Holidays are expensive. Last year British families spent £26bn on holidays abroad. That’s around £2,000 each trip. Some were all inclusive, but many, perhaps even most journeys will have seen people change money to pay for things overseas.
As we all get ready for our week in the sun this year, I decided to look at the cost of changing money. What I discovered has led me to ask serious questions about competition in the industry.
The problem is simple – it’s hard to know what you’re really paying for when you change money. Time and again, foreign exchange bureaus advertise 0 per cent commission, seeming to offer a free service. But the reality is that the generosity is all on one side. The commission isn’t charged openly as a fee. It’s hidden.
Although not strictly illegal, this is unquestionably wrong. Under the Payment Services Directive, banks and money-service providers have a duty to disclose the amount levied for a payment transaction and a breakdown of charges.
Foreign exchange providers rarely give this. They argue a mark-up on the mid-range rate between the price to buy and to sell isn’t a charge. But it is. What else could it be? This mark-up is an added cost levied by the provider and should be disclosed very clearly.
The profit can be huge.
This week I checked out the rates at a few high street banks, exchange bureaus and online. I calculated the cost not simply by looking at the price charged to buy or sell currency, but at the difference between them, because this gap – the spread, as it is known – is the margin that the currency dealer is taking. The larger the gap, the higher the commission.
The worst I found was a high street bank with a spread of 22 per cent. Anyone changing money there is getting short-changed with every transaction. To make this clear, imagine you change £1,000 into US dollars and change them immediately back into pounds. Those two transactions alone will cost you £217. That means each time you trade with that bank, they take around 10 per cent. And all the time they advertise 0 per cent commission.
This may seem like it’s only an irritation we have to put up with once or twice a year, but it is more serious than that. Today, much of our trade depends on foreign transactions and currency dealing. Small and medium-sized businesses conducted currency transactions worth an estimated $200bn in 2015, according to McKinsey’s Global Payments report. Large businesses account for many times that.
And this isn’t just about business. According to the Erasmus scheme, there are over 13,000 British students abroad and families regularly send them money. Many more send funds to relatives around the world in our mobile, multicultural society. That increases the sums even further.
So, what do we do about it?
First, by not using credit and debit cards abroad. Each transaction on a card is charged a straight fee – often nearly 3 per cent – and then an exchange rate higher than the mid-range rate is added.
Second, before changing money, check the rate in both directions – by calculating the spread you can see the profit. Then, finally, find the providers who actually offer a good service. Some charge much, much less than standard banks. The best one I found was TransferWise whose fee was around 1 per cent.
But it isn’t just up to us. Banks, foreign exchange bureaus and others should advertise their true commission – the mark-up – and the Advertising Standards Agency should enforce it. It is impossible to argue a bank is making no profit when it clearly does and signs claiming 0 per cent commission are just misleading.
I’m a Conservative because I believe in free markets. They are the best way to enable individuals to make the best decisions for themselves. But free markets only work when they are fair markets. When fees are hidden competition is impossible and, instead of promoting opportunity, a few profit from the ignorance of the rest of us. That’s not just wrong, it’s bad for everyone and damages our society because distortion diminishes trust.
That’s why I’m calling on the government to move quickly to ensure foreign exchange bureaus advertise their full fees. If we are to promote foreign trade, travel more widely, and encourage greater inward investment, we must know what we’re paying for in the services we need and use. That way we can be confident the market is working for the people, not just the dealers.