Traveller Rob Gower went to an ATM the other day at Phuket Airport in Thailand. He withdrew 10,000 baht in cash. The machine added a fee of 180 baht, which made the total withdrawal 10,180 baht.
The ATM machine offered Gower $429.78. He declined this offer and his Mastercard did the transfer at $407.30.
The difference in fees to the bank was 5.5 per cent. This fee of 5.5 per cent is known in the credit card trade as “Dynamic Currency Conversion” (DCC). It is a global sting on foreign travellers. The moral of this story is simply, if you are overseas and you are offered – at an ATM, a shop, a hotel or a restaurant – the opportunity to pay in Australian dollars or the foreign currency, select the foreign currency.
For Rob Gower, it was only by “backing out” his foreign exchange transaction at the airport ATM that he was able to spot the difference.
It is, of course, counter-intuitive to select the option to pay in foreign currency. Card industry insiders say up to 90 per cent of people choose to pay in the currency of their origin, the idea being that if they are Australian and choose to pay in baht, US dollars or euros, they may well be stung for another currency conversion fee.
For the banks, the beauty of DCC is that the fee is not adequately disclosed, arguably not disclosed at all, and so they make billions worldwide from unsuspecting travellers. Further, it is our banks that prey on foreigners and foreign banks that prey on Aussies abroad. Each therefore can place hand on heart and claim they are not ripping off their own customers.
What is the size of this market for our banks? Billions are spent by foreigners here every year. Five per cent of that is not to be sneezed at.
The merchants are also in on the scam. The hotel or the shop that does the card transaction gets a cut of the DCC fee. The intermediary, that is the DCC company, also takes its cut.
This is also counter-intuitive: the two major card companies Visa and Mastercard are not in on the heist. Yes, their cards dominate the world market for foreign transactions yet they receive no cut from DCC deals. In fact, card company insiders have told Fairfax Media they detest DCC but for regulatory reasons they are required to keep an open system and allow third parties onto their payments platforms.
So it is that these third-party interlopers have crept into the system and are making a killing at the expense of unwitting travellers.
The Big Four banks were contacted for this story. They ducked for cover, providing partial answers to a series of questions. Only one of the four, National Australia Bank, was prepared to warn its customers:
“NAB advises its customers who are travelling overseas to always pay in the local currency instead of Australian dollars so they can avoid paying additional charges for currency conversion,” a spokesman said.
Few begrudge the banks the chance to make a turn on what is a superb service –being able to pay at point of sale and withdraw cash in any country at an ATM. It is a far cry from the days of travellers’ cheques and lugging wads of cash about.
However, they make a 3 per cent turn on foreign exchange transactions anyway, before DCC. The vital question is one of disclosure. How, and where, are customers told they will be belted for a juicy 5 per cent to 7 per cent fee, on top of normal forex fees, simply for choosing the home currency option?
You won’t see it at the ATM, you won’t see it at the hotel point of sale machine. It is not broken out on your bank statement. It is buried in the “spread”, the forex buy-sell rate that is.
As they hide their 5 per cent fees in the exchange rate, are they exempt from a requirement to advise the customer?
As one reader noted: “If I want to send money to the USA or load a $US Travelcard this morning, my bank is quoting a rate of one Australian dollar at US73.73c whereas the actual rate is US77.36c, a fee of 4.92 per cent is thus concealed. On top of which they will charge a ‘commission’ but at least you get to see what that is.
“I am a retired investment manager and I know that the banks rip off their customers who buy forex products: what annoys me is that the large majority of their customers are forex innocents who don’t know they are being plundered. Surely the ACCC should require banks to disclose the fees.”
In Rob Gower’s case, the undisclosed DCC fee was 5.5 per cent but as he points out, that is not all. “I will also have to pay MasterCard/bank fees in Australia of 3 per cent. If you accept the DCC offer, what would be the total cost of getting approximately $400 cash out of a Thai ATM? 1.8 per cent ATM fee plus 5.5 per cent DCC fee, plus 3 per cent Australian bank fee – a fee-fest of over 10 per cent!”