So you need to transfer money between currencies but don’t know whether you should choose Paypal or Transferwise. We’ll break it down for you with some information about how each platform works, the pros and cons of Paypal and Transferwise and the bottom line of which is less expensive.
If you’d just like a cost comparison of each service with the Google exchange rate then you can skip to the last section of this article.
Paypal has been around for ages it seems, and was originally a ground breaking service to send money electronically. You could pay for items you purchased on eBay and never need to go to the bank, send a check or any other physical transaction. Everything was handled online and was quick and simple.
Of course, as a business, Paypal needs to make money. So for the service of performing these electronic payments, Paypal charges fees. If you buy something online from eBay you or the seller might pay fees of 3.4% plus a flat fee per transaction. As a seller, that can eat away at your profits, so most smart sellers would include those fees as part of their item price.
Paypal also charges fees for currency conversions. Want to buy a Brompton from a UK seller but only have a US bank account? You’ll owe Paypal a currency conversion fee on top of the seller’s side fees for receiving payments.
Unfortunately Paypal, much like your bank, is not completely transparent about these currency conversion fees. To their credit this is probably because the actual fee varies depending on the particular currencies being exchanged, and of course the daily exchange rate.
If you want to know how much a particular currency exchange transaction will cost you have to start a sample transaction to get the amounts. And even then it just tells you an exchange rate, not the fees. The exchange rate provided includes the fees, but it is not clear what the exact fees are. You’ll have to look up the actual exchange rate using Google and compare to find what Paypal is charging you. I find this a bit annoying.
Luckily there are other options.
A new player on the scene that was founded for the purpose of cross border transactions is Transferwise. This service allows you to transfer money from your bank account to another bank account in a different currency.
Of course, Transferwise charges a fee for this service, as again it is a business and they need to make money somehow. The transaction fee is a percentage of the amount plus a flat fee, and this varies depending on the type of currencies being transferred. As of this month (July 2018) they are changing their Euro to Dollar exchange fees from 0.49% (with €2 minimum fee) to 0.35% of the amount, for example.
Transferwise says that their goal is to get fees down to nothing. That might be a bit too lofty but I like the idea.
How does Transferwise work? They use partner banks in different countries where they maintain a balance in that local currency for their clients. So for example, let’s say I have €1000 and I need US Dollars and you have $1000 and need Euros – but of course we don’t know each other. If we both work with Transferwise, theoretically they can just perform a sort of swap and not have to pay any bank fees to do so. We’d only have to use the exchange rate to get the new currencies.
In a way you can imagine it like we are physically together and look up the exchange rate online then swap cash money. Of course we don’t know each other and we are not together so that’s the service Transferwise provides.
OK, so now you know how Paypal and Transferwise work. But which is better? Which is cheaper and which is easier? What are the benefits of each platform?
We will look at this with the example of exchanging Euros and US Dollars.
I’ll give you the bottom line right now: you should have both a Paypal account and a Transferwise account. They are both useful in different circumstances. Read on for the details.
These examples are valid as of today, August 10 2018. Fees and exchange rates will change. This is just an example of the current rates to give you an idea of the pros and cons of each option.
Let’s say you have Euros and you need to convert it to US Dollars and send it to yourself or someone else. What are the fees and actual exchange amounts for Paypal and Transferwise? We can examine them by comparing with the Google exchange rate. Please note, numbers are rounded.
Today (August 10, 2018) the actual mid-market exchange rate according to Google is €1 = $1.145 and $1 = €0.87
TRANSFERWISE – new rates (0.35%/0.6% updated July 5)
If you look at the above figures you can see that Paypal offers a better value for payments and exchanges under €100/$100. There is a tipping point where Transferwise becomes a better deal. This is why it is great to have both a Paypal account and a Transferwise account. For small payments and exchanges you can use Paypal, like for small online purchases or payments. Any larger amounts like monthly rent payment or big purchases should probably be done with Transferwise if possible.
Also good to know is that Transferwise fees go down if you exchange larger amounts in one transaction, like more that €100,000. Double check this before you initiate a transfer, as larger amounts also have other rules and restrictions.
Of course, the situation will differ depending on the daily exchange rate, changes in fee structure for either company, amounts you are exchanging and also the different currencies being exchanged. Keep in mind that both services charge additional fees if the original payment comes via a credit card – while payments from your balance or wire transfers from a bank are usually free.
Transferwise also offers their Borderless account with a debit card in Europe, and says they will soon offer the debit card in other markets as well. What is the difference between this Borderless account and simply using Transferwise to exchange money between currencies?
The Borderless account is basically an online bank account with minimal services. It allows you to hold funds and use their debit card to spend them. You can accept currency deposits in Euros, US Dollars, Australian Dollars and Pounds (at this time) and hold these funds in your Borderless account. Without the account you can merely send funds from one bank to another and don’t have a place to hold them or spend them.
One benefit of the Borderless account and debit card is that you can hold multiple currencies in one account and spend those currencies with the debit card or transfer them out to another bank account. I dont know of another credit card or bank account that will allow you to hold multiple currencies. Most will allow you to spend in any currency and provide an exchange rate for this service. Many banks will also charge a fee for this, usually called a “foreign transaction fee”.
If you do not have the currency in your Borderless account that you wish to spend, Transferwise will perform the currency exchange at the mid-market rate (Google’s rate). This is often much better than your local bank. However, Transferwise charges a fee for this service. The fees are quite low BUT this is very important to note. If you have a credit card with no foreign transaction fees that uses the mid-market rate you can use that instead and avoid this extra fee.
See the below table for some of the current Borderless fees for exchanging currencies. For example, changing €1200 Euros to US Dollars would cost you $4.20. As I said this is a low fee, but in this case I would be better off using my Capital One Quicksilver card that charges no fees and uses the same exchange rates.
The Borderless account is most useful if you hold multiple currencies in one account. Let’s say you get paid as a freelancer in US Dollars but live in Europe. You can receive the USD into your Borderless account and use the debit card when you travel or to purchase things online in USD without high fees and without having to transfer funds to your bank and exchange currencies back and forth. However if you rarely spend USD it might be easier to simple exchange the USD payments into Euros to pay your bills locally.
If you want to transfer funds in the same currency from the Borderless account to and from your local bank account this is free for almost every currency.
What if you don’t want to open a Paypal or Transferwise account? Are there other options for international payments and money transfers? Of course! The old school normal way is through your bank. In my research I have found that my bank is more expensive than both Paypal and Transferwise. And worse than that their fees are confusing and secretive. I could not figure out what exchange rate they would use unless I initiated a transfer. I had to call them and ask what rates they used and the representative had to quote me the day’s rate so I could compare it with the Google rate to calculate what fees they added. But of course I don’t know the actual breakdown of the fee so it might vary if I transfer €10 or €10,000. I hate that it is not transparent. Your bank might be better than mine.
Another option is to use a credit card to make payments abroad, as mentioned above. This can be an excellent option if you have a good credit card that doesn’t charge extra foreign fees. For example, the Capital One credit card I have does not charge a foreign transaction fee and they use the real exchange rate found on Google. Again, I had to call and ask for the details. It is a Visa card and Visa has its own rules on what exchange rates they use, you can check it out here. Compare this to another card I have. My Amex card charges a foreign transaction fee of 2.7%. So let’s say I buy something that is €100. First they will calculate the real exchange rate to $117 and then they will charge 2.7% on top of that for a total of $120. Transferwise would charge $118 while Paypal would be $121.
I hope this article helped you decide whether Paypal, Transferwise or another method is best for you!
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