The Australian, Wealth
IT’S time for Christmas shopping and many people will be visiting Singapore and Hong Kong or the duty-free halls for their seasonal spending sprees.
But retailers could be taking-advantage of the festive spirit by offering payment in Australian dollars and adding a surcharge to foreign currency conversion fees.
Called dynamic currency conversion, surcharging payments made in Australian dollars is perfectly legitimate. But this is one of the many pitfalls when spending abroad and is a matter of concern to Mastercard and Visa.
According to Rob Walls, head of Debit & Prepaid Products, Asia-Pacific, Middle East & Africa at Mastercard, prices are often quoted in Australian dollars, including a surcharge – not giving shoppers the cheaper option of paying in the local currency.
“We are seeing increasing dynamic currency conversion at points of sale. This is often seen in hotels, retailers and duty-free shops in airports. Often they show the rate in Australian dollars, but the actual exchange rate is hidden,” he says.
“There also may be an international transaction charge applied by your issuing bank.
“Those dynamic currency transactions are often done before even a consumer is given a choice. Sometimes they are automatically put through and the exchange rate is quite disadvantageous to you, and that’s because the merchant is applying a margin up front.”
It is one of the most expensive ways to shop abroad, according to a Mastercard study, The Real Cost of Foreign Currency Transactions. The study gives an insight into the true costs Australians face when accessing money overseas.
The study examines the benefits of different payment options, such as cash, credit cards, debit cards, prepaid cards and travellers cheques.
It found that the costs of buying foreign currency and using cards was diverse across the region.
Walls says that when he travels, he knows he can always get cash at destination airports and sometimes it can be cheaper than buying it locally. The place to avoid buying currency is hotels, where exchange rates can be poor, as well as foreign exchange vendors outside major cities.
“We did have a look at buying cash at the destination point versus the point of origination and it really depends where you are starting your travel,” he says.
“In cities like Dubai, there tends to be almost no margin in foreign exchange cash transactions; the cash is very very cheap in terms of buying foreign currency in the airport.”
But he says that in countries such as Australia and New Zealand, where there is a limited range of money changers to choose from, the foreign exchange margins are higher.
“I’d rather have the money in my bank account, potentially earning a 6 or 7 per cent interest rate for an extra day and then get it at the ATM at the destination,” he says.
In reality, the differences between foreign exchange rates between using eftpos, credit cards, prepaid cards and traveller’s cheques is small.
“None of us are foreign exchange traders, and those are the guys who are really going to worry about a couple of basis points here or there,” Walls says. “You’d have to be spending a lot of money overseas for it to make a big impact on your travel budget.”
What makes the difference are the upfront transaction costs, multiple ATM fees and the costs of prepaid cards and traveller’s cheques, which have high upfront costs, not cashed in after a trip.
“Transaction costs vary quite significantly depending on the transaction value,” he says. “Consumers need to understand the behavioural impact on overall transactions.”
For instance, 10 $100 withdrawals will cost more than two $500 or one $1000 withdrawal. Each time an ATM is used, there is usually a one-off fee plus a percentage charge, usually about 2 per cent.
Although within the Mastercard and Visa rules banks are not supposed to make their own local additional surcharges, they do so where the rules have been overturned by local laws. In Australia, these rules were overturned, allowing retailers to pass on credit card fees.
In Vietnam and some US states, surcharging at the ATM is permitted, but the ATM is meant to tell the consumer of that fee before the transaction proceeds.