives available that technically don’t involve changing currencies and thus avoid the international bank exchange rates. The first and best known of the new currency conversion companies is TransferWise, founded in 2011 by two Estonian men who were living and working in London when they hatched the idea. One was being paid in pounds but had bills to pay in Estonia, and the other was being paid in euros but needed pounds for his living costs. They came up with a way of sending money into each other’s accounts, which meant they didn’t have to pay extra fees for the exchange.

Soon they converted this concept into a service that everyone can use. From the customer's point of view, money transfers with TransferWise seem no different from conventional money transfers: The customer chooses a recipient and a currency, the money to be transferred is taken from his or her account, the transferring company charges for the service, and a few days later, the recipient receives the payment in the chosen currency. The difference lies in how TransferWise routes the payment. Instead of transferring the sender's money directly to the recipient, it is redirected to the recipient of an equivalent transfer going in the opposite direction, and vice versa, thus avoiding currency conversion. There is an fee for the TransferWise service, about $1,400 for moving $200,000, but this is far less than the unstated surcharge of around $7,000 that I’d pay to send the same amount through the banking system. I also had to pay my bank $25 to make a domestic transfer to TransferWise’s bank in New York.

According to the Transferwise website: “Banks have been treating people unfairly for decades. They charge you huge fees when you convert your money to other currencies. Then they hide more fees in unfair exchange rates. TransferWise has found a simple way to bypass the banks and make international money transfers transparent and fair. Like they should be. The pricing is transparent, the exchange rate is the real one, the small fee is easy to spot, and we pay out locally in most cases meaning no receiving fees.”

TransferWise is being credited as a digital innovator that is “shaking up the business-as-usual model” by The Times of London, which has listed it on its top 10 “disrupters to watch.” It’s many investors include Richard Branson, co-founder Max Levchin, former Betfair CEO David Yu and co-founder Errol Damelin.

My most recent transfer arrived about a week after I sent it, and since it came in euros, there was no fee added at my bank in Pescia. One added complication is that the bank manager questioned why the money had been routed through Estonia and asked for evidence that it was actually my money. I think this particular concern has more to do with the complicated banking and legal system in Italy, a country that is famous for extensive government regulations. It was an added challenge for me to try to explain in Italian how TransferWise works, and I ended up referring him to the Italian version of the TransferWise website, which he loaded and read while I waited.

Now all that remains is a meeting tomorrow at our notaio’s office to sign the final papers and make the last payment. If all goes well, we will be handed our keys!

Footnote: For smaller payments, we try to use our American credit cards whenever possible. We have two cards that don’t charge an exchange rate. And when we need cash, we use our bank ATM cards at Italian bank machines, which limit our withdrawals to 500 euros per day.