Anyone who has studied, worked, or done business overseas has probably come across the problem of how to best change and send money abroad. Banks and brokers usually charge several percent on the total amount exchanged as well as a transfer fee. Now, a new wave of Internet-based, peer-to-peer (P2P) foreign currency exchange services are cutting banks (and their fees) out of the exchange. Through an online P2P platform, individuals can find and safely exchange currency with individuals in other countries at much lower costs. Most online P2P companies claim to provide up to 90 percent cost saving to clients on international exchange and transfer fee.

How P2P Currency Exchange Works

P2P currency exchanges companies like CurrencyFair, Kantox (for businesses), and TransferWise allow users to register online for an account and deposit money into it. Depending on the site, users can accept a given exchange rate or bid on an exchange rate of their choosing. Once the user finds an acceptable rate, the site makes a match, shows change of ownership of funds, and remits the funds within 1 to 2 days through a simple domestic transfer. No currency ever leaves the country, it is merely exchanged between users. Users can send money to any person, business account, or even their own account in another country.

For example, suppose Mary is an American working in Paris for a year and earning euros. She needs to convert her euros to dollars and place them in her American bank account in order to pay her American mortgage. Meanwhile, John in Los Angeles wants to convert dollars into euros to send to his son who is studying in France. Instead of going to a bank, Mary and John sign up for accounts on a P2P currency exchange website. Mary deposits euros into her P2P account and John deposits dollars into his. The P2P website shows Mary and John how many dollars or euros they will receive for their transfers, and they each confirm the transfer. Within a day or two, the P2P currency exchange service will have John’s dollars transferred into Mary’s American bank account. At the same time, Mary’s euros will be transferred to John’s son in France.

The P2P provider even steps in to provide liquidity if there is a shortfall or if there are no good currency exchange matches. In such situations, the P2P platform typically charges an extra fee. For example, if there is no suitable currency match, the P2P platform, CurrencyFair, charges 0.5 percent and performs the exchange with its own funds (slightly more than the platform’s typical 0.35 percent for peer matches). The P2P platform WeSwap charges a flat fee of 1.5 percent in such situations (up from 1 percent for peer matches). The WeSwap offers the option of remittance through a prepaid MasterCard that it sends through the mail—an attractive option for travelers and tourists.

P2P foreign currency exchanges are still relatively new and they are most convenient for changing common currencies like dollars, pounds, euros, and yen where there are always many people looking to exchange. Because the platforms depend on connecting individual users in different countries, users of smaller currencies may not immediately find a good corresponding match. Small currency users may also find that certain platforms do not yet deal in their currency. Users trying to exchange a very large amount of money may also have trouble finding a match.

Significant Cost Savings

The most attractive feature of P2P foreign currency transfer is the cost savings. By sidestepping banks and brokers, these platforms provide currency exchange at a much lower rates. The average saving rate on international transfers for P2P users compared to banks is 75 to 90 percent. The saving percentage depends on the fee charged by banks which in most cases hovers between 2 to 5 percent.

According to P2P foreign currency exchange platform CurrencyFair. a typical bank would transfer £2,000 for a fee of £100 or about 5 percent of the exchange (£40 for international transfer fee plus £60 for the exchange rate margin). For the same £2,000, CurrencyFair charges just £10 or 0.5 percent (£3 for the transfer fee plus 0.35 percent of the total, or £7). Another advantage that these marketplaces offer is convenience. Users can access them anytime from anywhere. They are easy to use for both small and large sums and the transactions clear quickly (usually within 1-2 days, but users can pay extra for guaranteed same-day or the next-day transfers).

P2P foreign currency exchanges are also targeting businesses. Kantox, an online marketplace specializing in dealing with small- and medium-sized enterprises and mid-cap companies, claims to have more than 800 corporate clients.

But Are They Regulated?

For companies that did not exist five years ago, P2P currency exchanges are moving incredible sums of money. CurrencyFair’s website shows a running tally of funds the company has transferred. As of January 2015, it stood at €1.5 billion. Have financial regulators properly caught on and are consumers safe?

Many P2P foreign currency exchange firms are either based in or have registered offices in the United Kingdom. As registered money service businesses, they are administered by Her Majesty’s Revenue & Customs (HMRC ) and must follow the Money Laundering Regulations 2007. As payments institution, they also fall under the scrutiny of UK Financial Conduct Authority (FCA). Some UK-based firms include TransferWise. The FX Firm , Midpoint. moneycorp. Azimo. GlobalWebPay , UKForex. Smart Currency Exchange, and Kantox .

Within the FCA there are two categories: 1) registered (smaller firms) and 2) authorized (larger firms). Authorized firms must separate the customers’ money from their own at the end of each day in a process known as ringfencing. This provides better security for the user and a higher chance of recovering money should the company slip into financial difficulty. You can check the Financial Services Register for the FCA status of the company.

Some companies are regulated by more than one country. CurrencyFair in Australia is regulated by the Australian Securities and Investment Commission (ASIC ). The firm also has a registered office in Ireland where it is regulated by the Central Bank of Ireland. Another company, moneyswap (LSE: SWAP.L ) is licensed as a Hong Kong Money Services Operator and is further regulated under FCA in the United Kingdom as a small payment institution. International Foreign Exchange is authorized by FCA in the United Kingdom while its Dubai operations are regulated by Dubai Financial Services Authority.

In the United States, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN ) oversees P2P currency exchange firms like VenStar Exchange and US Forex. Firms are licensed as money transmitters by their respective state banking departments and must follow the anti-money laundering (AML ) policies.

How to Choose the Right Foreign Currency Exchange P2P Service

Before choosing and using a P2P foreign currency exchange platform, do some basic research.

• Look for a firm that does high volume: the more transactions, the more liquidity. This is essential for better rates, quick conversions, and smooth transfers. Check the number of currencies the exchange offers with along with the time it takes to carry out the transfers.
• Check that the firm does exchanges in your specific currencies.
• Compare the exchange rates and fees of different firms.
• Check that the firm is registered with the authorized country agency and has all necessary licenses.
• Use a firm that keeps customer money in segregated accounts and not common accounts. Should the company have financial difficulty, segregated accounts offer better protection for the consumer.

The Bottom Line

Peer-to-peer currency exchanges support fast transfers and provide substantial savings over banks. P2P exchange companies are growing at a fast pace by offering a lower-cost alternative to individuals and small businesses. On the downside, the P2P currency exchange marketplace does not fully protect the customers. Users should choose an established and fully regulated firm for currency exchange. (For related reading, see Key Uses For P2P Currency Exchange .)