Summary

  • there’s much fuzz on app-only fintechs issuing FX commission free credit cards
  • we compare these fintechs with the capabilities of the unknown and unloved new IBKR MasterCard and conclude it could be superior to any existing card
  • the IBKR card could be a game changer for IBKR investors: the card could drive further customer equity growth as IBKR accounts have been gaining turnkey online-banking and brokerage capabilities

Introduction

Because of regulatory differences, Europe has been faster than the United States to adopt online-/app-only banking services such as unicorn Revolut, N26, and Monzo. Revolut already claims more than 2 million users.

These players offer online banking solutions with pre-paid credit cards that allow users to pay globally with drastically lower or “no” forex commissions. At a typical bank in the mainland of Europe, one pays 1.5-4% forex commissions outside the Eurozone, while in the UK and the US these commissions have outliers as high as 8%. Withdrawing cash from an ATM can be even more expensive, paying the same range of percentage commission with fixed costs on top as high as ~5-10 USD per withdrawal (excluding the fixed costs the ATM charge). Other benefits from these fintech services are the immediate information to consumer about a payment confirmation, never needing to go into a bank again to block your credit card, change its limits, with in-app control over security features.

In the US on the other hand, the lowest-cost online broker Interactive Brokers “IBKR” recently launched its own credit card. As opposed to the above players, IBKR credit cards are not widely known with millennials or in fintech circles. As I will show, the unknown and unloved IBKR credit card could be superior compared to all current European counterparts but has extra advantages on top such as deep borrowing capacity (the ability to pay large sums is typically a unique credit card selling point) at the absolute cheapest rate in the world. TransferWise and Revolut are launching their own credit card soon in the US as well.

While the IBKR MasterCard is currently only available to US clients, it is coming to Canada and Europe respectively in ‘Q4 ‘18 and in ’19-’20 (as per investor relations’ answer).

A comparison of the fintech players

First, let’s compare the European fintech players to pick the financially most attractive proposition to clients. I will then compare this player to the all-new IBKR credit card.

While the pan-European German start-up N26 and exclusively-UK player Monzo offer “zero commission MasterCard forex rates” (i.e. they offer the same FX terms) for payments in foreign currencies, pan-European Revolut claims to offer the “interbank rate” during weekdays, with an added 0.5% commission during weekends to “compensate for the FX risk”. Because MasterCard (and Visa) do not offer any transparency on their official FX rates calculations but do publish daily official rates here, my comparison is based on empirical data.

As it turns out, none of the providers of “commission free” credit cards are fully commission free. While the “commission free MasterCard forex rates” has a hidden wholesale FX commission for MasterCard embedded in N26 and Monzo’s case, Revolut says it uses the real-time interbank bid price. However, based on my analysis using live data from the deep IBKR forex market that is freely available for customers, I found Revolut settlement rates are a bit worse than the real interbank bid prices of IBKR. Let’s first do a comparison between the “fintech” players before we move on to why “old” IBKR could be even better.

Based on datapoints in a personal holiday in Mexico using both N26 and Revolut, I found that Revolut is generally better during weekdays, while Monzo/N26 (same FX terms) are better during the weekends. This is corroborated by another analysis I recommend here. What I find is that the officially published daily MasterCard rates are typically a bit worse on the settlement day. The typical Revolut FX improvement to the “commission free official Mastercard rates” on weekdays is about 0.2-0.4%. A misconception: “Official MasterCard daily rates” are not FX mid-prices but inherently have a small commission embedded called the wholesale FX margin for MasterCard. Note that cards based on the official MasterCard rates settle your payments based on daily published rates on the settlement day, i.e. a few days later. When I say Revolut is 0.2-0.4% better, this means Revolut uniquely settles your FX rate immediately at payment, while N26 and Monzo payments will settle days later through MasterCards system at an on average 0.2-0.4% worse rate, but this is subject to relatively large FX fluctuations. However, the interbank rate at the time of payment is of course the statistically expected forex rate of the other providers in a few days at their settlement time, minus the wholesale commission of Mastercard (or Visa) that is hidden inside these players’ published rates.

In the weekends however, Revolut’s 0.5% commission (except for a few illiquid currencies, most notably the Russian and Thai currency, the commission is 1.5% instead) will trump the MasterCard wholesale commission of ~0.3%, making payments using N26 or Monzo more attractive. For the most liquid currencies however, Revolut offers users to convert and hold monies in advance in the app, allowing them to voluntarily bypass this 0.5% commission. For many emerging market currencies, this is however not possible. Of course, holding multiple zero-yielding pre-paid currency balances for a credit card is not very attractive from an investment point of view anyway. The peace of mind of using N26 (exclusively Euros in the app) and clearing payments at a slightly worse FX rate 5 out of 7 days versus Revolut might not be so bad after all.

Another advantage of N26 is the ease to transfer money as a client gets his own personal bank account, while Revolut – for now – requires you to wire money to an omnibus bank account with a structured code to redirect it to the user. This gets us closer to an all-purpose bank account.

ATM Withdrawals: Revolut offers a monthly 200 EUR no-commission foreign ATM withdrawal limit while charging 2% on any amount in excess of that, while N26 charges 1.7% for all amounts on top of the official Mastercard rate which has 0.3% commission embedded (both charge no fixed costs which are typically 2-6 USD per withdrawal at conventional banks). I don’t expect Revolut to continue the free 200 EUR ATM promotion for long however as they stated it is very expensive for them.

I would recommend N26 for peace of mind and efficiency, while recommending Revolut for nerds.

Lastly, there is the TransferWise MasterCard that is already available in Europe, while soon in the US. This card charges its own commissions published on TW’s website. As this ranges from 0.35% to 1% to the true mid-price, it is the “worst” card. However, for people that often get paid in foreign currencies, paying directly using monies in their foreign TransferWise “borderless account” currency balances in which they got paid (cheaper international transfers is TransferWise’s bread and butter) allow them to circumvent commissions using this MasterCard.

Some referral links to get a free card and account at N26Transferwise Borderless, or Revolut.

If you want to cherrypick the best features of any card and retro-actively change the payment from one underlying card to another card for free, start using Curve, a fintech card that aggregates all your existing credit cards into one. If you sign up with code WJ29Z here, you and I get 5 bucks.

How do these players make money

Judging from internet forums, people assume Revolut makes its money from add-ons such as buying cryptocurrency at higher commissions, insurance and premium card subscriptions. While true, I suspect the bulk of income right now is from a piece of the pie Revolut has negotiated with its issuing bank of credit cards: credit card payments collect interchange commissions charged to merchants and paid to the issuing bank. While Europe has capped credit card commissions for merchants at 0.2%, in the rest of the world these interchange commissions for the issuing bank are typically 1.2-2% (note there’s other commissions paid by merchants for the payment terminal operator and MasterCard/Visa). Lastly, I suspect Revolut makes a tiny spread on forex versus the true interbank rate it trades at, as I will detail later.

Why IBKR’s credit card could be the unknown better alternative to the current fintech players

While Revolut offers the best rates amongst its fintech peer group most of the time, it is using the rate offered in the market to convert (not the mid but the bid) and hence the customer should lose half of the bid-ask spread in a conversion. Broker customers of IBKR get direct access to the live interbank market. IBKR aggregates for its clients the best quotes of 16 of the world’s largest FX dealing banks that have an aggregate 60% global market share. Using real-time FX data as IBKR clients, we can see the real-time bid and hence can test Revolut’s claim.

Could IBKR be better than Revolut to pay in Mexican pesos?

I made screenshots of IBKR’s FX bid prices seconds before and after two consecutive Revolut payments at 11:50 and 11:53 local time. I also appended the FX traded range of the minute and compared it to Revolut’s payment settled rate (minute resolution for the zoomed candlestick chart). Note the time in my Revolut payment screenshot is shifted by 7 hours as I made this screenshot when back home and there’s a 7-hour time difference to Mexico.

Chichen Itza

Figure 1 Own screenshots of Revolut app and IBKR live forex rates

In another payment on another day, I show the bid-ask spread that is quoted minutes before the payment, and the traded price range of the minute on the other hand.

Monica Herrera.jpg

Figure 2 Own screenshots of Revolut app and IBKR live forex rates

At the second payment in my first picture, the average bid rate of the bid rate seconds before (middle screenshot) and bid rate after payment (right screenshot) was 22,74565 while my Revolut payment was settled at 22,7437. The difference is 0,00195.

In the second picture, the Revolut settlement was at 22,6553 while the bid price in the minute of payment should have been at worst 22,6585 minus 0,015 or 22,6570 (that is, the bottom of the candlestick on the minute of payment minus the bid-mid spread). IB is at least 0,0020 better.

I did not make bid screenshots for the first payment in the first figure (on the left). I believe the rate I saw but did not take a screenshot of was close to the upper end (ending price of the candlestick). Based on this, and the bid-mid, I estimate in this instance IB was 0,0033 better.

Wrap-up: it seems Revolut in this example is at least 20 pips worse than IBKR’s interbank bid price. For the Mexican Peso Euro pair, IBKR rates give you at least a 0.0088% better rate (20 pips divided by EUR MXN of ~22,7), or 0.88 basis points. However, for small trades, the IBKR FX commission is 0.2 basis points. The net improvement should be 0.68 basis points. When spending 5000 $ in Mexico, this gets you to a very small saving of 34 cents. Very small compared to the difference between Revolut and contenders N26/Monzo using the “official MasterCard FX rates” in which the difference was 0,3%. For a 5000 $ spend using Revolut versus these competitors, this makes a 15 $ difference.

Why IBKR is not as good for FX vs Revolut today, but could be: IBKR actually uses the currency conversion of MasterCard for its credit card payments (your FX payment will be deducted from your base currency in your brokerage account), while customers can trade in the interbank market on their brokerage accounts at a 0.68 basis points better FX rate than Revolut. This doesn’t make any sense and I will recommend IBKR to implement the Revolut system.

Other IBKR credit card USPs versus fintech players

  • Deep borrowing capacity: remember how credit card providers pitch deep borrowing capacity as a selling point in “gold cards”? IBKR credit card payments are only limited by your brokerage account net worth. If you want, you can heavily indebt yourself using margin debt up to 2-3X your brokerage net worth
  • Unrivalled cheap borrowing at the overnight rate plus a tiny spread (see here)
  • Commission free foreign ATM withdrawals with a fixed cost of 0.50$ (using of course Mastercard’s wholesale FX rates): remember N26 charges 1.7% on top of the wholesale FX rate for withdrawals
  • More efficient use of your assets: pooling effect as you spend from your brokerage account instead of having many zero-yielding cash balances at different brokerage/bank accounts (as of recently, IBKR added a lot of daily banking capabilities such as recurring payments etc.)

Conclusion

The IBKR credit card is not discussed on Fintech forums but has the potential to be even more attractive than the payment cards of Revolut, N26, Monzo and especially Transferwise*.

Another post will follow with an IBKR investment thesis, digging more into the brokerage account details.

I recommend an IBKR account for anyone above >100K$ (for smaller accounts, I only recommend IBKR if you are at least making two trades per month). You can open an account here.

To get a free FX credit card and account, here’s some affiliate links to N26Transferwise Borderless, or Revolut.

If you want to cherrypick the best features of any card and retro-actively change the payment from one underlying card to another card for free, start using Curve, a fintech card that aggregates all your existing credit cards into one. If you sign up with code WJ29Z here, you and I get 5 bucks.

* This post was about payments, but IBKR is much cheaper than TransferWise for large international money transfers: note that if IBKR clients have local bank accounts in multiple countries (e.g. a US expat living in Australia), clients can use local transfers via their IBKR brokerage accounts to transfer huge sums of money from one country to another at the real interbank rates (e.g. depositing AUD from Australian bank account to IBKR, converting at the real interbank rate, withdrawing the converted USD to a US bank account). This can save them 0.3-1% of TransferWise FX commissions. When our expat returns from Australia and buys a 1 MUSD house in San Francisco, he saves 4500$ (as per this TransferWise fee link; TW charges 0.45% for AUD-USD transfers).

Disclosure: I am/we are long IBKR and used affiliate links of the cards we recommend and used above.