International money transfers have traditionally been the realm of banks and wire transfer services. But the Internet enabled a new breed of money transfer services which, in recent years, have become a viable and affordable alternative to established financial institutions.
How do peer to peer money transfers work?
The basic principle behind peer to peer (P2P) transfers is the same principle which has been used by banks and wire transfer companies for over a century and by hawala networks for hundreds of years. Money is simply deposited into a financial pool at one location and a matching amount is paid out from another pool in another location. The money is not physically transferred.
In a genuine peer to peer transfer, the money is paid in and paid out by individuals and not by a bank.
Example: You want to send 1000 Swiss francs to your sister who lives in Brazil. You pay the 1000 francs to a Brazilian expatriate living in Switzerland, who then transfers the Brazilian real equivalent of 1000 francs from his Brazilian bank account to your sister’s Brazilian bank account. The Brazilian expat may charge a small fee for this service or he may simply be happy to “transfer” a load of real into Swiss francs with no transfer fees or exchange rate losses.
This basic peer to peer approach to money transfers, known as hawala, has been used in many parts of the world for hundreds of years and relies on a broad social networks and high levels of trust.
The Internet has brought this approach to transfers into the mainstream by providing a global platform on which people who want to transfer money can connect with those willing to help them. Peer to peer transfer services have brought security to an otherwise risky business by guaranteeing that all parties involved receive their money as promised.
What is a peer to peer transfer intermediary?
While peer to peer money transfers were originally carried out with the help of chat rooms and social networks, the demand for affordable alternatives to conventional transfer services has led to the establishment of a number of peer to peer intermediary service providers.
Services like Transferwise (based in the UK), and Currencyfair (based in Ireland) match multiple peers around the world to enable large transactions. They also provide additional liquidity by stepping in as the counterparty to complete transfers when no peer matches are available.
Example: You want to send 1000 Swiss francs to your sister who lives in Brazil. You pay the 1000 francs into a peer to peer transfer service’s account in Switzerland. Meanwhile in Brazil, a parent wants to send the equivalent of 400 francs to their daughter who studies in Switzerland and a small business wants to send 600 francs to a Swiss manufacturer for goods purchased. The P2P transfer service pays out the equivalent of 1000 francs to your sister from its account in Brazil, and pays out 400 and 600 francs respectively to the student and manufacturer in Switzerland from its Swiss account. The P2P service charges a fee for the transfer.
P2P intermediaries generally require you to deposit the money you want to transfer into a bank account using a special reference number. Money transferred to you is paid out from the intermediary’s account to yours. Both Currencyfair and Transferwise have bank accounts in Switzerland, allowing you to send and receive money without having to transfer to and from a foreign bank account. This is an important point to consider when choosing a P2P transfer portal.
Benefits of P2P transfers
The biggest potential benefit of peer to peer transfers is the low cost. This is especially true in the case of genuine peer to peer transfers, where two people connect directly and swap money held in different locations without an intermediary.
When you use P2P transfer services, you pay fees in exchange for the security and service. These fees are often – but not always – lower than those charged by Swiss banks and wire transfer services like Western Union or Moneygram.
However, P2P transfer services generally do not add a markup to inter-bank currency exchange rates (Swiss banks and wire transfer services generally use a wide spread). This means that when you transfer money internationally between different currencies, the recipient receives more money in the local currency.
Transferwise charges a minimum of CHF 1.50 per transfer. Its fee for CHF to EUR or USD transactions is equal to 0.5% of the amount being transferred. If you send money to a country with a less widely used currency you will normally pay a higher fee (CHF to THB = 1% fee, CHF to RUB = 1.5% fee, CHF to ZAR = 0.7% fee). The inter-bank exchange rate is used for currency exchanges.
Currencyfair levies a transfer fee equivalent to 3 euros per transfer plus a volume-based fee equal to 0.15% of transfers made between peers. An interesting feature of Currencyfair is that it lets you specify a rate at which you want the transfer to be made and the transfer will only happen if another user is willing to accept your offer. When no peers are available, you can still complete the transfer at the inter-bank rate, but this is more expensive at 0.4% - 0.6%.
Peer to peer transfers provide an interesting alternative to conventional money-transfer services. While direct peer to peer transfers without an intermediary can help you cut out transfer costs completely, P2P intermediaries make peer to peer transfers easy and secure while still offering very competitive transfer rates.