For many years, clients and friends have asked me what’s the best way to pay for hotels, meals and shopping, as well as the best way to obtain cash when traveling abroad. While this answer can vary some by country or region, I have usually advised to simply use your debit and/or credit cards. Since it can be quite costly to buy currency from a bank or kiosk (as high or higher than 10% in some cases), I tend to turn to my credit card when traveling abroad. Fees vary by bank and card, but when I use my EverBank Elite Plus® card, the usual International Transaction Fee is waived.
However, just like here at home, there are times when cash, or the home currency, is your only option. In such situations, hitting the ATM is often your best bet. Yes, you’ll incur transaction fees, such as the 2% International Transaction fee I’m charged when using my EverBank debit card, but this remains a more financially sound choice over the other options. Keep in mind there may be other costs associated with using your debit and credit cards abroad. Regardless, I still make every effort possible to minimize the amount of currency I carry.
So, What Are the Costs of Obtaining Currency?
Recently, Chris Gaffney, President of EverBank World Markets, stopped by a local bank here in Saint Louis to grab a few euros before a trip. “There will be no fee on this transaction,” replied the teller when asked. While this was technically correct, the transaction still included an over 10% mark-up. So, how does that make sense?
Rules vary worldwide, but here in the U.S. the rules set by regulators break foreign currency transaction costs into two parts: fees and spread.
- Fees, under these rules, are generally what we all expect them to be—explicit charges that are assessed against a transaction. Once upon a time these were usually just baked into an exchange, but today they are appropriately disclosed as separate costs. On consumer foreign wire disclosures, for example, you will see the costs of things like handling, wire fees, and other clearly itemized on your receipt.
- Spread, on the other hand, is not consistently disclosed. Not all disclosure rules treat these amounts as fees, or separately require that providers identify them. When Chris bought the euros, the bank took the spot rate for the day (i.e. the rate used by institutions to trade large blocks in the market) and added to it a spread of about 10%. When buying currency back from a client, a similar percentage is deducted from a customer’s payout, resulting in about a 20% “bid” to “offer” spread. That’ll leave a mark! By the way, EverBank has always told clients our spread when buying or selling currency—typically about ¾ of 1%. Credit and debit card transaction spreads, on the other hand, will vary and are established by the applicable card networks.
A Closing Piece of Advice
Here is one of those “I should have known better moments.” In early August, I walked up to the “No-Fee ATM” in our hotel in London. In went the debit card, out came the pounds sterling. I gasped when I saw the 10% mark-up. There’s that number again. Yikes. This was clearly not a “bank” ATM. Smart, attentive travelers will remember to use the ATMs of recognized banks rather than the money hungry versions placed in crowded tourist areas. Note to self: pay better attention next time.
With these financial thoughts in mind, go enjoy your travel abroad.