A Tale Of Two Currencies

Watch those fees. When spending money in another country, merchants, banks and credit cards all conspire to take their pound of flesh. Even if it doesn’t look that way.

This is true for anyone travelling to a different country. You may be spending more than you expect. In some cases, a lot more.

I’ll share with you how we deal with just two currencies, the US dollar (USD) and the Canadian dollar (CAD). Keep in mind that it can be much worse when travelling through Europe.

Let’s look at credit cards. I use two. An American Express card and a MasterCard. I pay a steep membership fee for the American Express card. As a retired bank executive, I am provided a MasterCard without any fees.

American Express makes the following statement in their cardholder agreement concerning foreign exchange:

All foreign currency charges have been converted into Canadian dollars on the date we processed the charge. Non-U.S. dollar charges have been converted through U.S. dollars, by converting the charge amount into U.S. dollars and then by converting that U.S. dollar amount into Canadian dollars. U.S. dollar charges have been converted directly into Canadian dollars. Unless a specific rate was required by law, the American Express treasury system has used conversion rates based on interbank rates (selected from customary industry sources) from the business day prior to the processing date, increased by a single conversion commission of 2.5%. Any charges converted by third parties prior to being submitted to us have been at rates selected by them.

Two important notes here. The first, American Express applies a single conversion commission of 2.5%. The second, third parties can select a conversion rate. And that rate will not be the interbank rate. For example, a U.S. tourist may purchase an item at a Canadian retailer and that retailer may well post a conversion rate that is much less favourable than the interbank rate.

Most U.S. retailers will not accept Canadian currency. Canadians will either charge their purchases on their credit card or use American currency that they purchased at a bank or at a currency exchange storefront.

What will I see on my American Express statement when I make a charge in U.S. currency?

Only one entry: an exchange rate conversion. There will not be any breakdown of that conversion showing their commission charge nor their markup on the interbank rate. More on that in a moment.

What about my MasterCard?

Well, as a savvy Canadian Snowbird, I carry a U.S. MasterCard. All transactions are conducted in USD and I settle my balance with USD. The way I do that is by moving CAD from one of my Canadian accounts into a Canadian USD account. I then pay my U.S. MasterCard with funds drawn from my Canadian USD account. Because I am a retired bank executive, I receive a favourable rate to convert from CAD to USD.

Here is the difference taken from two transactions last week.

I transferred CAD to my USD account to pay my U.S. MasterCard. My conversion cost: 1.3335 and no handling charges.

On the same day, I had a small USD charge hit my American Express account. My conversion cost: 1.37091. Removing the 2.5% conversion commission, I paid 1.34591 or an additional 1.2% on the foreign exchange over my transfer of CAD to USD. A total premium of 3.7% for this specific example.

Even for those cards that waive the single conversion commission, usually between 2-3%, you may still be paying more than you might expect for the currency conversion. Or, if you happen to have a currency which is trading at a premium, you may not be getting the best value from your currency.

For us, it really pays to watch how we spend our CAD when in the United States.

Here are a few examples based on the interbank rate as I write this post.

$1,000 USD would cost me $1,335.14 CAD if I could get the interbank exchange rate. To get the interbank exchange rate, I would need to buy a minimum of $5 million USD. The interbank exchange rate changes moment to moment.

$1,000 USD would cost me $1,363,50 CAD if I purchased USD from a retailer like a Canadian bank. The retail rate can vary but in effect it is a spread added to the interbank rate to account for market movement between when a client transaction is completed and when a set of of small amounts can be aggregated and traded on the interbank market. Like the interbank exchange rate, this quote changes moment to moment.

$1,000 USD will cost me $1,370.40 CAD if I were to charge it on my American Express. Yikes. That is another $35 CAD added to the interbank exchange rate.

Foreign exchange costs can really add up. And, to make things even more challenging, the rate that you pay may not be the rate in effect of the date of the transaction.

In our case, if we pay the U.S. MasterCard at the end of the month, the cost of the currency is the rate on the day that we moved the money from our CAD account to our USD account. That rate could be better, or worse, than the rate of the purchase date.

Look at how much movement occurred in the past 30 days:

Aside from peering into my crystal ball to find the date for the best price of CAD, there is absolutely no way for us to optimize our foreign exchange costs based on market prices. Too much volatility in currency.

All we can do is understand our opportunities to manage the conversion costs. Based on our living expenses for six months in the United States, currency conversion fees can really add up.

Before retirement, we spent at most a few weeks at a time in the United States. The delta in currency fees back then wasn’t all that material.

As Canadian Snowbirds, well, it is expensive enough taking such a hit on the value of our loonie in the first place. To wind up paying an extra 3 to 5 percent on needless currency exchange fees over a six-month stay is unwise.

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