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Part of the joy of travelling comes from experiencing the unfamiliar – a different climate, culture or cuisine. But when it comes to paying for things abroad, we might feel more comfortable using the currency we are most familiar with, the one we use at home.
This has recently become a common – and expensive – option for tourists withdrawing money from cash machines, or paying electronically in shops and restaurants.
When a restaurant bill arrives for example, foreign customers may be offered the choice on the card reader to pay in their home currency rather than the local one. This feature, known as “dynamic currency conversion” or “currency choice” sounds appealing at first – a service which has done the hard work for you, converting the bill to a currency you understand, giving you a better idea of how much money you are spending.
But it comes at a price – as the fees charged for this convenience can be exorbitant. In fact, one study shows that the average fee applied to this kind of conversion is a whopping 7.6%, more than double the cost of paying in the local currency (usually between 1.5% and 3%).
So suppose a French traveler goes out for dinner in a British town, and the final bill comes to £88.43, the equivalent of 100 euros or about $108. Paying in UK currency, which would then be converted to euros by the French diner’s bank, would lead to a payment of around €102. But using the dynamic currency conversion to pay the restaurant bill directly in euros would end up costing them €107.60.
Despite the high fees, our research shows that more than half of international customers still choose to pay in their familiar home currency. The most obvious explanation for this is an understandable preference for the familiar when dealing with money abroad.
But it is also true that the fees are not explicitly shown to customers. That is, tourists may see the applied exchange rate, but they are not shown the hidden fees or how that exchange rate compares with others.
And while expensive for tourists, the currency choice “service” can be highly lucrative for those who operate it. The companies which provide dynamic currency conversion options earn significant conversion revenues – a portion of which is often shared with the business where the transaction takes place.
Sources indicate that extra revenues for retailers come to around 1% of the transaction value. We have also been told of well known department stores training employees to actively encourage foreign customers to pay for purchases in their home currency.
And despite the high conversion fees involved with dynamic currency conversion, most government regulators around the world have been hesitant to intervene. One possible reason for this is that regulation would be seen as potentially hitting the profits of local businesses.
The exception is the European Union (EU), which considers excessive transaction costs to be a barrier to the development of businesses and aims to protect European consumers.
The latest EU regulations (not yet enforced) aim to enhance transparency by including extra information about the costs of currency choice on card readers and ATMs.
This is a step in the right direction. But we would in fact encourage a reduction in the amount of information to make things simpler, so that customers are made aware purely of the percentage fee being added if they choose to pay in their own currency. We also think there should be maximum conversion charges to protect unaware customers from excessive fees.
With the continued growth of international travel, it is crucial to find ways to help people make informed financial decisions when dealing with exchange rates and making payments outside of their currency zone.
But for now, travelers are likely to spend more of their money abroad than they need to, because of something they intuitively feel will make a transaction simpler and less time consuming.
So if you’re on holiday or traveling for work, our advice is to decline the option of paying in your home currency and instead opt for the more reasonable conversion fees charged by your bank. Your travel experience could end up much cheaper if you do.
Dirk Gerritsen is an assistant professor of finance and financial markets at Utrecht University, Bora Lancee is a researcher at Utrecht University and Coen Rigtering is assistant professor in strategy and organization at Utrecht University.
Republished under a Creative Commons license from The Conversation.