When to use Peer to peer transfer platforms such as PayPal or Transferwise and when to use An FX broker?

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Transferring foreign currency to a person or business abroad? Foreign exchange transfer specialists are a cheaper option than using your bank. Here we’ll look at the two main categories of this kind of specialist provider – brokers and P2P platforms. Both have respective strengths in relation to different values and kinds of foreign currency transfer. Here we’ll detail their similarities, differences and what kind of transfer they are best suited to.

Comparing How Foreign Exchange Transfer Brokers and P2P Platforms Work

In general, P2P platforms are the cheaper option for transferring smaller sums of up to £4k of foreign currency abroad whilst brokers are cheaper for larger transactions such as repatriating personal finances, business payments or buying a property abroad.

Exchange Rates:  Firstly, both brokers and P2P platforms offer exchange rates that are typically much more competitive than those of banks. A recent article in The Telegraph puts the difference at around 4%.

In the case of P2P brokers, this is the actual market exchange rate you will find on Google, with nothing added by the broker. When possible, P2P brokers will match different users making the inverse currency transfers, avoiding middlemen. For example, Richard in the UK wants to send his nephew in the USA $200 for his birthday. Brad in the USA wants to pay £150 to a UK-based freelancer who did some work for him. The P2P platform will use Richard’s pounds to fulfil Brad’s exchange and transfer and Brad’s dollars for Richard’s. This means international transfers are usually not required, further reducing overheads. This internal matching process isn’t always practical (there aren’t always enough users making inverse exchanges and transfers at the same moment) but is used by P2P platforms as much as possible. When they can’t match inverse client orders, P2P exchange platforms still buy currency in via traditional interbank markets.

Brokers use the interbank market with a much smaller mark-up than high street banks and are also always working from the live rate when providing quotes. They also largely avoid international transfer costs by having accounts in different countries.

Transfer fees: P2P platforms charge a transfer fee based on a modest % of the overall transfer to compensate for the fact they don’t make any money on the exchange rate. Transferwise, for example, charge a flat 0.7% fee. For the exchange and transfer of sums less than £4k it will usually be cheaper to use a P2P platform. However, it is worth comparing costs with brokers just to be sure.

Brokers will usually charge a small transfer fee for lower value transactions and waive this for sums of more than £3k. This could be slightly more or less depending on the particular broker.

Currency Hedging Services: Currency hedging services are varied but they allow the client to safeguard against exchange rate fluctuations. Brokers offer different options for their clients to hedge their exchange, an option that most P2P foreign exchange transfer platforms do not. This is the main reason why brokers are often preferred for higher value transfers of over a few thousand pounds. The most common hedging mechanisms brokers offer are:

Forward contracts – a forward contract allows the current exchange rate to be locked in.  If you know you need to make a transfer at a future date and are concerned that there is a reasonably high probability the exchange rate will move against you in the meanwhile, a forward contract allows the current rate to be fixed. For a small premium and a deposit, you can order a transfer to be made at a future date at today’s exchange rate.

Limit orders – if a transfer is not urgent, a limit order allows you to set an exchange rate at which the transfer is made when the market reaches the assigned level. Let’s say you have to transfer $50,000 euros within a month. The current exchange rate is 1:1.13 but you think that there is a reasonable chance it may reach 1:1.15 or 1:1.16 at some point over the next month. A limit order would mean the exchange and transfer is automatically actioned as soon as the better exchange rate you set is touched. If it isn’t, the transfer will be made anyway at the deadline date agreed.

A limit order can also include an order to action the transfer at a particular level if the exchange rate moves in the opposite direction to what you expect in the meanwhile. This is called a stop loss order.

There are also slightly more complex hedging mechanisms brokers often offer, such as currency swaps, that your personal advisor can offer advice on.

Personal Service – another plus of brokers is that they allocate clients a personal account manager. This manager gets to know the client and their personal or business needs. Because they are also foreign exchange professionals, your account manager will often be able to offer helpful guidance when it comes to making the most of hedging services available, based on the probability of future exchange rate trends. You can also often negotiate through your personal account manage on exchange rates offered by the broker, particularly for larger transfers and if a regular client.

P2P Platforms vs. Brokers: Which Service Should I Use for My FX Transfer?

In summary, P2P platforms are often the most cost effective and convenient foreign exchange transfer option for small sums of up to around £4k. There is no commission or spread on the mid-market exchange rate and the small flat transfer fee, under 1%, won’t add up to much in pounds and pence. If you will be making regular month transfers of a few thousand pounds, it is worth speaking to a broker and asking if they can beat P2P platforms by waiving transfer fees or reducing their commission.

For larger value transfers, in most cases a broker will be the most appropriate choice. At over a few thousand pounds, a slightly inferior exchange rate will generally still lead to a lower end fees total than the flat fee P2P platforms charge, even if modest. The difference will become more pronounced the larger the transfer is and currency hedging services and the advice of a personal account manager should also mean additional cost efficiencies can be secured.

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