Overseas trips offer the opportunity to experience new cultures, take in history, eat exotic cuisine and see new sights. But the lead-up to a big trip can be stressful, particularly if you are trying to organise everything at the last minute.
One thing that often slips through the cracks is planning how you will access foreign currency.
Why you shouldn’t convert money at the airport
If you travel regularly, you might already know that exchanging your money at the airport is a bad idea. From high fixed fees of anywhere from $5 to $15, to exchange rates that can be up to 15 per cent worse than the standard bank rate, it's no secret that airport exchanges are amongst the most expensive options for trading in money.
Still, many international travellers simply don't know the extent they are getting over-charged and end up exchanging money at the airport for the sake of simplicity.
Airport exchanges use colourful marketing techniques to give the impression that you are getting a fair deal on your money exchange. But slogans like "no fees" or "discounted exchange rates on today's transactions" are intentionally misleading.
Travelex, for example, explicitly states that they don’t apply fees to their transactions. But if you look closely at your receipt, you’ll notice that they have simply labelled it a “Service Charge”. So, while technically correct, Travelex is still charging you a fixed amount for their service. Call it whatever you like – it’s still money out of your pocket!
Global Exchange, another popular airport currency exchange in Australia, is guilty of similar marketing tactics. You will often see them advertising discounts on the exchange margin for transactions above a certain amount. Sounds good in theory, right? But what if the currency exchange rate they are “discounting” from is already significantly worse than the rate you see on Google or Yahoo? By comparing their exchange rates to inflated base rates, rather than the real exchange rate, Global Exchange is giving the impression that travellers are getting a good deal on their foreign currency transfer. Unfortunately, this is “savings” is totally fictitious.
Foreign Currency Conversion Costs
Whenever you are exchanging currency at the airport there are always two fees involved: a currency exchange rate and a transaction fee (or service charge).
1. Currency Exchange Rate
The exchange rate margin is the main source of profit for airport currency exchange companies. This margin, or profit, is the difference between the exchange rate that companies like Travelex or Global Exchange obtain from their own providers on the wholesale foreign exchange market (ie the Interbank Rate) and the rate that they quote you.
Don’t expect these companies to tell you just how much extra you’re paying on the exchange rate. Fortunately, it’s easy enough to work out. Simply Google the exchange rate of the currencies you are looking to convert from/to, for example AUD/USD, and then compare that to the rate that the airport exchange is offering.
A real example:
Global Exchange’s website is currently offering an AUD/USD exchange rate of 1 AUD = 0.651125 USD. If you were looking to purchase USD 325 for your upcoming trip, you’d have to pay them AUD 499.14. (Remember, this amount does not include ‘service charges’).
The real AUD/USD market exchange rate, as found on Yahoo!Finance, is 1 AUD = 0.7209 USD. To buy USD 325 using that exchange rate would cost you AUD 451.00.
This means that you are being charged 0.069755 more (Official Rate of 0.7209 – Global Exchange rate of 0.651125) per 1 AUD, or ~10.7% (0.069755 more per $1 converted / Global Exchange rate of 0.651125) on the exchange rate to use Global Exchange.
10.7% is a HUGE profit margin on foreign exchange conversion. In comparison, Flash Payments charges 1.5% on the exchange rate margin and zero transaction fees - a savings of over 9.0%!
2. Transaction Fees
Also sometimes called a ‘commission fee’ or ‘service charge’ this is a fixed amount that an airport currency exchange will charge for each transaction, almost always on top of the exchange rate margin. Travelex charges up to $12 in ‘service charges’ at most Australian airports, while Global Exchange charges a fee for any transaction less than 999.99 AUD, although its website doesn’t explicitly state the amount.
What is the best place to exchange money?
As the above example made clear, converting your cash at the airport is an expensive choice. That being said, having foreign currency on-hand when you land in new country is often necessary for paying for things like transport into the city or tipping at the hotel.
While it still is not the most affordable option, you could consider ordering a small amount of cash in advance for collection at the airport. By ordering ahead of time, you are likely to get a better rate than what you would receive if you looked to exchange in-person. Other non-airport cash advance options are available through Aus Post, your bank or some Forex retailers.
ATM withdrawals on the ground are also a cheaper alternative to airport currency exchange desks due to lower fees and more reasonable exchange rates. Just be sure you avoid dynamic currency conversion (DCC), which is where you are asked if you want your transaction charged in the local currency or in AUD. Choosing the local currency ensures that your bank in Australia will determine the exchange rate for the transaction, rather than the ATM operator.
If your trip overseas involves a visit to see friends or family, a great choice is to send money in advance through a bank-to-bank transfer. Doing this through a company like Flash Payments will ensure that you get an exchange rate close to the interbank rate, and won’t be charged any additional transaction fees.
While requiring a bit more organisation, using a dedicated online money transfer company can end up saving you hundreds of dollars in fees and exchange rate charges than if you went with an airport FX provider.