Travel Savings: Foreign Exchange

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One of the most exploitative businesses in the world is the foreign exchange services at airports and on-street booths. The rates they charge are nothing short of robbery. They exploit the ignorance of the general population to charge a fortune for a service that deserves very little margin.

That may sound harsh, but when you look at the options available to everyone for foreign exchange transactions, it’s absolutely shocking that outlets charge what they do to switch your dollars for pounds, or euros for dollars.

In this article I’ll explain the problem and give you a few numerical examples to show you how bad it can get. Then I’ll provide alternative methods for getting foreign currency. Methods that won’t result in spending a ton of cash for a service that shouldn’t cost very much.

The Foreign Exchange Business

There’s an exchange rate that you can look up at any point in time, between any pair of currencies, that tells you how many of one currency you can buy with a unit of another currency.

For example, at the time of writing, the chart looks like this :

Currency rates for selected major currency pairs on December 14th 2018

This tells you that one British Pound will buy you 1.11454 Euros, or 1.25905 US Dollars.

But it won’t.

That’s because you have to pay someone to provide you with the currency exchange service. They need to pay their staff, their rent, their taxes and make money on top of that. So they’re going to charge you a little more than the exchange rate.

That’s fair, as far as it goes, but only up to a point.

If you know that GBP £500 is actually worth US $629.53, how much are you willing to pay for that transaction? How much is it worth to you to translate that money into the other currency?

It’s a simple, effortless, mostly risk-free service provided by financial institutions with deep pockets. They should be able to provide it at a very competitive rate.

Never buy your foreign exchange at the airport counter

The Cost of Foreign Exchange

If you were an international banking institution, you could get this done with almost zero additional cost.

When you go to a high street counter or an airport exchange service, you can be charged in two different ways:

Foreign Exchange Transaction Fees

First there’s the foreign exchange transaction fee. This is a charge they apply to the transaction that you pay for the service. Here are a couple of examples:

A Flat Fee: I exchange GBP £500 into USD, the market rate is US $629.53. The foreign exchange fee is $25, so I get US $604.53

A Percentage Fee: I exchange GBP £500 into USD, the fee is 4%. So I pay 4% of $629.53, which is $25.18, and I receive US $604.35.

I like this form of fees. They’re transparent and easy to understand.

But this is not how the true cost of the exchange rate is hidden.

Foreign Exchange Spreads

When you go to an airport, you’ll see two prices for each currency pair. A “buy” price, and a “sell” price. So an airport counter in the UK will “buy” your dollars off you, giving you pounds in exchange. They will also “sell” you dollars, in return for your pounds. The two prices are different, and the difference is called the spread.

So when you see the Travelex counter with it’s big neon sign that says, “no exchange fees”, understand that this is part of a con. There are no visible fees because the company makes its money on the spread, and that spread is outrageous.

As an example, take a look at this article from the BBC News website, taken on the same day as the exchange rate table above. The relevant passage is reproduced below:

Extract from BBC News article: "Those exchangeing pounds at the UK's biggest airport, Heathrow, are finding as little as $1.05 coming back across the counter."

Wait a minute. The chart above clearly states that one British Pound is worth 1.25905 US Dollars. But if you exchange money at the airport counter will only give you $1.05? How can that be right?

What fee does that imply? That’s pretty easy to calculate. If you ought to have received 1.25905 and you actually received 1.05, then the exchange counter charged you a fee of 20% (19.9% if you want to be pedantic about it).

They swapped your money from one currency to another and kept 20% of it for themselves.

Allow me to translate this information into a piece of easy-to-follow advice:

NEVER, EVER, EVER EXCHANGE YOUR MONEY FOR FOREIGN CURRENCY AT AN AIRPORT COUNTER.

It’s like consensual robbery.

So How Do I Get Foreign Currency Without Getting Ripped Off?

There are a number of ways you can do this. A variety of online services will charge very little. Certain credit cards are low-spread, no-fee. Shopping around ought to give you the best deal. Here are a few deals you can grab right now:

Revolut

A relative newcomer to the banking space, Revolut is a new kind of banking service. One of the very useful features of the Revolut ecosystem is a fee-free currency exchange service at the inter-bank rate. That is as good as it gets, and this is how I change my money. Particularly when I then have to send it to someone abroad.

I cannot recommend Revolut enough. I particularly like it because it breaks the monopoly banks have on certain financial services, like foreign exchange. That brings prices down to something reasonable for ordinary people like me.

Other Providers – MoneyCorp

You can get good deals even at the big brand name outlets provided yuo don’t go to their airport counters. I’ve used Moneycorp in the past, and still hold an account with them. They dealt with all the money transfers I needed when I moved to the UK and it was efficiently handled.

Their online rates are very competitive and they can handle direct transfers into and out of bank accounts. You can also pay in using a debit card.

Other Providers – The Post Office

Another good service in the UK that sometimes has better rates than MoneyCorp is the Post Office. If you want to carry physical cash on holiday, then the Post Office will deliver for free to your home if you order more than £500 in currency. Alternatively you can go pick up your currency at a post office counter of your choice. The Post Office has won the best foreign exchange provider award from the British Travel Awards for 7 years in a row.

A Dedicated Foreign Use Credit Card

Most credit cards are terrible when it comes to foreign exchange and foreign transaction fees.

There are a few exceptions in the UK, however. If you travel often, it’s worth having one of these in your wallet to simplify payments abroad.

Halifax have led the field for foreign exchange cards for years with this no-nonsense card that’s really ideal for foreign use. The lack of fees makes it the best for day-to-day purchases. The only exception is that cash withdrawals begin incurring insterest immediately, so it’s good to limit how much it’s used in ATMs. I have this card and use it every time I go abroad.

The BarclayCard Platinum Travel Credit Card is another contender, although the 29.7% interest on ATM withdrawals made my blood run slightly cold, you don’t want to carry a balance over!

The Post Office Platinum Credit Card is similar, with the same interest rate on cash withdrawals if you carry a balance over, but also a 2.5% fee on the withdrawal itself, with a £3 minimum.

A couple of comments: about all these fees:

  • You should never be carrying a balance over on a credit card anyway, so apart from the Halifax interest charge and the Post Office 2.5% fee on cash withdrawals, the interest rates shouldn’t be a concern. These cards should always be paid off at the end of the month with a direct debit from your bank account.
  • It’s not surprising that credit cards charge for cash withdrawals. They make money from the use of the card in a shop, by taking a percentage of the payment as a fee. This pays for their running costs. They don’t make as much from cash machines and so they transfer that cost to you. This is not shocking or criminal, it’s just paying for a service. You just need to be aware of it and act accordingly.

What about in the USA?

I crowdsourced a few suggestions for my American friends. I’m sure you enjoy getting ripped off by your banks even less than we do by ours.

Apparently, the thing to do in the US is to have a Charles Schwab Bank Account, because their card provides good rates on foreign exchange, no fees, and even reimburse ATM fees while travelling abroad. You can read more about this here :

Travelling Well For Less: Charles Schwab Checking Account

The other suggestions I received, in no particular order :

  • Getting foreign currency off a friend who no longer needs it is always better than going through a bank. By cutting out the middle man you both get a better deal.
  • Compare your cards and the rates / fees they charge ahead of time, both for transactions and for cash withdrawals, so you know which is the best.
  • You light want to warn your bank you’re travelling. Otherwise they might suspect fraud and block your account when you need it the most.
  • If you’re going to exchange money, shop around. Banks typically have better rates than dedicated exchange agencies.
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