Peer-to-peer money transfers under the microscope
Are peer-to-peer platforms a valid alternative for making cross-border money transfers? How much can one save compared to conventional money transfers? Learn more about this in this article.
International money transfers were once a monopoly for banks and money transfer companies. With the dawn of the Internet, a new type of money transfer service has appeared. In recent years, it has continued to grow by becoming a valid and inexpensive alternative to the offer offered by established financial institutions.
How does peer-to-peer money transfer work?
In principle, the peer-to-peer money transfers function in the same way as banks and companies that have been active in money transfer for more than a century, as well as hawala networks for centuries. With these, the money is first paid to one place in a financial pool, while in another place the money is withdrawn from another financial pool. The money is not physically transferred.
In a transfer between “peers” as originally practiced, the exchange of money is made between private persons based on trust, without the intervention of a bank.
Example: You want to transfer 1000 Swiss francs to your sister who lives in Brazil. You first pay 1000 francs to a Brazilian expatriate living in Switzerland. The latter in turn transfers the equivalent of 1000 francs from his Brazilian bank account to your sister’s Brazilian bank account. The Brazilian expatriate invoices for this service a small commission or he is satisfied to have exchanged some reals in Swiss francs without expenses of transaction nor loss of exchange.
Such peer-to-peer money transfers as originally practiced still exist today. This is particularly the case in what is called the “Hawala”, a mode of exchange practiced for centuries in many parts of the world.
With the advent of the Internet, this money transfer system has become accessible to the highest number. Online platforms are bringing together people who want to make a transfer and others who wish to participate, have appeared. In this way, peer-to-peer money transfer services, providing security in an area of activity that can otherwise be risky, ensure that all exchange participants get their money back as promised.
International peer-to-peer platforms
Peer-to-Peer (P2P) transfers were originally done through social networks or chat rooms (“chat rooms”). The demand for cheap alternatives to conventional money transfer services has allowed several peer-to-peer intermediary services to establish themselves.
Services, such as those offered by UK-based Transferwise or Currencyfair in Ireland, have brought together “peers” from around the world to carry out larger transactions. These companies also sometimes act as counterparties and provide additional liquidity that makes a transaction possible.
To return to the previous example: You want to transfer 1000 francs to your sister who lives in Brazil. You pay the 1000 francs on the account in Switzerland a service of transfer of money from peer to peer. Meanwhile, a couple of parents in Brazil want to pay their daughter studying in Switzerland the equivalent of 400 francs, while a small company wants to transfer 600 francs to a Swiss producer for the goods it has ordered. The peer-to-peer money transfer service pays your sister the equivalent of 1000 francs from her account in Brazil and pays the student and the producer in Switzerland respectively 400 and 600 francs from a Swiss account. For the payment made, the peer-to-peer service charges a commission.
Generally, peer-to-peer intermediaries require that the amount to be transferred be paid into a bank account with a special reference number. The amount of money that is paid to you is transferred from the intermediary’s account to your account. Both Currencyfair and Transferwise have bank accounts in Switzerland.
The benefits of peer-to-peer transfers
The biggest advantage of peer-to-peer transfers is in their low costs. This is particularly true for “real” peer-to-peer transfers, i.e. those that allow two people to exchange money directly without an intermediary.
When using a peer-to-peer money transfer service, you pay a commission for the security and service obtained. This is often lower than the fees charged by Swiss banks and traditional money transfer companies such as Western Union or Moneygram.
In general, companies active in the peer-to-peer money transfer service do not charge additional fees on interbank exchange rates, in contrast to the often-high bank spreads. This means that the recipient of an international money transfer often gets more money in his local currency if he uses a peer-to-peer service than a conventional money transfer service or a bank.
Transferwise, for example, charges a minimum commission of 1.5 francs per transfer. For transactions made with Swiss francs (CHF) against Euros (EUR) or Dollars (USD), a commission corresponding to 0.5% of the amount exchanged is charged. For a money transfer involving a country with a currency less often used, you normally have to pay higher fees. (Examples: CHF in THB = 1% fee, CHF in RUB = 1.5% fee, CHF in ZAR = 0.7% fee). Interbank exchange rates apply for each of these transactions.
Currencyfair charges a transfer fee of 3 euros per transfer, plus a commission of 0.15% depending on the volume of the transaction. The particularity of Currencyfair is that you can determine the exchange rate applied when transferring money and that the transaction takes place only if another user accepts your offer. If no other “pair” is available to complete the deal, you can also transfer money to the interbank rate – which will be more expensive, however, because of the 0.4% to 0.6% commission charged.
Peer-to-peer transfers are an attractive alternative to traditional money transfer services. While there is no charge for peer-to-peer money transfers made directly without an intermediary, P2P intermediaries such as specialized online platforms can make simple and secure transfers at advantageous rates.
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