Foreign exchange is ahuge earner for the banks, which take 5% or more when you buy holiday money or send cash abroad. But now there's a new service that connects, say, someone from Melbourne coming to London and needing sterling, with someone from Birmingham going to Sydney who needs Australian dollars.
CurrencyFair.com describes itself as an online dating bureau for people who want to swap money but avoid hefty fees. "We just charge a small fee to facilitate the union," says its co-founder Jonathan Potter.
"It's such a simple idea. Someone has one currency and needs another. Elsewhere, someone else has that second currency and wants the first. CurrencyFair puts the two together over cyberspace," he adds.
In some ways it's the foreign exchange equivalent of Zopa.com, the website that connects individual borrowers and savers, cuts out the banks and promises better interest rates all round.
But let's do a reality check. How do you physically swap the money? What's the likelihood of finding exact matches? How can it work for relatively small sums, such as the cash you might need for a weekend in Paris or Barcelona? Will the rates and convenience really beat the likes of specialist operators CaxtonFX or high street bureaux such as Travelex and Marks & Spencer? And how can you be sure your money won't disappear as it zips across the net?
How does it work?
CurrencyFair is not a bank but a marketplace. You have to register and credit your account with money you want to exchange. Then you look for the best deal that others on the site are offering. If you see a rate you like, the trade is "matched" and the sum transferred from your account to theirs, and vice versa. You don't have to match the sum exactly – all you do is buy a portion of what's on offer in the market. In reality, the money is never exchanged across borders. It stays in the country of origin, cutting out the cost of bank conversion fees.
Is it good value?
Money checked it out on Wednesday afternoon, looking to swap sterling into euros. CurrencyFair offered a best rate of €1.2165 to the pound, at a time when the pure interbank rate (with no fees and commissions) was €1.2200. But that was only for £411 worth of euros that someone (you won't know who) was offering on the other side of the market. However, there was up to £11,502 on offer at €1.2134, and hundreds of thousands of pounds more at rates close to that.
In other words, you could swap money into euros at close to the pure interbank rate. We then checked for the best rates we could get elsewhere from more traditional suppliers. It certainly beat the €1.17 to the pound rate at NatWest and the €1.15 from HSBC, but was slightly worse than the €1.2180 on offer from ICE (although that was only available by booking online and collecting from Waterloo station).
CurrencyFair promises the rates on offer will never be worse than 0.5% below the interbank rate which, if true, should mean it will be always a cheap option. It makes its money from a commission on each deal, which it says will be kept below 0.5%. CHECK
How do you get hold of the cash?
This is where the CurrencyFair concept starts to look less appealing. It only works if you have a bank account in the currency you are swapping into. So if you are buying US dollars with your sterling, you need a sterling account here in the UK and a dollar account in the US, in which the money is deposited. This means it only really works (for now, at least) for people who need to send or receive a large lump sum, such as for a holiday home purchase or sale, or who need to make regular payments, such as utility and tax bills on holiday homes. It will also appeal to expats abroad or foreign workers in the UK who send money home regularly.
So it won't work for my holiday in Spain this year?
No, it won't, nor will it for that $70 you've got stuffed in a drawer from a holiday in Florida a few years back. But CurrencyFair says it will soon introduce a prepay card which means that smaller swaps of holiday money may become possible.
Who it does work for?
CurrencyFair offers this as a real life example: Stephen and Dominique have (separately) registered with CurrencyFair and have credited their accounts, ready to exchange. Stephen lives in the UK, has a holiday home in France and has received a French electricity bill for €525. The bank offers what he sees as an uncompetitive exchange rate, plus will charge him around €25 to transfer the euros. He checks the rate on CurrencyFair, and it's significantly better, and the transfer fee is only €3. But he wants an even better deal, so he puts up a "requested" rate on CurrencyFair.
Meanwhile Dominique, who lives in France, has a son at university in the UK. She needs to send him some sterling. She can see Stephen's rate on CurrencyFair (but not his details, as all exchanges are anonymous). It's better than her bank's rate, so she takes it. CurrencyFair instantly credits Stephen's and Dominique's CurrencyFair accounts and transfers the money.
How long does it take?
Another less-than-appealing aspect of CurrencyFair is that it takes around two days for the transaction to take place. But anyone with experience of sending significant sums abroad knows banks can sometimes take weeks to enact a cross-border money transfer.
Is it safe?
CurrencyFair is regulated by the Irish financial authorities and is based in Dublin. It's not a bank, so doesn't come under a deposit protection scheme. It says money can't just disappear as all monies are held in segregated accounts and transfers only take place from pre-funded accounts. So that person on the other side of the transaction can't run off with your money.
Is this concept going to take off?
It needs critical mass to work. The founders promise to inject liquidity into the market so transactions can take place. Currently CurrencyFair offers deals on 12 currencies, including all the major ones except Japanese yen. Its best aspect is transparency, says Potter: "If you want to transfer a large sum – say you are buying a property abroad – you currently have to ring a broker. Invariably you get offered a poor rate at first, then you have to haggle for something better. Not many people are inclined to do that."
