Avoid unnecessary costs abroad: Say no to dynamic currency conversion

Although exchange rates can make traveling abroad expensive, it’s possible to minimise extra costs for the sake of convenience.

A significant aspect of travel is the excitement of exploring the unfamiliar, such as a new environment, customs, or food. However, when making payments overseas, many people prefer using their domestic currency to feel more at ease.

This preference has become a widespread and costly practice for travellers using ATMs or making electronic payments at stores and eateries.

For instance, a foreign patron might be presented with an option to pay in their native currency instead of the local one when receiving a restaurant bill. This option, termed ‘dynamic currency conversion’ or ‘currency choice’, seems attractive initially ─ it appears to have simplified the process by converting the total to a more comprehensible currency, thus providing a clearer understanding of the amount spent.

Nonetheless, this convenience comes with a hefty price tag. Research indicates that the average fee for such conversions is around 7.6%, which is over twice the cost of paying in the local currency (typically between 1.5% and 3%).

Imagine a South African visitor enjoying dinner and drinks at a British restaurant, with a final bill of £35.43, equal to R800. By paying in British currency, which would then be converted to rands by the diner’s South African bank, the total would be approximately R820. However, using dynamic currency conversion to pay the bill in euros would result in a cost of R860!

Despite these elevated fees, studies reveal that more than 50% of global customers continue to pay in their familiar domestic currency.

The primary rationale behind this choice is the natural inclination towards familiarity when managing finances overseas. However, it is essential to note that the fees are not explicitly disclosed to customers. Tourists may see the applied exchange rate but remain uninformed about hidden fees or how the rate compares to others.

While costly for tourists, the dynamic currency conversion service can generate substantial conversion revenue for the providers, who often share a portion with the businesses involved in the transactions.

Reports suggest that additional revenue for retailers amounts to approximately 1% of the transaction value. There have also been instances of well-known department stores training staff to actively promote foreign clients to pay in their native currency.

Increased transparency required

Although dynamic currency conversion comes with high fees, most government regulators globally have been reluctant to intervene. One potential reason is the fear of affecting local businesses’ profits.

An exception is the European Union (EU), which views exorbitant transaction costs as a hindrance to business development and seeks to safeguard European consumers. The latest EU regulations (not yet implemented) aim to improve transparency by providing extra information about dynamic currency conversion costs on card readers and ATMs.

This progress is commendable. However, we suggest streamlining information for customers by displaying only the percentage fee added if they opt to pay in their currency. Furthermore, we recommend setting maximum conversion charges to shield uninformed customers from excessive fees.

As international travel continues to grow, it is vital to develop strategies that enable people to make informed financial decisions when navigating exchange rates and making payments outside their currency zones. Until then, travellers may inadvertently spend more than necessary due to a perceived simplicity and time-saving aspect.

If you’re vacationing or travelling for work, we advise against paying in your native currency and suggest choosing the more affordable conversion fees offered by your bank. This decision could result in significant savings during your travel experience.

The facts and content in this article are based on an original article published by Bellan Media. While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes and should not be construed as financial advice.