New rules govern international money transfers

If you’re sending money internationally, your transactions are covered by new federal rules that impose disclosure and complaint-handling requirements on so-called remittance companies such as Western Union and MoneyGram.

The rules, which went into effect Oct. 28, were adopted by the Financial Consumer Protection Bureau under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

While giving consumers new protections, the rules stop short of mandating a system that would make it easier for people sending money internationally to determine which transfer company is offering the best value.

What the new rules require

The new rules give consumers up to six months to dispute errors with the remittance transfer companies, which then have 90 days to investigate and then report back with the results. For certain errors, consumers may be entitled to a refund or to have the money sent again.

The rules also require a series of pre- and post-purchase purchase disclosures. Pre-purchase disclosures include the transaction’s exchange rate – the amount of foreign currency provided for every U.S. dollar, a list of fees and taxes to be charged by the money-transfer company, any additional fees charged by its agents and certain other institutions involved in the transfer, and the amount of money expected to be delivered, not including foreign taxes and certain other fees.

Once the transaction has been completed, customers must receive another written copy of the exchange rate, fees, and taxes, along with written notice of when the money will be available at its destination. Customers also must receive notice of their right to cancel the transfer at no charge, generally within 30 minutes, but, in the case of transfers scheduled in advance, up to three days before the transfer occurs. Customers must also receive instructions on what to do if there’s an error and how to submit a complaint. (For more information about the new rules, download a CFPB fact sheet (PDF).

When we looked at the industry in 2011, we found that money transfer companies already were providing many of the now-required disclosures and that customers generally seemed satisfied. People who work in the U.S. and have famiiles in other countries often depend on the companies to send money home, including to Central and South America and India.

For more information about sending money internationally, read "The Best Ways to Send Money Abroad."

What the rules don’t do

The new rules don’t require transfer companies to provide customers with the so-called effective exchange rate, a single number that makes it easier to comparison shop among money-transfer companies.

The reason comparing can be difficult is that money transfer transactions typically include both an exchange rate and a transaction fee. For sending a certain amount of money to a given location, one transfer company may deliver more foreign currency per dollar exchanged than another but have a higher fee. That can make it hard to figure out which company is the best value, even with the information the new rules require transfer companies to provide.

The effective exchange rate helps those who want to trasnfer money find the best value by taking into account both the exchange rate and any fee. It work much in same way as the federally-mandated "annual percentage rate” lets consumers compare mortgages with different rates, points, and costs.

Do the math

If you want to use the effective exchange rate to compare money transfer offers, you can calculate it yourself or use the free effective exchange rate calculator on the website of the money transfer company Viamericas. It lets you compare up to four different services. We recommend using it in manual mode. To do so, select "Manual Comparison" on the upper left corner of the website and then fill in the required information. You'll need to get the current exchange rates and fees from each of the services you're considering using. Viamericas will fill in its own automatically.

Calculating the effective exchange rate

Calculating the effective exchange rate yourself is easy. Here’s how, based on sending $100 to Mexico in pesos.

1. Add any fees to the amount you're sending:

In this case, Company 1, with a higher effective exchange rate of 11.90 pesos per U.S. dollar, is the better value even though it provides fewer pesos.

Keep in mind that the amount you're sending can affect the outcome. If you were to do the same calculations for sending $500 instead of $100, Company 2 would be the better deal. That’s because the more you send, the more significant the exchange rate is compared to the fee. Remember that, companies usually change their exchange rates at least daily. So the company that offers the best value for a given transaction can change depending on when you're sending the money.

Two other options

There are two other ways to comparison shop.

The first is to obtain the fees from a variety of service providers and, in each case, deduct them from the amount you want to send (for example, $100 - $9.50 = $90.50), and plan on sending the difference. The service that delivers the most foreign currency for the remaining amount is the best deal.

The second way is to find out how much each service would charge you in total to deliver a certain amount of foreign currency (for example, delivering 1,255 pesos will require you to shell out a total of $104.99). The service with the lowest total cost is the best value, but only for delivering exactly 1,255 pesos.

Value is not the only thing you should consider when selecting a money transfer company. For example, if your recipient will be picking up the money (instead of its being sent to bank account), you'll need to know if a service has locations close to where your recipient lives or works.

—Anthony Giorgianni