Chris Pickles

FX and how to lose 20 percent of your money

11 Apr, 2012 16:45

Time for a vacation-time bleat. I noticed yesterday that my bank had charged me £2 for a debit-card transaction – on this occasion, when I used my debit card at Heathrow to buy Swiss Francs so that I could attend a Financial Stability Board workshop in Basel. It turned out that the foreign exchange company that I used at Heathrow books all of its transactions through its banking operation outside of the UK. My debit-card transaction therefore gets charged by my bank as taking place abroad – not at Heathrow – and my bank therefore charges a £2 “cash advance fee”. This only shows up on your next bank statement when you notice that your bank has charged you a higher amount than what the foreign exchange company charged you.

My Generation Y son overheard my ensuing phone conversation with my bank , and asked me how all of this works – so I explained, using euros as the example. You buy £100-worth of euros at the airport, and pay £3 commission for that service. If you don’t spend any of your euros on your trip, you bring them all home with you and change them back into UK sterling – paying another £3 commission for that service. It has cost you £6 in fees – 6% of your original £100 - and you’ve not spent any money at all.

But on top of that, because there is a 12.5% spread between the sell-price and buy-price, the bank only gives you £87.50 for the euros that you paid £100 for. You’ve lost £12.50 on the spread, plus £6 in commission fees.

Plus £2 for having used your debit card in the first place, making £20.50 charges in total. Over 20% of your money lost, and you haven’t spent a penny on yourself.

I already knew why this is – but I’d never worked out just how much this is!

Comments

Added: 12 April, 2012 - 08:13 | Christopher Mc Carthy - SunGard - Zurich

I was under the impression that using a (debit) card - once abroad - to withdraw cash was the way to get the best rate? Can;t remember the last tiem I bought currency before leaving for a destination.

Although I got hit with heavier than expected charges, when leaving Heathrow recently. I withdrew GBP with my foreign bank card, and was given the option to be bileld in GBP or the currency of the account. Cannot remember what I chose, but it must have been the wrong one as I was amazed at the final total coats when I got my statement!

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Added: 13 April, 2012 - 09:05 | Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune

Had you EFTd a like amount, the fees would've been over 30% - as I learned to my dismay when my bank in London slapped a fee of EUR 18 equivalent to transfer EUR 55 equivalent to another bank in Frankfurt. With fees like these for commodity products, no wonder banks can afford to give away highly differentiated offerings like Faster Payments for free!

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Added: 13 April, 2012 - 09:45 | Chris Pickles - BT - London

UK Faster Payments - mmmm! If I remember correctly, that is the system that the Office of Fair Trading in the UK has been forcing the banks to introduce because the OFT considered that the banks were treating their customers unfairly. I'm not clear on how this can remain as a "premium service" if the standard lower service level doesn't satisfy the OFT - ?

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Added: 13 April, 2012 - 18:36 | Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune

The BEFORE-FPS scenario might have been unfair to customers if that's what the OFT decreed but the AFTER-FPS scenario is highly differentiated when compared with ACH-based systems in many other parts of the world (e.g. USA). Where it's applicable, FPS delivers RTGS-like value, which justifies fees. In a free market, fees should be a matter between a bank and its customers. As far as I know, OFT doesn't concern itself with whether a bank can levy fees or not.

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Added: 14 April, 2012 - 09:18 | Chris Pickles - BT - London

I think that you've come back to my original point - fees and what a customer gets charged. Back in 17th century France, charging 4% per annum was described as "usury" (see Molière's "The Miser"). So being charged over 20% should be described as what - "banking"?