Some days we have genius ideas. This is where we tend to write them down.
Take note so you can feel as smart as us one day.
April 9, 2015
Paypal is an incredibly convenient tool for transferring money. Whether you are sending money to an employee located in another state, buying a product online, or just need to transfer money to somebody in another country, PayPal does it all. They have over 150 million active users and many of them are small business owners.
One of the reasons PayPal has so many users is because its fees seem very reasonable; at least on the surface anyways. When you compare the listed transaction fees with similar money transfer services, you may think you are getting a good deal, but it couldn’t be further from the truth. The problem isn’t in the listed fees, it’s the hidden fees they charge that really get you.
We’ll just set the record straight from the beginning as we aren’t trying to unfairly bash a company that provides such a useful service. If you are transferring money from one place to another for personal transactions and keeping the same currency during the entire process, then yes PayPal is free. The problem is when you are transferring money from one currency to another. This is where PayPal really gets you.
The biggest chunk of your money gets lost during international transfers to poor exchange rates and not hefty fees as many people think. This is doubly true if you are sending a large amount of money. Think about it. If you are sending $2,000 overseas, even banks (which are known for charging the highest transfer fees) often only charge you $30 – $40, but if you get a bad exchange rate that is 3% off market value, you’ll be losing an additional $60.
So how bad is PayPal’s currency exchange rate? Well here are some quick examples that highlight just how much you might be losing on your next international money transfer using PayPal. I’ll use $1000 as a nice round sample number. Below you can see the exchange rate PayPal offered along with the actual current market rate to compare the difference.
$1000 from USD to EURO
PayPal = €897.54
Market rate = €924.40
$1000 from USD to British Pound
PayPal = £655.76
Market Rate = £675.20
$1000 from USD to AUD
PayPal = AU$1,274.20
Market Rate = AU$1,308.77
As you can see, while they may claim they are offering the service free of charge anywhere they have their terms of service printed, they are actually making a large chunk of money off you by offering a very poor exchange rate. Often, even worse than what you’d get at a bank.
Let’s say you’re willing to chalk this up as just the cost of doing business internationally. Ok. Fair enough, but since I know you’re a savvy business person, you’re obviously deducting all of your expenses from your income so you can save on taxes right? Well here’s another shocker for you, PayPal won’t provide you any type of receipt or documentation with proof of the money lost in the exchange so you can’t even claim it.
Well, let’s rephrase that. You do actually get a receipt of the transfer from PayPal, but it shows a fee of $0.00. So even if you tried to use their provided receipt to show the loss of money in the transfer, you wouldn’t be able to. There is no documentation provided that will allow you to deduct the transfer and exchange fees from your taxes at the end of the year.
Just in case you had the same bright idea we did and want to try and open a currency account in your bank that operates in the same currency you get paid, they won’t let you. We tried it and PayPal informed us that unless it is an official currency of that country, they won’t send USD to it, so no sending USD to anywhere in Europe, Australia, etc. They will only send Euro to Europe, AUD to Australia, BPD to the UK, etc. You get the idea.
If you need to process regular international money transfers, use the Send Money Cheaper Comparison Tool to find the cheapest option for your needs. Next time you are planning an overseas money transfer between two currencies, use our comparison tool and check the results against the rate PayPal will give which can be found using their currency converter tool. (Hint: you’ll need to be logged into your PayPal account to access their convertor.) Doing this, you can see exactly how much you’ll save by not going with PayPal and using a dedicated currency transfer firm instead.
If you regularly do business overseas, check out How To Save Money When Doing Business Internationally for more useful tips.
You keep on doing your job making money and we’ll keep doing ours to help you keep more of it in your pocket.