Vacation season is upon us! In a few weeks’ time, you could be leaving your home country for some relaxation. Perhaps to the Mediterranean for some sun or somewhere further afield off the beaten track. In full holiday mode, as the sun shines high and mighty, you’re about to indulge in another sundowner. Just only one last hurdle before you can quench your thirst, as you hand over your credit card and are promptly presented with the mobile POS, whilst being asked politely “Would you like to pay in Sterling or local currency?”.
What will you choose?
It is a familiar situation experienced by many of us who have ventured abroad. In that instance, we must decide our fate without fully comprehending the ramifications of our choice. EUR or GBP? And with seeming enlightenment, many rookie fingers have floated reluctantly towards the more familiar currency, GBP, sheepishly smiling, whilst not knowing whether it was the right choice and perhaps not thinking further of the implications (because after all, there is only one cardinal rule during vacation time – no stress allowed!). Was it the right choice though? Well, not according to Starling Bank who have shed some light on the matter through an experiment on Dynamic Currency Conversion (DCC), as reported by This is Money in the article (http://www.thisismoney.co.uk/money/news/article-5784137/The-proof-pay-local-currency-never-pounds-holiday.html).
DCC is the capability that allows a purchase or cash withdrawal to be done either in the local currency abroad or in the home currency associated with the debit or credit card being used. If the home currency is selected, then the POS terminal does a currency conversion on the spot from the local (e.g. EUR) to the home currency (e.g. GBP) at an exchange rate decided by the merchant. The merchant could potentially add their own commission to that conversion operation, resulting in a more expensive purchase than it would be if the local currency were selected. Whereas, in the case of the latter, the purchase or withdrawal is carried out in the local currency, following which a currency conversion is done by the issuer bank or credit card provider at an exchange rate defined by the card scheme network, which is invariably about as good as you can get.
As an example, in their experiment, Starling Bank have found out that an ATM cash withdrawal of EUR 200 costed £195.18 when GBP was selected, meaning that the withdrawn amount was converted on the spot to the home currency (i.e. GBP) by the local bank. In comparison, when EUR was selected whilst keeping all other factors alike, the same withdrawn amount costed £177.44 since it got converted later by the Issuer bank or credit card provider at a better rate. Indeed, that is £17.74 in savings when carrying out the transaction in local currency (EUR) rather than converting it on the spot to the home currency (GBP). This was also true for all the purchases made; albeit the difference was much less (in pence) for each individual purchase. Yet, we all know that the cumulative amount of these smaller differences over purchases made during an entire week’s holiday could potentially result in significant savings. The bottom line from the experiment, and the article, is that you are much better off almost always paying in the local currency.
Understanding the workings of DCC is only one part of the puzzle when trying to save costs for card usage abroad; but there are additional “hidden” costs, which we need to be aware of. More specifically, Issuer banks or credit card providers could charge a fee per transaction for purchases or withdrawals abroad (on top of the conversion rate), which could accumulate during a holiday stay and set you back considerably. Personally, I prefer to completely avoid these costs by opting for payment cards (prepaid, debit or credit) tailored for frequent travelling that do not charge for usage abroad and can offer additional features. However, you do need to be familiar with the terms and conditions for using these cards, since the card providers could restrict their usage, for instance, by limiting the total daily spend, or the number of times you can withdraw cash from an ATM in a day. Most of these restrictions align with typical leisure spending behaviour abroad, including mine so I never had an issue, but every person has different needs. The advantage is that the majority of these travel-specific payment cards come with a companion mobile application that allows you to manage your card, including various features such as viewing your transaction history, topping up your balance (in case of prepaid), blocking your card if stolen or lost, requesting emergency cash, etc.
Prepaid travel cards are quite popular for usage abroad since they allow you to manage spending overseas with ease. An advantageous feature of prepaid travel cards is that they can be associated with different currencies. So, I could load the balance on the prepaid card with a choice from various popular currencies such as GBP, EUR, USD, etc whilst potentially locking in the exchange rate at the time of loading. This gives you total control (and certainty) over planning your holiday spending budget allowing you to make significant savings when compared to using any payment card not tailored for usage abroad. There are many prepaid travel card products available with different features and costs, so it is important to choose the right product that suits your needs and demand. Also, be aware of other costs that prepaid card providers might impose such as card inactivity fee. There are various comparison web sites that table out the different fees and limits associated with the various prepaid products, and of course always refer to the terms and conditions for each card product. For more information on different types of prepaid travel cards I suggest checking out a web site like the following https://www.moneysavingexpert.com/credit-cards/prepaid-travel-cards.
Although prepaid travel cards are ideal for daily spending abroad, I still recommend that you take other types of payment cards, preferably from different card network schemes, only as a fall-back. Unfortunately, a prepaid card might not be accepted in certain situations that would require pre-authorisation such as petrol stations, car rental deposits or hotel reservations, so it is best to have other travel specific debit or credit payment cards in hand. Also, as witnessed recently with the service disruption of one of the international card scheme networks, it is best to diversify the scheme network as a contingency measure.
Working for Consult Hyperion, I’ve had the opportunity to work for the kind of payments innovators who identify areas like this where customers get a bad deal and there are opportunities to make things better. It is thanks to the work of those striving to improve payments, with the support of people like us, that in today’s world we have different payment products to choose from. It is just a question of finding the right product for you, whilst making sure that you fully understand the terms and conditions, such as fees and limits for operating the product. Understanding DCC and carefully planning for the right payment instruments before travelling abroad could help you avoid certain costs, ultimately having more funds available to spend on that well-deserved vacation. So, start looking for the right payment instrument, so you can fully enjoy a stress-free summer vacation! Oh, and if during your vacation you have a great idea for a new payments product, we’d love to hear from you and help you turn the idea into reality.