Travel Money Conversions: How Does Exchange Work?

When travelling, there are many ways to convert money. One way is to use a credit card for all purchases, as long as it does not have a foreign transaction fee. Another way is to withdraw from an in-network ATM during your travels, as this eliminates the fees associated with middlemen and provides the best exchange rate. It is also possible to order directly from an international financial institution, cutting out the fees associated with exchanges that occur through middlemen like airport exchange counters.

Currency exchange fees

Currency conversion fees can be a tricky business, and it's important to be aware of them when travelling to avoid losing money. Here are some things to keep in mind:

• Credit and Debit Card Fees: When using your credit or debit card abroad, you may be charged a currency conversion fee, also known as a foreign currency conversion or foreign currency exchange fee. This is typically around 1% of the purchase price but can vary. This fee is usually levied by the card payment processor, such as Visa or MasterCard, or the ATM network for cash withdrawals. It's important to check with your card issuer if they charge any foreign transaction fees, as these can add up to the total fee you pay.
• Dynamic Currency Conversion (DCC) : DCC allows you to see the cost of your transaction in your home currency at the point of sale. While this may sound convenient, it often comes with a less favourable exchange rate and added fees. It is usually a more expensive option than a regular currency conversion.
• Card Network Exchange Rates: Visa and Mastercard, for example, have their own currency conversion rates, which may differ from the daily exchange rate. These rates are applied on the day they process your transaction and may not be the same as the rate on the day you made the transaction.
• Retailer and ATM Fees: In addition to currency conversion charges, you may also be charged fees by retailers or cash machines when using your card abroad. These fees are separate from the currency conversion charges and should be considered when planning your trip.
• Foreign Transaction Fees: Your credit or debit card may charge a foreign transaction fee, which is separate from the currency conversion fee. This fee is typically charged by your card issuer and can range from 1% to 4% of the transaction amount. It's important to check with your card provider to understand all the fees associated with using your card abroad.
• Prepaid Currency Cards: An alternative to carrying cash is to use a prepaid currency card, which can be loaded with local currency and used like a debit card. This option allows you to lock in the exchange rate before you travel, providing certainty over your budget. Additionally, if your card is lost or stolen, you can usually get your money back by informing your provider promptly.
• Bank Exchange Rates: Banks offer currency exchange services, but their rates may not always be the most favourable. It's worth shopping around and comparing rates, as some banks may offer better deals than others. Some banks may also charge a fee for exchanging currency, so it's important to understand the total cost before proceeding.

Foreign transaction fees

• Get a credit card that doesn't charge foreign transaction fees: There are plenty of credit cards that don't charge foreign transaction fees, even if their issuers do. For example, the Chase Sapphire Preferred® Card, Bank of America® Travel Rewards credit card, and the Capital One Venture Rewards Credit Card.
• Exchange your money before leaving: If you plan to use cash primarily while travelling, exchanging your money before leaving the US can be more convenient and less costly than waiting until you're abroad.
• Open a bank account with no foreign transaction fees: Opening a bank account that doesn't charge foreign transaction fees can be useful if you need to use your debit card or withdraw cash from ATMs overseas. For example, the Schwab Bank Investor Checking account doesn't charge foreign transaction fees, but you must connect your account to a Schwab brokerage account.
• Avoiding foreign transaction fees when shopping online: Check where the merchant is based. To avoid paying the fee, use a different card when shopping on that site or see if you can find the same product from a US-based merchant.

Dynamic currency conversion

Here's how it works:

Card detection

The point-of-sale (POS) system or e-commerce platform identifies the card's country of origin when a customer uses a foreign credit or debit card.

DCC offer

The system, equipped with DCC technology, automatically offers the customer the option to complete the transaction in their home currency. The amount includes the conversion rate and any additional fees involved in the conversion.

Customer's choice

The customer can accept the DCC offer and pay in their home currency, or decline it and pay in the local currency.

Transaction completion

If the customer chooses DCC, the transaction is processed, and the card is charged in the cardholder's home currency using the displayed exchange rate. If the customer declines, the transaction is processed in the local currency, and the cardholder's bank will convert it using its exchange rate.

Benefits of DCC for businesses

• Additional revenue: Businesses earn commissions or fees from DCC transactions, providing an extra revenue stream.
• Customer convenience: The option to use DCC can improve the customer's experience by providing them with more payment options and clarity on pricing in their home currency.

Challenges of DCC

• Higher costs for customers: DCC often involves exchange rates that are less favourable compared to standard bank rates, leading to higher costs for customers.
• Transparency and consent concerns: There are instances where the terms of DCC are not clearly communicated, leading to confusion and potential dissatisfaction.
• Regulatory and compliance requirements: Businesses offering DCC must adhere to complex international financial regulations.
• Impact on customer perception: If customers feel misled or overcharged due to DCC, it can affect customer loyalty and brand reputation.

Best practices for DCC

• Understanding and compliance: Businesses should adhere to relevant regulations and ensure staff and customers are well-informed about DCC.
• Transparent customer communication: Always offer customers a choice between paying in their home or local currency. Provide a clear explanation of DCC and display exchange rates and fees upfront.
• Competitive and fair pricing: Use competitive exchange rates and keep fee structures reasonable to avoid deterring customers.
• Technology and integration: Ensure smooth integration of DCC into payment systems and implement security measures to protect transaction data.
• Monitoring and analysis: Regularly monitor DCC transactions and analyse performance, including customer feedback.
• Marketing and promotion: Consider targeted marketing and promotional offers to highlight the benefits of DCC.

While DCC can be convenient for customers and beneficial for businesses, it's important to be aware of the potential challenges and best practices to ensure a positive experience for all involved.

ATM fees and limits

When travelling, ATM fees and limits can be a concern. Here are some tips to help you navigate these charges:

• International or transaction ATM fees: These are charged when you use a foreign ATM, often a flat rate of between $1 and $5, or a percentage of your total withdrawal (generally 1-3%). For example, Bank of America charges a $5 fee for global withdrawals.
• Conversion fees: Your bank may charge an additional 'conversion fee' of 1-3% for foreign ATM withdrawals. This is a hidden surcharge for the currency conversion service.
• ATM surcharge: The ATM itself may add a surcharge for using the machine, usually a few dollars. You will be notified of this on the ATM screen and can choose whether to accept or decline the transaction. To avoid this, use ATMs at major banks or post offices, as smaller banks and independent ATMs are more likely to impose surcharges.
• Poor ATM exchange rates: ATM exchange rates are tied to interbank currency rates, which fluctuate but remain relatively stable for months. Check the current exchange rate online before using an ATM, so you can assess whether it is offering a fair rate.
• Dynamic currency conversion (DCC): Some ATMs may offer to convert transactions into your home currency. This service, however, often includes significant hidden fees. It is best to decline DCC and pay in the local currency, leaving the conversion to your bank or card network.
• ATM withdrawal limits: Your bank will set daily withdrawal limits on your account, which may be lower than the limits imposed by foreign ATMs. Contact your bank to check your limit and request a higher one if necessary.
• ATM networks: Your card is likely linked to a global ATM network, allowing you to make withdrawals from any ATM within that network. Common networks include Cirrus (linked to MasterCard, Maestro, and Cirrus cards), Visa, MasterCard, and Amex. Use the network's ATM locator to find machines within the network at your destination.
• Choosing a bank: Many banks charge excessive fees for international ATM use. Consider switching to a bank that does not charge foreign transaction or ATM fees, or one that reimburses ATM fees. Examples include Capital One 360, Discover, HSBC Premier Checking, and Varo.
• Using a credit card: Instead of using ATMs, consider using a travel credit card that waives foreign transaction fees. Examples include the Platinum Card from American Express, Capital One Venture Rewards Credit Card, and Chase Sapphire Preferred Card.

Currency conversion rate

When travelling, it's important to understand currency conversion rates so that you can exchange currency without paying unnecessary fees. Here are some tips to help you get the best currency conversion rates when travelling:

• Get cash at your bank before leaving – One of the best ways to minimise currency exchange fees is to visit your bank or credit union before you leave and exchange some money. Depending on the country you're visiting, most major US banks will have foreign currency available. You can also order currency online or by phone to be delivered to your home.
• Avoid currency exchange kiosks at airports – Airport kiosks offer convenience but their exchange rates are typically much less favourable than your bank at home.
• Pay by card, but watch out for foreign transaction fees – Paying by card can help you conserve foreign cash, but you may have to pay foreign transaction fees of up to 3% on every purchase. Check the fine print on your bank's website or call them to ask about these fees.
• Pay in the local currency to avoid currency conversion fees – Some international merchants will let you choose whether to pay in the local currency or your home currency. Choose to pay in the local currency to avoid an extra currency conversion fee and a poor exchange rate.
• Know your ATM fees and limits – Using a foreign ATM can be a good way to get a favourable exchange rate, but be sure to check what kind of fees your bank charges and what limits it imposes on daily withdrawals.
• Use international banking apps – If you travel frequently, consider using an international banking app such as Wise or Revolut to manage your money. These apps make it easier to hold multiple currencies and transfer money to accounts in different countries.

Frequently asked questions