How do you get the best value for your Aussie dollars when you’re overseas? In the past it was simple. You trotted into a bank, got a fistful of pounds or lira, bought some travellers cheques and off you went.
In the digital era, new players have entered the game offering various ways to pay for goods and services and access cash when you’re overseas. Working out which one is going to deliver the best deal is a bit like comparing internet service providers. Confusion reigns, and as the Chinese general and philosopher Sun Tzu noted “In the midst of chaos, there is also opportunity” – but the opportunity is in all the hands of the financial institutions.
A number of banks, airlines and credit institutions tout their travel money cards as the ultimate solution. Using Aussie dollars, the client buys foreign currency and loads it onto their travel money card as euros, US dollars or any one of a number of other major world currencies. These funds can then be withdrawn as cash from foreign ATM machines, or used to pay for goods and services.
The unseemly haste with which various financial institutions have galloped in to offer competing travel money cards should sound a warning bell.
All come with fees that chisel away at your cash and leading comparison website finder.com.au has put travel money cards under the spotlight. In a granular review of the most popular travel money cards, finder.com.au notes that on top of these fees, the biggest hit to your finances comes in the form of the unfavourable currency exchange rates that ravel money cards involve.
This could see a $10,000 spend on a European holiday costing you up to $505 more compared with using a Visa or MasterCard with no currency conversion fees, according to the review.
It’s patently true that travel money cards offer a less attractive currency conversion rate than a transaction using a Visa or MasterCard. On May 17, $1000 would buy $US722 on a Travelex Money Card, $US703.30 on an Auspost Multi-currency Cash Passport and $US706 on an NAB Traveller Card. That same $1000 spent on the same day using a MasterCard would buy you $US740.10 of goods and services, $US738.07 on a Visa card, so both clear winners, but there’s a catch.
Most credit and debit cards impose an international currency conversion fee, usually 3 per cent. That Mastercard or Visa card spend is going to cost you $1030, which makes the Travelex travel money card seem like a solid deal. However a small number of credit and debit cards charge no currency conversion fees, more on that later.
Another weakness in the case against travel money cards is nobody knows what the exchange rate is going to be when you come to use your travel money card. While the rate for paying for an overseas transaction using a credit or debit card might be more attractive today, that might not still be the case compared with using your Aussie dollars today to lock in foreign currency against a later spend, one of the features of a travel money card.
Travel-money card providers are at a disadvantage since they need to hedge against the downside risk of a fall in the value of the purchasing currency – in this case the Aussie dollar – between the time of purchase and the time of redemption.
Say you spend $1000 to load US dollars onto your travel money card and you now have $US720 credit. Now suppose that when you travel to the US and spend that US currency the Aussie dollar has dropped by 2 per cent against the US dollar. Your card provider has to fork out another $20 to pay for those US dollars. Should the Aussie dollar rise against the US currency that’s a win for the financial institution, but financiers don’t make that kind of bet. Above all else they want to guard against the downside, and thus the less favourable exchange rate.
In the case of a debit or credit card there is no such downside risk that the financial institution has to carry. You pay for purchases or withdraw cash from a foreign ATM machine at the current rate of exchange, which allows them to offer more euros, yen or US dollars in return for your Aussie dollars than if you were to load your dollars onto a travel money card on the same day.
Is using a debit or credit card a better option? Probably marginal in the case of your standard card but it is in the case of those cards which charge no currency conversion fee. The finder.com.au survey identifies four cards that fall into that category, the Bankwest Breeze Platinum Card, the Bankwest Zero Platinum card, Coles Platinum Rewards card and ANZ Rewards Travel Adventures card. All but the Bankwest Zero card charge an annual fee.
There are two more cards to be added to that list, the 28 Degrees Platinum MasterCard and the Citibank Plus Visa Debit Card. Neither charge an annual fee or international transaction fees and both are popular with frequent international travellers.
One advantage that travel money cards offer is the ability to lock in the value of your Aussie dollars against foreign currencies at the current value. Even applying a less favourable exchange rate that’s a factor worth considering, especially at the moment. Over the past three months our dollar has fallen by 7.4 per cent against the euro, 4 per cent against the US dollar and 8 per cent against the British pound.
If you’re heading overseas in a month or six months and if that slide continues, you’ll find yourself paying more for hotels and dining, shopping and everything else that involves foreign currency.
It makes sense therefore to hedge against the possibility of a falling Aussie dollar, lock in foreign currency at the current value and invest at least some of your overseas holiday budget in a travel money card.
Never, ever use a travel money card to pay for a hotel pre-authorisation or as a deposit against a hire car. The funds will immediately disappear from your account and it can take some time to have them refunded after you finalise the transaction, up to 30 days in the case of the Qantas Cash Travel Money Card. By that time you might have returned home, and the funds will be returned to your account in whatever currency you used to pay for the transaction. Getting them converted to Aussie dollars is going to involve a currency conversion fee, with yet more lopped off your available funds.