2 Sep 2015

More Sensible Forex Transactions

I sometimes receive dollars from the sale of restricted stock my employer gives me. These dollars are converted into rupees when I receive them in my rupee-denominated bank account.

When I receive a foreign-currency transfer, my bank levies fees, both explicit and in the form of a poor exchange rate, which totals to around 2%. On top of that, the sending bank has its own fees, like $25. And a third “intermediary bank” can come in and snatch another $75.

All this is to receive a foreign currency transfer in my Indian account. Later, when I go to the US and use my Indian credit card, the rupees are converted back into dollars, and I’m hit with another 7% in fees, for something like 10%. This is huge.

How do we solve this problem?

One solution is crypto-currencies, which are not restricted to a single country, and therefore have less need for conversion. No conversion means no fees.

A second solution is systems like Ripple which are multi-currency systems. Some of these use an auction to convert currencies, resulting in far lower overhead than your bank, which wants to rip you off rather than give you the best deal.

Even then, currency exchange has a bid/ask spread, which is 0.158% for dollar : rupee, as of this writing. That means if you receive dollars worth a million rupees, you’re paying ₹1580 just to convert currencies. This seems like a high fee just to convert money from one form to another.

The third solution is to leave the incoming money in the currency it’s in, assuming it’s a major currency like dollars, euro or pounds. Why? Several reasons:
- These inflate less than the rupee, so you lose less value over time. The rupee has fallen by half relative to the dollar over the past two decades.
- The US, EU and UK are also less volatile (no wild swings in the short term), and more stable (less chance of a default in the next decade than the Indian government, which is rated only one notch above junk).
- Holding on to multiple currencies also gives you diversification as opposed to a single currency, which can depreciate in value.

So, all bank accounts should be multi-currency accounts [1], which can hold a number of balances in different currencies. I might have a balance of ₹20k + $200 in my account, for example. When I deposit rupees, the rupee balance goes up. When I receive a dollar-denominated transfer, the dollar balance goes up. And if I receive a third currency, like euros, then the account will have a third balance. That way, conversion between currencies happens lazily, when needed, like, in this example, traveling to Japan and withdrawing the money in yen from a Japanese ATM. And if I receive money in dollars and eventually spend it in dollars, then I’d have saved the 10% currency conversion fees I mentioned above.

This works for cypto-currencies as well — one can have a digital wallet that holds different amounts of currencies.

[1] Which, of course, requires government permission.

No comments:

Post a Comment