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PDS exchange rate costs header

Exchange rate costs: cards charged unnecessarily when used abroad

British holidaymakers are paying millions in unnecessary charges when they use their credit or debit card to pay for goods or services abroad. Tourists are being given the option to pay in pounds or the local currency, and risk being given a poor exchange rate, in shops and restaurants as well as at cash machines.

These poor exchange rates are costing UK tourists around £500m a year as the lower rates are around the same as charging 6% on a transaction. Although, tourists could be charged as much as 10% for paying in sterling on some transactions according to currency trader FairFX.

These pay-in-sterling options are known as dynamic currency conversion and many holidaymakers are unaware of the dangers and potential costs of this practice. Although tourists are much savvier than they used to be with regards to high charges, they do not assume that payment systems are something to be vigilant of.

This service is sold to holidaymakers as an extra convenience but many tourists have said that they are confused by the choice and are not usually made aware of the vast exchange rate differences. The Netherlands is one hot spot for this scheme at the moment with Consumentenbond, the Dutch consumer organisation, taking action to ensure visitors take extra care when paying by card.

PDS exchange rate costs content

Speaking for the group, Sandra de Jong, said; “Let me warn those that are being offered to pay by card and the shop owner says: ‘Would you like me to give you the exchange rate of what it will be in pounds’ – don’t do it”

Dynamic currency conversion works when you put your card in a payment machine or ATM, you will be given a choice to pay in euros or pounds. If you choose euros, your transaction will go through the standard route and the exchange rate set by Visa or Mastercard will be applied although your bank may charge an additional fee.

If you opt to pay in pounds then money will be changed there and then by the shop’s bank or payment processor and they decide on the rate to charge based on their interest rates. As the exchange rate differs hugely from one bank and payment provider to the next, it is better to pay in local currency and take the standard fee of Mastercard or Visa.

As one in five transactions abroad are affected by this, people have been asked to be vigilant especially in places such as the Netherlands, Hungary, Thailand, Spain, Turkey and Sweden where this practice is becoming more and more common.

Although, dynamic currency conversions are legal in Europe and the UK, traders need to display the price and the exchange rate before payment is made. However, it has been found that in most cases the rate is not shown in a way tourists are used to and therefore they find it difficult to assess the rate and any potential charges on the spot.

As traders and their bank or payment processor benefit by recouping banking costs and potentially making a profit, holidaymakers are being charged for simply not understanding what the best option for them is. As a result, you will need to be able to protect yourself from these charges, here’s how you can do that:

  1. Be vigilant – Make sure you are aware of dynamic currency conversions before you go away and always make sure you know what to look out for, if you are confused or unsure ask someone or walk away.
  2. Always pay in local currency – If you are offered the option to pay in either currency, always choose to pay in the local currency as this will protect you from huge charges due to exchange rates.
  3. Take cash – This is particularly useful if you are only going away for a couple of days as it will mean that you will avoid dynamic currency conversions altogether by not having to pay on card or withdraw money.
  4. You should be aware of the choice and fees – If dynamic currency conversions are going to affect your transaction you should be made aware of the choice you have and how the fees will affect you and your purchase. If you are not made aware then this could be classed as mis-selling.
  5. Don’t be forced into making a payment – If you are unsure, confused or worried about the payment or you feel like you are being forced into the payment then walk away. This could save you money in the long run.

If dynamic currency conversion has affected your purchase(s) whilst abroad, particularly when you have not been made aware of the situation, you should get in touch with your card issuer to explain the situation and in some cases, you could reclaim the extra money paid.

References and further reading

Header image – Warwick Economics Blog

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