Why Singapore spends more on foreign exchange fees than tuition

SINGAPORE is saddled with S$2.8 billion in foreign exchange fees every year - an average of S$2,000 per household.

This figure was published last week in a new study commissioned by TransferWise, a fintech company I co-founded. For some context, that is more than the S$1 billion Singaporeans spend yearly on after-school tuition classes - despite the great emphasis parents here place on helping their kids do well in school. It is also more than foreign exchange fees paid per capita in Australia, where a similar study was carried out.

Two groups are especially hard done by.

First, individuals. They pay 15 times what a company pays for each dollar sent. Individuals account for just 5 per cent of all foreign exchange volume here -- but pay 43 per cent of fees. That is like a business being charged $2.50 for a plate of chicken rice, and an individual being charged $37.50 for the same dish.

Second, Singaporeans living abroad. They number over 200,000 and pay an average of S$1,040 in fees a year, or S$8,266 throughout their time abroad, to send money home. That is money that could have paid for a second-hand car in full or the downpayment for a new car in the countries where they live.

So what's the story? Why are Singaporeans paying so much? In two words: Hidden fees.

Banks and remittance providers still engage in an age-old misleading practice - it is what drove me to co-found TransferWise. They would say a transfer can be done for "$0 fees" or "with $0 commission". What they don't say is, they are charging a hefty fee hidden in the exchange rate mark-up.

When a supermarket says a carton of milk costs $5, we expect it to cost $5. When a bank or remittance company says an international money transfer costs $5, they are often hiding an additional $15 in the exchange rate mark-up. Besides being unfair, hidden fees have been shown to harm consumers by impairing their judgment.

A March 2018 report commissioned by the UK government found that the share of individuals failing to choose the cheapest option in foreign exchange transactions nearly doubles to about 58 per cent when fees are hidden in exchange rate mark-ups.

By hiding what they charge, banks and remittance companies have an opportunity to charge more. In short, hidden fees lead to higher fees. A major reason Singapore pays S$2.8 billion in fees a year is that 71 per cent of those fees - or S$2 billion - is hidden in the exchange rate mark-up.

This must stop - in Singapore and elsewhere. Banks and remittance providers should present clearly to each customer the exact amount in dollars and cents they are charging for each transfer. It is the right thing to do.

TransferWise and a small number of remittance providers do this. But such companies are still the exception. And they shouldn't get any brownie points for merely doing what companies in nearly any other sector of the economy would do as a matter of course - telling you how much we charge to provide a service.

If banks and remittance companies somehow find this concept novel, or if they can't see a problem with the present state of affairs, it is because there's something fundamentally broken about the remittance industry - that is why I started TransferWise.

What if banks fail to do this on their own? The regulator can step in to make them. Regulators everywhere are starting to wake up to the problem. In February, the European Parliament voted in favour of mandatory transparency for cross-border fees. Foreign exchange service providers in the EU will soon have to tell consumers exactly how much they are charging in the local currency. The UK is considering similar legislation. In Australia, the Competition Commission also began investigating hidden foreign exchange fees last year.

In the event that banks and regulators don't act fast enough, consumers can protect themselves. Simply being aware of the problem is a good start.

We should always compare the exchange rate we are given by a bank with the one we see on Google, and know that the difference between the two is a hidden fee paid to the bank. If you are not happy with that fee, shop around and get a quotation from a different provider. One easy way to compare between them is to see how much money arrives on the other side.

Change won't happen overnight. But it will come - surely if slowly - when we each start asking for it in our everyday lives.