This piece first appeared in Reader's Digest in August 2001
 The text here may not be identical to the published text

Fair exchange may be no robbery – but foreign exchange very often is. The banks in our own High Street will charge us twice, three or sometimes four times to convert our hard-earned pounds into other currencies. And many of these charges will be so well hidden we never see them.

Most of us take some cash with us when we go abroad. But did you realise that you are effectively being charged around 7 per cent for the privilege of doing so? So if you want to take £100 in cash you will end up with foreign currency worth around £93. There are two charges the bank or exchange office makes. The first is easy to spot – it is called commission and is usually 2% - or up to £3 minimum if you change less than £150. It will appear on your receipt as ‘commission’ and seems quite modest – though if you wanted to earn 2% interest on your money you would need to keep it in a savings account for six months or so.

But there is another, more expensive charge lurking in the figures. It is called the ‘spread’ – the difference between the exchange rate the bank uses when it sells you currency and the rate it uses when you sell it back. For example, on one day in May this year Thomas Cook, Britain’s biggest foreign exchange dealer, was selling US dollars at $1.37 to the pound and buying them back at $1.52. The middle price between these two is $1.44½. That means whichever way you convert your money you are being charged just over 5%. Thomas Cook charges £2 commission, rather than 2%, but on £100 that still means you are paying more than 7% to change your money from one currency into another. Of course, some of the charge covers the costs the bank itself incurs. But it is still a lot of money for a simple and common transaction.

And when you change it back, it all happens again. If you change £100 into US dollars on the way out and bring the same amount back in dollars which you convert into Sterling, a typical foreign exchange office will leave you with around £86 – so £14 has disappeared in a couple of weeks. It would take you more than three years to earn that much interest on the money if you invested it. Some banks offer to change any spare currency back ‘commission free’. But they still charge you the spread. Even at its lowest, on US dollars, that will be around 5% and it is slightly higher on European currencies such as Francs, Lira and Pesetas and even more on smaller currencies like the Australian dollar or South African rand.

Although you will usually need some cash when you arrive abroad, it is now very easy to use plastic to pay for goods or to get currency out of local cash machines. And although the charges are complicated and numerous, it will usually end up cheaper than taking cash out from the UK.

The first charge is called the ‘Foreign Usage Loading’. That is really commission by another name. If you use your card to buy goods or get cash abroad you will be have a charge of up to 2.75% slapped on it. You will never see this charge, your statement will just show the amount you spent in foreign currency, the exchange rate used, and the cost in Sterling. The loading will be hidden as part of the exchange rate, in other words, the rate will be 2.75% worse than it should be. However, the exchange rate used is different from the one you will get changing cash in the High Street. Foreign cash transactions on a debit card go through either Visa or Cirrus/Maestro (the brand name used by Europay international, which owns Mastercard). These companies buy and sell a great deal of foreign currency each day and offer very good rates. They charge the banks a commission – Visa for example charges just under 1% in most countries but nothing within Europe and Scandanavia. The banks pass the charge on, AND add their own bit on top. So the outcome is that you get a very good rate of exchange but then have up to 2.75% added on top by the bank. Only Nationwide, the building society, makes no charge at. Almost all other banks and societies charge between 1.25% and the maximum 2.75%. The Loading will also be charged if you use your debit card to buy goods abroad rather than get cash.

If you use your debit card to draw out cash abroad from a machine, two other charges may be made. First, there may be a cash handling charge. Again, Nationwide is the cheapest with no charge, but many banks charge 1.5% which will be shown separately on your statement. Second, the bank operating the machine may also charge you. In the United States of America for example, many banks charge $1 for using the machine.

The same charges apply with credit cards – up to 2.75% for using it abroad, a cash charge of up to 1.5% if you if you use the card to draw out cash, and possibly a charge by the local bank for using the machine. And most credit cards make a further charge for taking out cash. They start charging you interest from the day you draw out the cash – there is no interest free period. So even if you pay off the debt as soon as you get your statement, that can add another £1.65 onto the cost for a month’s interest. So the total charges on drawing out cash abroad on a credit card could be as high as £5.90 for each £100-worth of foreign currency you draw out. But this is cheaper than converting it to cash in the UK, especially when you take account of the better exchange rate. It is also cheaper than the cost of using traveller’s cheques. You will normally be charged around 2% commission when you buy them and you are then subject to the vagaries of exchange rates offered in foreign banks and hotels. They can be better than the rate here, but they can also be much worse, especially the ones that are open late at night. Give me a cash machine any time. Even if all the charges really do turn exchange into robbery.

From next January, a lot of familiar currencies such as the franc, the lira, the peseta, the mark, and the drachma will vanish as the euro takes over. From 1 January 2002, local currencies will disappear and travellers to the 12 European Union countries which have adopted the euro (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain) will only be given euro. This will not normally make travelling or exchange cheaper or easier for people from the UK. However, if you are travelling to more than one eurozone countries you will be saved the trouble – and expense – of converting one European currency into another as you cross borders. If you have any old currencies from the twelve countries you should be able to change them, at no cost, into euro, in banks in the eurozone countries.

August 2001

e-mail Paul Lewis on paul@paullewis.co.uk