Recently, I, an American, was flying from Amsterdam, Netherlands to Naples, Italy. I got pretty confused and frustrated by the airport currency exchange options available and did some investigating. This article should help you, beloved reader, avoid the manipulative scheme that is currency exchange.
Buckle up: currency exchange is a worldwide scam. Companies like Travelex are desperate to keep you confused so that they can keep skimming 16% or more of every dollar you exchange at their counters. By using artificial exchange rates, charging hidden fees, and advertising rates in misleading and inconsistent formats, these ubiquitous travel exchange kiosks make billions by deceiving consumers.
We’ll help you preserve the value of your hard-earned money by using services like TransferWise and strategically making ATM withdrawals. But first, we’ll show you how your money loses value when you convert it into a foreign currency.
Artificial Exchange Rates:
Currency exchange rates are set artificially by banks and currency exchange companies like Travelex. There does exist a real exchange rate, which you can find with a quick Google search, or here, or here. This is commonly referred to as the mid-market rate or the interbank rate. ‘Mid-market rates are derived from the mid-point between the buy and sell rates for large-value transactions in the global currency markets,’ says xe.com. The interbank exchange rate is the rate at which banks trade currencies with each other. These rates are not offered to you at your average travel exchange kiosk.
Companies and banks like Travelex and ABN AMRO (whom we’re using as examples in this article) actually set two exchange rates. One is called the buy and one is called the sell. When you see these expressed in an airport, a train station, or a downtown shop, it looks like this:
According to the screen, if you were to give ABN AMRO $100, they would return to you €82. But, if the transaction were the other way around, you would pay them €99 for the same $100. It can feel complicated to do even this small bit of calculating, but it’s quite simple: ABN AMRO buys $100 for €82, but they sell $100 for €99. If they bought and sold one-hundred-dollar-bills all day long, they’d make €17 on every transaction, without charging any other fees. (Spoiler: they charge extra fees).
The difference between the buy (or bid) and sell (or ask) prices is called the spread. These companies make enormous profits on the spread (like that €17 in the above example), which is where unwitting consumers are often unaware that they lose money. In the spread alone, check out the enormous differences in value that would be forced on your money:
If you gave Travelex $100, they’d give you back €79. If you gave ABN AMRO $100, they’d give you back €82. If you gave TransferWise $100, they’d give you back €87 (TransferWise is your best option: more on that in a minute). Please understand that the numbers for ABN AMRO and Travelex here don’t include their extra fees, this graph shows how your money shrinks by the spread alone. This. Is. A. Rip-Off! It gets worse, so just keep reading.
You’re now a wise customer, or at least wiser than before. We’ve opened your eyes to the manipulative insanity that is the artificial exchange rate. Travelex ‘serves’ 37 million customers every year, and conducts 2,000 transactions every hour, which means 2,000 times an hour they use an artificial exchange rate to shrink the value of their customers’ money.
What can you do? Any decently enlightened consumer would try to comparison shop. If you went to buy a pair of speakers on Amazon, would you purchase the first set that came up in the search? Or, would you scroll down and check the other prices and even consider buying the speakers secondhand? Of course, you would compare prices.
Currency exchange companies make it difficult to compare prices by advertising their rates in what are essentially different languages. Take a look at the photo below, and then scroll up to the photo of the ABN AMRO rates.
What’s difficult to notice is that the exchange rates aren’t expressed in the same format, making it impossible to accurately compare the ‘prices,’ or rates, without a calculator, a little bit of mathematical skill, and a lot of patience and time. We’ve shown the problem in the graph below:
Here’s what’s going on: When Travelex wants to buy your dollars, they express the rate in USD/EUR. But, when they want to sell you dollars for euros, they express the rate as EUR/USD. To add a layer of difficulty, when you walk across the departures terminal to check out your other options, ABN AMRO competes with Travelex but expresses both rates as EUR/USD. Once again, making comparison shopping a totally frustrating proposition.
Confused enough yet? There’s one more problem to go.
Commissions and Fees:
Now that they’ve set their own exchange rates and expressed them in terms that confuse and frustrate their customers, these companies tack on extra fees. If you look at the two photos of the live screens from Travelex and ABN AMRO, you’ll see small notes below the exchange rates that disclose the commissions or fees that will be added to your transaction.
ABN AMRO: ‘Commission: EUR. 3,25 – No commission on transaction from EUR. 200,-‘
Travelex: ‘Commission 0.75%. Minimum 3.95 EUR. Maximum 7.50 EUR.’
So, what’s going on here? ABN AMRO uses the European comma, while Travelex uses the American decimal point. Travelex charges their commission as a percentage, but with a minimum and a maximum value that the commission can be (how quickly can you work out whether 0.75% of $400 is more or less than €3.95?).
Furthermore, since you’re handing over dollars, which exchange rate do you use to calculate their fees, which are expressed in euros? The buy rate, the sell rate, or the actual rate? Do you have a calculator and some patience? ABN AMRO’s fee is obviously easier to understand, but why do they even charge a fee when they make such a profit on the spread?
None of that even matters because both of their sentences about fees are blatantly misleading. How? Because your money shrinks in value by a minimum of 8% with Travelex and ABN AMRO. (Believe us, or scroll down to the graph below). Travelex’s charge is a whole lot more than some measly 0.75%. Don’t be fooled.
Let’s give Travelex and ABN AMRO some time to write us a pouty, pissed-off email while we tear apart this next example. When you leave the terminal and head downtown, you’ll find dozens more currency exchange shops. Often they have signs like this one, which we found after our arrival in Naples, Italy:
Notice that this nonsensical sign has only one exchange rate. If you stop and think for a second, you’ll see that it’s the buy rate, which allows the business to pay you €83 for every $100 you hand over, instead of the €90 that it’s actually worth. And if you want to sell them euros and receive dollars in return, what’s the rate? We’ve got no clue because they didn’t post it.
Furthermore, this particular Italian shop has the nerve to claim that the exchange has ‘no commission’ and is ‘free of change’ (we assume they meant to write ‘free of charge,’ but since they’re scamming you anyway, who cares?) Actually, the charge is about 8% of your money (like many travelers, we didn’t have access to the true exchange rate at the moment that photo was taken, but we’ve since checked the historical rate recorded for that day). Despite their manipulative and dishonest claims, exchanging money with them sure as shit ain’t free.
Are you angry yet? Here’s some advice.
We absolutely love a service/app/website called TransferWise. TransferWise is to currency exchange as Uber is to taxis and Airbnb is to hotels. Look at the chart below to see how much money you would lose on three different transactions, and notice how tiny that number is in the blue TransferWise rows.
TransferWise works like this: You transfer money to someone with a bank account of a foreign currency. This could be an American transferring money to a British friend, or a German sending money to a French colleague, etc. The typical international traveler often knows someone in her destination country.
Ideally, the traveler uses TransferWise (easy website, even easier app!) to send money to a friend, colleague, or acquaintance in another country. That foreign person would make a free ATM or bank withdrawal of the money the traveler sent and hand over the cash when the traveler arrives.
TransferWise uses the true exchange rate and takes a flat fee from the original currency. If you’re sending $300 to a European, TransferWise will charge you $3.00 but still use the real exchange rate. This means that you will actually send $297 to your European buddy, but they will receive the exact value of $297 in euros. $3.00 is just 1% of $300, and as that tiny fee grows nominally for transfers of more than $300, it shrinks in real terms to as low as 0.72%. That’s a great deal!
What if I don’t know a local?
There is still hope for you! Like we cover in our article, WLI’s Guide to Saving Money When Traveling, there are many ways to pay in a foreign currency for a small fee and even for free.
Use a credit card: Using a travel-oriented credit card like the Chase Sapphire Preferred or the Capital One Venture will allow you to swipe your Visa or MasterCard in other countries and pay the fair exchange rate. The credit card company will use their exchange rate, allowing you to pay in euros, yen, pounds, etc. and they won’t charge you an extra fee. Make sure your credit card carries no foreign transaction fee; these cards are easy to find, but the cards without this feature tend to take 3% of every international transaction as a fee.
Remember, if the cashier or card machine asks you whether you would like to pay in the local currency or your home currency, always choose the local currency. This puts the burden of setting an exchange rate onto your credit card company and doesn’t allow the shop or their bank to set their own artificial rate. And do not use your credit card at an ATM.
Debit card only? Head to the ATM. Taking your debit card to a name-brand ATM is your next best option for grabbing cash. Many ATMs abroad don’t charge an extra fee for your transaction, but you’ll likely pay your bank something around 3% for the exchange. As you already know, this beats the crazy losses you sustain when changing money at the Travelex counter.
Try to find an ATM that is in your bank’s network (it may say Cirrus, Maestro, or PLUS on the back of your card). You can match the names on your card to the names on the ATM. Before you travel, check on your bank’s website or give them a call to find out if they have foreign branches or partner banks that will let you use ATMs for no extra fee. Use the ATMs of major banks, not the small, flimsy ones freestanding on the floors of shady, tourist-trap shops. Look for Barclays, ING, Bank of America, Chase, etc.
You can also shop around for a debit card with no foreign exchange fee. Yes, they really do exist. Read about them here, or open a checking account with Capital One 360 (which we recommend in this article) or Charles Schwab. Capital One 360 won’t charge you any extra fees at a foreign ATM, but you’ll still have to pay the (usually) flat fee charged by the company or bank whose ATM you use. Charles Schwab won’t charge you, and they’ll refund unlimited third-party ATM fees.
Finally, here’s a simple chart to keep your brain straight:
How to use that chart: Remember that when you give ABN AMRO dollars in exchange for euros, they express their rate to you in euros/dollars, or EUR/1USD. Luckily, this is clear on ABN AMRO’s live screen. The bottom number of any of these fractions, a.k.a the denominator, is always equal to one.
When you see ABN AMRO’s exchange rate of 0.828, you know that it means 0.828EUR/1USD. Using the chart above, you now know that you should multiply your dollars by this number to find out how many euros you will receive in return. $100 × 0.828 = €82.80 -the first option on the chart.
But Travelex is doing its own thing. It isn’t clear from their live screen, so to know that they express their rate in USD/1EUR you either need to do some semi-hard thinking, some googling, or some asking-at-the-desk. But we’re telling you now that when they give you euros for your dollars, they express their rate as the opposite of the rate used by ABN AMRO.
Use the chart to quickly understand how to find the what your dollars are worth in euros at the Travelex desk. You start with dollars, of course, and then you divide your dollars by the USD/1EUR number, which Travelex has set at 1.257. $100 ÷ 1.257 = €79.55 -the second option on the chart.
Thanks for reading, we hope this article will make your life a little better!
How do you preserve the value of your money when traveling abroad? Tell us in the comment section below!
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