Guidelines for Cashing Foreign Checks – Recommendations (Part 2)

To avoid paying a usurious interest rate to a money changer, it is recommended that those who convert foreign currency should do one of two things. Either:

A.

Ask your overseas bank to set up the ability to send wire and/or ACH transfers so that you can wire or transfer money to your money changer instead of writing a check to them. ACH (Automated Clearing House) transfers are similar to wire transfers but are less expensive. ACH transfers are processed like a physical check but are done so electronically.

Setting this up with your bank may require a physical trip to the overseas bank, but more often than not, it can be arranged online. By wiring or transferring foreign currency via an ACH transfer to your money changer instead of presenting to your money changer a physical check, you can avoid the 1% or bigger fee the money changer will charge you.

The money changer will not have to advance any money to you against your check and he will bear a lower cost in the processing of your check. That means greater savings for you. Of course when you do this, be wary of the exchange rate your money changer is offering you. Money changers like to make a certain amount of money on each transaction whether it be in check processing fees or in the exchange rate itself.

Don’t be misled to think that you are saving money on the check processing fee when you are in fact losing money on the exchange rate. Be a well informed consumer and compare the exchange rates of different money changers.

B.

You may want to negotiate with the money changer for a better rate by telling him that you do not need immediate cash in return for your checks.

Tell your money changer that you are willing to wait for your foreign currency check to clear and be processed before coming to pick up your shekels. Don’t be scared of the wait time. A money changer clears foreign checks much quicker than banks do, and you should not have to wait that long (generally no more than 3-5 business days) for your check to clear.

If your money changer is a reasonable businessman, he should be happy to lower the fee he charges you to process your check if you agree to wait for your check to clear.

A money changer who advances immediate cash to his customers in return for their checks takes the risk that his customers’ checks may bounce, bears the costs of advancing his customers money prior to their check clearing, and pays additional processing costs in order to advance cash to his customers. The money changer charges his customers a check processing fee for bearing these risks and costs.

If the consumer is causing the money changer to avoid risk and save money, the money changer should be more than happy to reciprocate and lower his check processing fee. If the money changer is unreasonable and refuses to do so, perhaps you should consider taking your business elsewhere.

Develop the Mindset that Checks Take Time to Clear

In my opinion, consumers need to get out of the mind-set that they need immediate cash for their overseas checks. No consumer demands this from an institutional bank and accepts the fact that checks take time to clear. Why should money changers profit by charging ridiculously high interest rates to consumers who don’t know that they can expect and demand better? It is a shame that tons of money is being wasted by customers just for a matter of days that it takes to clear a foreign currency check.

The banking industry is fairly sophisticated nowadays with money moving fairly quickly. Israeli banks are slower than other western banks in processing international wires, but waiting several more business days may be worth it if you can avoid voluntarily paying a rate of 52% per annum.

Guidelines for Cashing Foreign Checks (Part 1)

The average money changer charges a client from ½% to 1½% for cashing a foreign check. Money changers call this a service fee but if the consumer analyzes what in fact is happening, they will realize that this transaction is in effect tantamount to a usurious loan that they might be able to avoid. Consumers don’t look at it this way because their average check is small, and the service charge seems negligible in comparison to the convenience a money changer offers them. Also, many consumers don’t know that they might have an alternative.

Service Charge or Interest Rate?

The first question that should come to mind is why do people run to money changers to cash their foreign currency checks in the first place? If you were in the U.S. and you received a $1,000 dollar check for your goods or services, would you run to your money changer to cash it for a fee or would you just deposit it? Do you cash the Israeli checks you receive at the money changer or do you deposit them at the bank? What is the rush to cash a foreign currency check and not deposit it?

If the consumer deposits their foreign check with a bank or institution and waits for it to clear, he can avoid paying 1% or more to his money changer. Let us suppose it takes a week for his foreign currency check to clear. By the consumer paying 1% to his money changer for an immediate cash advance against his foreign check, he is in effect borrowing cash for a week against his foreign currency check and paying 1% for a one week loan. This in fact translates to a 52% interest rate per annum (1% x 52 weeks in a year)! Even if the money changer charges the discounted rate of ½% to cash checks, the interest rate that the consumer is paying is still a whopping 26% per annum (1/2% x 52 weeks in a year). No one in their right mind would borrow money at this usurious rate if it was presented to them in this format.

Paying for Speed and Convenience

The problem is that money changers seem to be the only place one can go to in Israel to deposit a foreign check and get your money either right away or in a reasonable amount of time. If you don’t have a bank account in Israel you may not be able to deposit your check. If you have a bank account in Israel, your bank may allow you to deposit your foreign currency check with them but you would probably get a poor rate and wait weeks for your check to clear.

Suddenly the “loan” your money changer is loaning you does not seem that unappealing after all (even if it is). Also, money changers generally offer you the rate you are getting when you give them your check, allowing you access to a well-timed foreign exchange rate that you may not get if you deposited your check in the bank.

Exchange Rate Against the Service Fee

The consumer may think he is timing the market perfectly and running to the money changer to cash his foreign check when rates are up. However, the consumer mustn’t be misled as to what, in fact, the effective exchange rate is after he pays the 1% service fee to his money changer. For example, an exchange rate of 3.50 translates into an exchange rate of 3.465 after the 1% service fee. Not as appealing.