Transfer money overseas at almost zero cost with TransferWise

New money transfer service TransferWise can cut the cost to almost zero for small transactions, and is now the cheapest option for those transferring up to £5,000

How much do money transfers cost? The cost comes both in fees (which are also called commission) and hidden in the exchange rate.

The “real” exchange rate is what banks give each other to exchange currency. Customers usually get a worse one, which is where the hidden cost comes in. That's why you shouldn't jump for joy when you're told a foreign exchange is “commission free”. It is not a free transaction.

Here's an example. The “real” exchange rate might mean that you should get €126 for £100. However, you're offered just €119.

Plus, some companies will charge fees on top. Fees can be fixed or based on a percentage of the transaction. It can be very expensive, particularly if you transfer money overseas regularly. But there's a new top dog in town - TransferWise.

The former number one

I have written about super-cheap overseas transfer service CurrencyFair a few times before.

It's a peer-to-peer service for exchanging currencies. You pay a deposit into a client account at CurrencyFair. Then, people who have foreign currency but need pounds, offer to exchange with you. Since lots of people are competing for your pounds, this gets the exchange rate very close to the real exchange rates.

CurrencyFair then swaps your pounds for your chosen currency. When you pay into your foreign bank account, it takes just a £3 fee – which is its only charge.

I have used CurrencyFair every month for some time now. If I transfer around £1,500, I usually pay a total cost – that's both the exchange rate offered by other users plus the £3 fee – of between £6 and £14, with the cost averaging probably closer to £8. This is around a fifth to half the cost of a typical exchange broker, and banks are even more expensive.

Sometimes the total cost of my transfers is less than the £3 fee, because the exchange rate that my peers offer me are actually better than the real exchange rate.

I expect that as more and more people use CurrencyFair, the rates could be shaved down even more.

The new number one can be almost free

I thought that CurrencyFair would never be beaten, except perhaps if another peer-to-peer service came along. I was wrong. TransferWise appears to be even cheaper.

Apparently this new broker has been around for a year, but it's been very quiet about it. TransferWise gives you the real exchange rate and takes just a tiny commission.

If your overseas transfer is £300, the total cost is almost zero, at a fixed cost of just £1. Over £300, the commission rises to between 0.45% and 0.5%, with a £1,500 transfer costing about £7.

Comparing the two services

TransferWise's fees are fixed, so the cost is always known to you. The cost of CurrencyFair, on the other hand, varies depending on what other individuals offer you.

However, looking at today's CurrencyFair rates, they look pretty normal in my experience.

I compared the prices of the two websites, testing exchanges in three different currencies.

For £300 exchanges, TransferWise was around one quarter of the cost of CurrencyFair, at just £1 total cost.
For £1,000 exchanges, TransferWise was just over half price compared to CurrencyFair, costing about £4.50.
For £3,000 exchanges, TransferWise's charge of around £14.40 was between three-quarters and 90% of the best price available on CurrencyFair.
At £5,000, both services cost pretty much the same, except for the Polish zloty, where CurrencyFair edged slightly ahead, costing £23.90.
At £10,000, CurrencyFair was cheaper with two currencies, but with the Swiss franc it was a little bit more expensive.

Overall, TransferWise was cheaper, but larger transactions begin to skew it more in favour of CurrencyFair.

There are two disadvantages to TransferWise

The first downside to the newer service is that it currently lists just three currencies that you can exchange pounds against: the euro, the Polish zloty and the Swiss franc. CurrencyFair lists those plus 11 more currencies.

If CurrencyFair can't exchange into the currency you want, the next cheapest option looks like Azimo, which I wrote about one month ago (before I discovered TransferWise) in New low-cost international money transfers.

The second downside to TransferWise is that you can only exchange a maximum of £10,000 at a time. You could try to split your transfer and get away with doing more than one exchange per month, but make sure you compare the costs with doing a single exchange through CurrencyFair before doing so.

CurrencyFair has no maximum transfer size.

Watch the charges

It remains to be seen if TransferWise's low costs are sustainable. No one else has managed to get costs down so low in the past, not even with peer-to-peer transactions.

Whichever service you use, you need to beware of being stung by fees from an overseas bank. This happened to one reader recently after using CurrencyFair.

As I have written before, the recipient bank sometimes charges you when you send money to it from overseas. These charges are beyond the control of your currency exchange service, whether you use TransferWise, CurrencyFair, or anyone else.

When you change service, or the service you use changes its bank, or when the recipient bank changes its policy, or if you send money to a different bank or country, all these things can result in an unexpected charge at the other end. Sometimes complaining to the recipient bank helps.

Otherwise, you might have to try another service. And now we have two super-cheap exchange services to choose from.

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