Settling your debts abroad

by Philip Wagenaar

(First of two parts)

Olpe, Germany, May 9, 2005. . .

With disbelief, I stared at the notice on the wall next to the ATM in the Volksbank’s small foyer.

No, I was not mistaken. It clearly said, both in German and in English, that cash withdrawals were subject to a 1% fee if you used a card other than the bank’s or one of its affiliates’.

This was the first time that I ever had to pay a fee at an ATM abroad.

I checked the Sparkasse, the other bank in town. No luck. It had the same charge, and so did all branches of both the Volksbank and the Sparkasse within a 100-kilometer radius. No other financial institutions served the area.

I assumed (correctly, as it turned out) that the “gratuity” would be deducted from the amount I would receive. Since the machine dispensed only bills, and the smallest euro banknote was €5, I reasoned that I would come out “ahead” only if I withdrew €500 (1% of 500 = 5). Indeed, I received €495. Anything less than €500 would have set me back €5, and anything more would have incurred a €10 loss.

Costs of overseas transactions

Realizing that I had come up against one more way banks were enriching themselves, I investigated how I could minimize my bill-paying expenses abroad.

As most travelers settle their debts through the medium of credit and debit cards, I researched their costs by studying the websites of the issuing institutions and querying their senior representatives by telephone. I also obtained authoritative information about recent changes in applicable fees from MasterCard’s (M/C’s) spokeswoman Susan Gamsin and from Visa’s USA Vice President, Rhonda Bentz.

I unearthed the following.

1. As of June 9, 2005 (the most recent update), Visa imposes a 1% fee on all transactions when a single “cross-border” currency conversion occurs, which in plain English means this: when you receive a bill in a foreign currency, Visa adds 1% to convert it into dollars.

Visa does not charge in so-called dynamic currency conversions, in which a merchant presents an invoice to the customer in dollars instead of foreign currency. However, in this scenario the total cost may be much higher since the business’s markup is usually greater than the 1% assessed by Visa. Fortunately, you can elect to receive your statement in the native currency, which usually will be to your advantage.

2. Effective Oct. 1, 2005, M/C will levy 0.8% for any “cross-border” transaction, whether the invoice is presented in dollars or in foreign currency. If M/C also has to do the currency exchange, it will add 0.2% for a total of 1% (M/C indicated that it may consider changes in this formula).

Fees, for both Visa and M/C, apply to all transactions (debit, credit and ATM) abroad involving U.S.-issued cards. They are transmitted to member institutions — not to the individual clients — after conversion into American dollars (if applicable) at a wholesale rate chosen daily by each company. The final rate for each cardholder depends upon the day a merchant’s invoice is processed.

3. Issuers of your card typically add an additional 2%. At the time of this writing, Citibank, Bank of America, MBNA (which will become Bank of America at year’s end), JP Morgan Chase, Wells Fargo, U.S. Bancorp and First National Bank of Omaha add a total (including Visa or M/C assessments) of 3% of the amount converted into American dollars on credit card charges, while Capital One Financial Corporation and Providian Financial impose a mere 1%. Different rates apply to debit instruments.

4. American Express, which has its own system unrelated to Visa or M/C, appends 2% over the applicable exchange rate.

According to Consumer Action, an advocacy group, Amalgamated Bank, BMW Bank and Tompkins Trust Company have no surcharges on foreign transactions.

Of course, the only important figure to you is the overall markup assessed by the issuing banks. The breakdown of the involved costs is irrelevant as long as you receive the favorable wholesale rates offered by Visa and M/C.

To get an idea of those rates, log on to www.oanda.com.

5. ATM assessments, imposed by the home institution, can vary from a 1% conversion charge by Citibank to a $2 withdrawal fee by Wells Fargo.

6. A host ATM “surprise,” as we encountered at the Voksbank in Olpe, may materialize as you are about to plunge your card into the dispenser to receive its coveted supply of foreign currency. On the other hand, in some cases the automated teller doesn’t inform you of its fee until after you have inserted your beloved cash extractor.

Besides the above-mentioned dynamic conversion, there is another gimmick in which one may become involved. As I scrutinized my bill at the Holiday Inn in Istanbul, I found that the previously quoted room rate in American dollars had been converted into new Turkish liras at a very unfavorable exchange. When I received my statement a month later, I found that the new Turkish liras had been reconverted into American dollars with the usual 3% markup, resulting in a double whammy.

Credit, debit or cash

After reading the above, you may ask yourself how you should go about settling your debts abroad. Should you pay with a debit or credit card or should you use cash either obtained at an ATM or carried with you from home?

To clarify payment choices, I will first discuss debit instruments and follow it by a short description of credit cards. After wrestling through the information presented below, you can make up your mind which product and which firm will be the appropriate one for you.

As few people in the business seem to be familiar with all the ramifications of a particular brand, it behooves you to read the fine print in the contract BEFORE you acquire or use it. You should also have your chosen issuer spell out in writing all its fees for each kind of transaction, be it credit, debit or ATM.

Of course, there is no way to prevent the same institution from unilaterally changing the rules in its favor at a later date, merely by sending you a notice.

Debit cards

Debit cards come in a bewildering variety, with different charges, restrictions and clauses set by each financial establishment.

They all function like cash or a personal check, since the money is almost immediately subtracted from your checking or savings account.

Some only work with a PIN. Others, also called check cards, can be used with either a PIN or a signature (the choice is not always up to you) for so-called point-of-sale (POS) purchases at grocery stores, gas stations, restaurants, etc. You can use either type for ATM cash withdrawals.

Debit cards inherently are more dangerous than credit cards, since any criminal who gets hold of your number can deplete your account, although there is a delay between the transaction and the time at which your money is taken out of the account.

Fortunately, Visa and M/C have extended a zero-liability guarantee to the cardholder in cases of fraud. Since there are exceptions, read the fine print.

Reducing the costs of bill paying

To minimize or nullify your debit card-associated expenses, such as transaction and conversion fees, consider using one or more of the techniques listed below.

1. Obtain a card from smaller banks, regional banks or credit unions, which often will waive foreign levies.

2. Use ATMs of establishments abroad affiliated with your issuer, which ensures surcharge-free withdrawals.

3. Get a debit card from your brokerage firm, which usually relinquishes ATM and conversion expenses beyond those of Visa and M/C. (Check on the number of monthly/yearly withdrawals allowed.)

4. Refrain from using a prepaid, or so-called stored-value card (which can store cash similar to a gift card), since it carries additional costs.

5. Check with your issuer on the maximum permissible ATM withdrawal (although this may be different from that allowed by the host bank) and inquire whether you can access the machine more than once a day (you usually can).

6. To minimize a possible host ATM fee, which usually is deducted from the sum you will be receiving, withdraw the appropriate amount. This amount revolves around the fact that automated tellers don’t dispense coins. (For example, if there is a 1% fee and the smallest banknote is €5, you should, if allowed, withdraw €500.)

Occasionally, however, you may run into a machine that informs you of the charge during the withdrawal process and which may show up later on your monthly statement.

7. Set up an account in a country, such as the Netherlands, which does not charge you for domestic cash advances. Withdraw the desired amount of cash (you can usually obtain an unlimited sum) and carry it with you in your money belt.

Alternatively, thanks to a new European law effective July 1, 2005, which makes it illegal for banks to charge for an ATM withdrawal in any euro country if it doesn’t bill you for the same service domestically, you can use this same account to obtain transaction-free money in any other euro-zone state.

8. Use your card at POS establishments if you think you may run into other machines that will gouge you. (Check beforehand whether POS trades will be subject to currency conversion fees.)

POS payment with a PIN is ubiquitous in the Netherlands, where most establishments spout a sign, “Hier kan men pinnen” (“Here you can use your card with a PIN”).

To reduce the bulk in your money belt, take the small notes dispensed by an automated teller to a bank and have them exchanged for larger denominations. A caveat — although the largest denomination in the euro zone is the €500-note, merchants commonly refuse to accept it, except for large purchases. However, you can, if needed, reconvert into smaller bills at your destination.

9. Consider settling your debts in the currency in which it is charged. For example, in countries such as Israel, you could pay hotels with greenbacks, since these establishments customarily quote and bill their charges to noncitizens in American dollars. (Alternatively, this may be your chance to use travelers’ checks, but only if you obtain written assurance that, upon checkout, they will be accepted at their dollar face value. However, I have never tried this.)

In other countries, if you get a good ATM deal, contemplate cash payments.

Having said all the above, credit and debit cards are still the easiest and safest way to settle your debts abroad.

I will continue this discussion next month.

Dr. Wagenaar welcomes questions but may not be able to answer them individually. Write to him c/o ITN.