There are three fees you need to consider when you exchange currencies.
1. The fee the institution charges you directly.
This is usually a $ amount worked out as a % of the transaction. Often there is a minimum $ amount, and sometimes there is a maximum $ amount. If you ask about fees, it is this charge that you will be advised.
It can be quite a lot, depending on the institution.
However, some institutions promote the fact that they charge “zero Commission” – this does not mean ‘no fees’; what it does mean is that they won’t charge you a % based on the size of your transaction, rather they charge a fixed amount – say $3.99, for doing the exchange.
Generally, the “fee” is what the retailer earns from the transaction.
2. The ‘spread’ the institution applies.
Exchange rates change second-by-second on wholesale markets. This is the rate that analysts (like us) monitor when we watch the currency markets.
But when you come to do a currency transaction, the institution will not sell you the funds at this rate. They will add or deduct a margin (points) to the wholesale rate depending whether you are buying or selling.
At retail, this can be a lot. When we wrote this, on average, NZ banks had a spread of between 300 to 500 points around the wholesale market indicator rate – and this depended whether you were buying/selling cash, drafts, or doing a telegraphic transfer (TT). The bigger your transaction, the tighter the spread (or the fewer the points). Big wholesale traders can operate on less than ten points – in fact CFDs are sometimes done on 2 or 3 points.
If you deal with a retailer who is also a wholesale dealer, you can often get them to waive the fees. But if you are making a big transaction, it is really the spread you should negotiate hard over. There are very large margins involved.
3. The credit card “foreign currency service fee”
This is a fee, often about 2.25% of the transaction value, that Visa, Mastercard, or American Express charge over and above the spread they take on the conversion back to your NZ$ card account. This fee will be clearly displayed on your credit card statement, but you will notice this cost well after you have incurred the transaction. If you work out your all-up cost of your foreign currency purchase, you will understand why many customers get angry and feel ripped off. Most credit card companies call this a ‘convenience fee’. Maybe it is ‘convenient’ but it can be very costly.