Monday, 22 April 2019

Fighting hidden forex charges

Back in the days when banks' own equity funds had a lot of hidden charges, they also managed to raise the yearly cost percentage. When presenting this as 'a modest increase from 1% to 1.2%', they forget to mention this is in fact a huge raise of 20% of their income from managing the fund. Back then, I left, and found the first true index fund in the Netherlands (Meesman). They still exist and operate at a total cost of ownership (TCO) of 0.5 percent.

These days it's much easier to get equity funds against low TCOs. What has become actually harder, is to avoid foreign exchange charges. It's today's cashcow for banks and credit card issuers. When paying with a debit card, you'll probably pay at least 1% extra compared to the interbank exchange rate. When paying with a credit card, this will easily become 2%, or even more. These bits add up, but things can get worse.

Ever shopped at Amazon? When you pay in a different currency, they ask you politely if you want to pay them in your own currency. More transparent, right? You know precisely what it will cost you in your own currency. Yes, more transparent, and more expensive. Amazon roughly adds 3% to the interbank rate. It's completely free money, for them. Not for you, you were just tricked.

The same happens at ATMs worldwide these days. They offer you a fixed rate in order for you to be sure what your cash withdrawal will cost. Really nice feature, right? No, you will again be charged a considerable surplus on your withdrawal. This is called 'dynamic currency conversion', which is a euphemism for skimming. Always let your cards be charged in the currency of the country you're visiting. It'll save you money.

But there are more ways to save even more money.
  • In some countries, credit cards are issues that have 0% foreign exchange surplus rates. You may want to consider those.
  • If there aren't any, such as in the Netherlands, you may consider one of the 'fintech' alternatives that are available. I discuss two of them below, because I use them myself: Revolut and Curve.
The Revolut card is a Visa debit card. It's linked to a UK bank account that allows you to transfer money in and out. It takes different currencies - you can easily keep your GBPs and EURs separate and exchange them at any point in time. 

It usually let's you exchange between currencies at a 0% rate, however, be aware of exceptions that might apply for some currencies and during closure of the forex markets. Main drawback is that this card takes some planning. If you want to use it you have to preload it with money. 

The same drawback does not apply to the Curve card. This is essentially a debit card, but it is linked to any of you Visa or Mastercard creditcards. At any point in time you can choose to charge a different card, and you can even retroactively change the card used. 

The 'magic' with Curve happens when you pay: you pay in the currency of the country you spend in (or on, in case of a local hotel reservation). Curve then charges your own credit card in the currency of its own country of issuance. This happens at rates starting at 0%, with again the exceptions of some currencies, a maximum spend per month and closure of forex markets.

Remember that with Revolut, you can use local ATMs without a charge. But given the fact that Curve indicates a cash withdrawal from an ATM as such, your credit card will probably impose the usual (high) rates for withdrawing cash, which will wipe out any forex advantage that you might have. These cards require quite a lot of careful planning to use them most effectively - it's up to you if you think the possible gain is worth it. 

Two side notes: both Revolut and Curve card make an excellent Oyster card for London transport. Using the same card for tapping in and out every time you use public transport in London also provides you with the advantage of automatically capping your day spend (at a one day travel card cost, or similar). The other side note: both cards offer many more features. I wouldn't go anywhere near the bitcoin BS, but some of the other features might also be useful to you. 

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