Making banks disclose FX margins could be 'quick win' for competition, says rival

Monday, 13 May 2024

Converting currencies is money for jam for banks, critics have long argued.

The country’s competition watchdog could score a quick win improving banking competition by recommending banks are required to disclose their full foreign exchange fees and margins when converting currencies, a rival to the major banks says.

Jack Pinczewski, an Australian-based lobbyist at financial services firm Wise, said banks should have to disclose the full cut they took on each currency conversion as a single figure, using the mid-point of the exchange rate as the reference point.

Its proposal is believed to have interested Commerce Minister Andrew Bayly, who said the Commerce Commission had identified “potential issues” in that part of the banking market.

Wise is one of a number of a new breed of financial services firms, particularly popular among younger travellers, that significantly undercut the banks on foreign currency transactions.

Banks publish separate “buy” and “sell” rates for foreign currencies which might appear to imply that they themselves incur a margin charge when converting between currencies.

However, in many cases banks maintain a float of different currencies and “net off” transactions when, for example, customers convert US dollars into Kiwi dollars or versa versa, meaning many conversions will effectively cancel-out.

Commerce Minister Andrew Bayly says the Commerce Commission identified “potential issues” in the FX market.

Their only significant costs in that situation would be administrative and the “opportunity cost” of holding some amount of money in a liquid form in foreign cash, forgoing the interest they could earn if they instead loaned out those sums.

Pinczewksi said Wise sometimes also used the netting-off technique when transacting between major currencies.

Its total average charge when converting between 1200 currencies averaged 0.67% of the value of the transaction, using the midpoint exchange rate as the benchmark, he said.

But different banks in Australia had margins of between 2.5% and 5%, he said.

Rates in New Zealand appear slightly more competitive than in Australia.

Banks here maintain a spread of about 4% between their advertised retail buy and sell rates on conversions of major currencies, which would indicate their margins from the mid-point would be about 2%.

Large corporates got a far better deal and some banks would offer improved “wholesale” rates when converting larger sums of money for other customers, but there was no guarantee of that, Pinczewski said.

It was not possible to tell what proportion of bank profits came from foreign-exchange mark-ups, but they would generate a “substantial amount of money”, he said.

Banks tended to focus their disclosures to consumers and small businesses on the fees they charged, sometimes advertising foreign currency transactions as “fees-free”, rather than disclosing their full margins, he said.

The former government explicitly discouraged the Commerce Commission from putting a major focus on foreign exchange services or on KiwiSaver, wealth management or insurance services when it kicked-off its market study into the banks last year.

But Bayly appears open to taking action in the area, saying the Commerce Commission had identified “potential issues” in the services provided by the banks.

“The Commerce Commission’s personal banking services study is an independent process,” he said.

Westpac said it would work with the Commerce Commission if it extended the scope of its market study to include foreign exchange services.

“While foreign exchange services are not a focus of the study and have not been included as part of the study’s draft recommendations, I do note these services were part of the commission’s exploratory research for the draft report,” Bayly told The Post.

“From its initial research, the commission has indicated it sees potential issues with pricing transparency in foreign and money transfer services and merit in more detailed assessment of the scale of these issues and how they may be affecting competition.”

Bayly made clear the commission would be allowed complete its market study into the banking industry despite earlier suggestions it could be terminated early in favour of a separately promised select committee inquiry into the industry.

“I am looking forward to receiving the final report in August and responding in due course to the recommendations it makes,” he said.

The Commerce Commission is hosting a three-day conference, starting on Monday, on a draft report it issued in March.

The Philippines has perhaps gone the furthest, globally, in forcing banks to shine a brighter light on their retail foreign-exchange margins.

Money remittances from Filipinos working abroad are a major source of income for the archipelago nation.

Its central bank, Bangko Sentral ng Pilipinas, requires banks disclose the mark-up between their conversion rates and the central’s bank own reference rate, as well as all fees, on all transactions.

Wise identified Westpac as having had a high foreign exchange margin in Australia, but it is understood the bank disputes some of its information and the relative competitiveness of foreign exchange services in New Zealand appears different.

A spokesperson for Westpac NZ said it believed its own rates were “highly competitive when compared to other major banks”.

“We welcome the market study into personal banking services … and we would work with the Commerce Commission if they extended the scope of the market study to cover foreign exchange,” she said.

Will Edmonds, a spokesperson for BNZ, which is owned by National Australia Bank, which Wise identified as offering the most competitive exchange rates of the major banks in Australia, said BNZ wouldn’t be commenting on submissions to the market study made by other parties.