Why international Money transfers are so expensive And why this is going to change soon

Have you ever wondered why sending money to a country using foreign currency is so expensive? 

My favorite explanation is that banks want to charge huge fees for those services, because their clients are likely to accept that fact.

A typical bank client pays close attention to the services that he uses often (and fees associated with then are negligible), but rarely looks at the currency exchange rates or international transfer prices (because (s)he does not expect to use them often).

This fact is mercilessly exploited by banks, and a single international transfer can literally double your commissions during a year. There are, however, three things that banks need to be careful about:

• class actions - the fee should not justify legal action.
• complaints - depending on a country, those can be very expensive if taken to financial ombudsman (no matter who is right here).
• competition - the fee should not cause immediate research of alternative payments providers.

To cut the long story short - banks are likely to charge a little bit less than cost of a legal advice for rarely used services, as this gives them maximum income with minimal risk.

But there is another aspect of international money transfers - it is a consensus based protocol. A bank willing to transfer money to another country needs to appropriate central bank, which then passes money to corresponding central bank, which then passes them to the receiver's bank. There are always at least four banks involved, and a whole lot of other central banks just confirms the transfer (consensus).

You should be wondering at this point how those banks communicate with each other. Well, the simple answer is that they communicate through a private, secured VPN delivered by SWIFT.

I must admit I admire the SWIFT company. They support currently over 10500 financial companies and process over 15 000 000 messages per day [1]. I was not able to figure out exact pricing, but I have found multiple providers offering shared network access points, so I guess SWIFT messages are expensive.

Now & The future

Two things are happening simultaneously:

• the days of glory for alternative payments providers - current pricing strategy did wonders for banks - but it has a significant drawback - it is easily exploitable. It is not difficult to batch a number of independent transfers into one, send it, and then split the fee (and the transfer). We have already a number of players here.
  Banks fight with them as much as they can (by closing their bank accounts). 

• the days of glory for Hyperledger - as it was explained earlier, banks rely on a consent protocol, and therefore are actively supporting Hyperledger. It will allow them to remove a an expensive service provider from their value chain, and rely directly on a distributed protocol. Bad news for entrepreneurs - banks did it right and used open source.

Things cannot be reversed. A major cost factor will go away together with SWIFT (the latter is trying to fight changes by lowering prices by 30% between 2010 and 2015, imagine their margins). Without that cost, banks will be able to compete with alternative payment providers, but they will not want to.
Cheap international transfers will be a deeply buried option that will be accessible to financially savvy customers, while the rest will have standard (and expensive) service enabled.

In other words, if you do not want to be shaved by your bank, better pay close attention to the services it does not advertise!

[1] ​https://en.wikipedia.org/wiki/Society_for_Worldwide_Interbank_Financial_Telecommunication