Choose your forex carefully

Travellers’ cheques could be your cheapest option when going overseas, especially in the United States, but are not always the most convenient currency choice.

Thanks to the National Credit Act, banks are now required to disclose the full fees charged on a transaction, which highlights the cost of credit card transactions.

This came to light when a friend received her credit card statement recently and found a R19 fee for “international currency conversion MasterCard”. This equated to 2% of the transaction.

According to the banks, this fee, which includes the MasterCard/Visa charge to the bank, has always been in the transaction costs as a currency convergence fee, but previously had been built into the rand cost of the purchase. Not all banks are disclosing this fee separately.

To understand the costs of foreign currency fully I asked the banks to assume exactly the same value transaction using a credit card in a store, an ATM withdrawal with a credit card, using travellers’ cheques and taking cash.

According to Standard Bank, based on a $2 000 transaction, the total costs would be:

  • Foreign notes: 1,70%

  • Credit card in store: 2%

  • Credit card ATM withdrawal*: 2,14%

  • Travellers’ cheques**: 1,45%

  • Travel wallet: 2,36%
  • These are surprising findings as credit card providers have always suggested that credit cards are the cheaper option and cash has always been touted as the most expensive option.

    But before you rush off to buy travellers’ cheques, there are some things to consider.

  • First shop around. The banks’ fees are not all equal. For example, Absa is slightly cheaper on travellers’ cheques at 1,25% and FNB is more expensive on credit cards at 2,75%.

  • Karl Sieber, product manager, international banking at Absa, says if you go to an Amex outlet or representative to cash in your travellers’ cheques, no charge applies. In the US travellers’ cheques can be used as currency in shops and even taxis without charges. He warns, however, that in most other countries a fee will be charged by the vendor if he or she is not a fee-free participant with American Express Travellers’ Cheques. Anything between 1,5% and 3% can be charged by vendors abroad.

  • Credit cards are convenient because they can be used at most merchants and to draw cash at any time. You do not need to spend time finding a bank to exchange your travellers’ cheques. You also have a 55-day interest-free period and built-in travel insurance.

  • If you do not spend your full foreign exchange taken in travellers’ cheques, travel wallet or foreign notes, you are obliged by law to cash them in when you return. You will be refunded at the buy rate, which is at a lower rate in favour of the banks and for cash you will pay a further commission.

  • Taking all your forex as cash is risky because if you are robbed or lose your wallet you have no recourse.

  • The travel wallet is the most expensive option, though a high percentage is the card activation fee, set at R75, and would come down as a percentage the more forex you take. It should be seen as a competitor to travellers’ cheques because it fixes your currency before you travel. The travel wallet is effectively a debit card and can be used at most merchants and to make ATM withdrawals. It is therefore more convenient than travellers’ cheques and can be cheaper if you have to pay commission to cash in your travellers’ cheques.
  • Lovemore Fuyane, head of retail foreign exchange at FNB, says pre-purchasing your currency is a good idea in highly volatile markets.

    * Standard Bank charges R20 for a foreign cash withdrawal. This varies between banks with Virgin Money being the cheapest at R8,75. This fee does not include an additional fee that might be charged by the foreign ATM

    ** This does not include commission for cashing in the travellers’ cheques, although there is not always an additional fee, especially in the US

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