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Dec 05

Financial management overseas

Once you’ve worked out your budget when travelling overseas, you have to figure out how you are going to access all your money.

Typically, there’s four types of things you can carry: cash, credit cards, debit (ATM) cards and travellers’ cheques. There are other things, such as Suncorp’s Cash Passport, but they are dependant on what financial institution you have an account with. Trying to balance factors such as safety, accessibility and maximisation of money after various exchange rate fees and commissions can be a headache. Often, it depends on where in the world you’re travelling which determines what the best mix of currency is.

Cash is very easy to convert at money changers which are readily available around tourist areas. It is perhaps more difficult to do it at banks – I was told at my local Commonwealth Bank that changing AUD to USD would involve a waiting period of a week or two to get the required currency in. Whether it’s better to convert to a foreign currency when you’re still in your home country, or after you arrive at your destination, requires a bit of research. Typically, the money changer market in Australia is less competitive than, say, Singapore where there is an Indian money changer around every corner. The more competitive the market, the better the cash exchange rates you will receive.

The exchange rate for any given day is called the spot rate. For our purposes, the interbank rate – the exchange rates banks use when swapping money between themselves – is the same as the spot rate. Money changers make profits by selling at a lower rate, and buying at a higher rate. The difference between the buy and sell rates is called the spread, and the larger the spread is, the higher the profit margin of the money changer.

For example, in Canada, money changers may buy your 1 USD for 1.19 CAD, and sell you 1 USD for 1.21 CAD. The spread here is 2 Canadian cents, around the spot rate of 1.20 CAD to the 1 USD. In other words, the spread is about 1.7%.

Currency spreads are not uniform. For example, in Canada the availability of American dollars is much greater than Australian dollars. Because Canadian money changers find it harder to swap Aussie dollars, they make their efforts worthwhile by increasing the spread.

So, 1 AUD may buy 0.87 CAD, but you may need 0.93 CAD to buy 1 AUD. This is a 6 Canadian cent spread (or a 6.7% spread).

In lesser developed countries, swapping anything other than US dollars may incur exorbitant spreads. Money changers in these countries may not have access to up to date information about exchange rates of non-US currencies and thus seek to insulate themselves from currency fluctuations.

In addition to buy/sell rates, some money changers charge commission. For example, after they convert your money, they will pocket a certain percentage for themselves as a “transaction fee”. Look for zero commission money changers, but note that these changers may roll this transaction fee into their spread anyway.

Further, some money changers (eg UOB in Thailand) will give higher rates for US bills with higher denominations. That is, swapping 50s and 100s will give you more Thai Baht than swapping the equivalent amount but in 10s and 20s.

Travellers’ Cheques
Travellers’ Cheques are best known for being secure and widely accepted. If you lose them, you can always replace them within 24 hours, unlike cash. This security comes with a cost, however, and it may be slightly inconvenient to have to produce your passport every time you want to encash your TCs.

TCs are normally bought at banks, or at a branch of Amex or Thomas Cook. When buying travellers’ cheques from a bank, it is sometimes possible to get the conversion done at an interbank rate. However, there will be a commission levied on this (which is essentially payment in exchange for the benefits TCs offer you). Some banks will waive this commission in certain circumstances – for example, being a Gold Mastercard holder at the Commonwealth Bank and being a member of one of their rewards programs allows the waiver of TC fees.

TCs are normally bought in USD, or sometimes Euros.

When you cash in US travellers’ cheques in America, you will normally get back all your money minus a commission of a few percent. So if you encash USD100, you may get back USD98 after a 2% commission. I presume this is because there is some work involved on the bank’s part in claiming back money from the TC vendor. There are some fee-free places where you can encash a TC without commissions – for example, Amex TCs can be encashed without commission at an Amex branch or a bank which is a “fee-free partner” of Amex (eg, Bank of America in the US).

When you encash TCs into another currency, you will receive a certain exchange rate which will be similar to (but rarely the same as) the exchange rate for cash. On top of this, there will be a commission charged (eg in Thailand, there’s government taxes and fees of 33 baht per transaction).

So, in a worst case scenario, you will get charged fees for buying TCs, for selling TCs, and only be able to recoup currency at a money changer’s spread rate.

In the best case scenario, you can buy TCs at the interbank rate and redeem 100% of your money if you are getting out money which is the same currency as the TC.

Debit Cards
Debit cards can be used overseas if they are part of the Maestro or Cirrus networks. Especially in developed countries, ATMs are widespread. However, they will be virtually useless for lesser developed countries or more remote towns which do not have ATMs.

The benefit of debit cards is that money withdrawn is normally debited from your bank account back at home at an interbank exchange rate. However, there is normally a flat fee incurred for withdrawing from an overseas ATM. For example, the Commonwealth Bank charges a flat fee of AUD$5 for each withdrawal from an overseas ATM.

Note that debit cards normally have a daily withdrawal limit. You can get this changed at your bank, but this is set in your home currency. So, if your limit is AUD 1000 per day, you will not be able to withdraw USD 1000 in one day while you’re in America.

If you are travelling with others, you can also save on the withdrawal fee by getting one person to withdraw money for the whole group (subject to daily withdrawal limits). For example, if there are two of you, only having to use the ATM once means you only need to pay a $2.50 withdrawal fee, which is often much more cost effective than using a money changer if you need several hundred Aussie dollars worth of currency. You can reimburse the person withdrawing back at home in your domestic currency, or you can rotate withdrawing duties if you are visiting more than one country.

Credit Cards
Like debit cards, credit card companies will bill you in your local currency after applying an interbank exchange rate. However, most credit cards (eg Mastercard) will charge a 1.5% international transaction fee which appears as a separate amount in your credit card statement. Amex tends to roll this fee into the same line. A 1.5% fee is roughly equivalent to a money changer’s spread of 3%.

Some shops will charge you a fee for using a credit card in order to pass on the merchant fee they incur from the bank. Typically, this is 2% for Mastercards and Visas, and 3% for Amex. This is much more prevalent in lesser developed countries where every cent counts, or for businesses with razor thin profit margins.

One advantage of using credit cards is you get frequent flier points. Normally points have a cash value of 50 to 70 cents per 100 points (0.5 to 0.7%), so this will marginally offset the international transaction fee.

Be careful with credit cards in lesser developed countries. Credit card fraud (via theft or “swiping”, where a copy of your card is made without your knowledge) may be a problem, so don’t let your card out of your sight. Most credit card companies offer a fraud protection guarantee, so this is more of an inconvenience than a major problem these days.