The exchange rate information published daily
by newspapers, central banks and other public sources
is based on an average of interbank transactions,
which occur electronically. These conditions, in
which the difference (or spread) between the bid
and the ask (or buy and sell) price is between 0.03%
and 0.07%, are usually applied only to transactions
of one million dollars or higher.
When exchanging small amounts of cash at a local
bank branch, the rates are usually about 4%-5% less
favorable than the interbank rates. This percentage,
which is reduced as the volume increases, represents
the bank's revenue on the transaction.
When a credit card is charged in a currency other
than the cardholder's charge currency, the cost
of the conversion is between 1% and 3%. This means
that the exchange rate which is applied when the
card is charged, and which gets printed on the card
statement, is by about 1%-3% less favorable to the
cardholder than the interbank rate.
For example, if Robert from Germany uses a credit
card linked to his German bank account to buy $100.00
worth of goods from the United States, his card
is likely to be charged $100.00, but his credit
card statement will show the equivalent of about
$102.00 (which he settles in euro). An exchange
commission of 2% is of course quite good, compared
to what banks charge for exchanging small sums of
cash, but Robert might wonder why the charge is
not exactly the same as one would obtain by applying
the "official" exchange rates.
We have asked a major credit card company (which
will be referred to as "CardCompany" in the following)
to explain the process:
"Currently CardCompany exchange rates are
not make publicly available. However, to determine
the exchange rate for CardCompany transactions,
CardCompany uses a wholesale market rate or a government
mandated rate in effect one day before our system's
processing date. Added to this 'base' exchange rate,
CardCompany assesses the Member financial institution
a 1% conversion fee. The bank may or may not pass
this cost along to the cardholder. This would be
indicated in your credit card agreement or disclosure
statement.
In addition, a Member may request that our system
calculate an additional percentage to cover any
costs they incur as a result of converting a foreign
transaction. This fully loaded figure is the exchange
rate sent to the Member bank that is ultimately
charged to the cardholder. For specific information
regarding how the exchange rate will be applied
to your account, please contact the financial institution
that issued your CardCompany card."
In practice, by asking a few card issuing organizations
we determined that the above tends to result in
a 2% premium. The maximum exchange commission we
could verify with different cards was about 3%.
Exchange commissions do not apply between European
Economic and Monetary Union currencies in a
transition to the euro, although
a "service charge" may be applicable when converting
cash.
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