Foreign transaction fees

Foreign exchange is rarely a straightforward transaction.
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01 .Introduction


We take a look at the fees and charges associated with foreign currency transactions, and how you can find the right rate and make savings.

You may have noticed the Aussie dollar has been delivering a nice bonus on overseas transactions in recent years, especially during its long run above parity with the US greenback. For globe-trotting Australians, our currency was worth about 44% more in both euros and US dollars in April this year than it was three years earlier.

That’s a lot of extra buying power, but it doesn’t take into account the fact that most banks and other moneychangers rake a fair bit off the top during the foreign exchange process.

For more information about travel money, see Banking.

The "cream off"

You’ve probably also noticed that the exchange rate announced in the media – called the mid-market, or wholesale, rate – isn’t the same as the one you end up getting when you make a transaction. 

A fitting term for the gap between the exchange rate your financial institution pays and the one applied to your overseas purchases or withdrawals (in addition to any fees) is the “cream off”, and it varies according to the type of transaction or payment card in question, as well as which moneychanger you use. If you’ve ever changed money at an airport booth, you know what it means to get creamed.

Why do consumers keep getting the short end of the stick? Because the complexity of the cream-off makes it seem unavoidable. It’s not easy to know how much financial services providers are pocketing by way of the foreign exchange process.

Robin Boyle, a CHOICE member since 2003 and a former Deakin University lecturer in statistics and financial mathematics who now lectures at RMIT, contacted us with a trove of research on the topic. We worked with Boyle to frame the larger issue by zeroing in on some cases in point and identifying a few options that can help you avoid being taken to the cleaners.

If you withdrew cash overseas using a debit card on the test dates, the fees and charges made matters even worse.

Rate check

Boyle compared the exchange rates of the big four banks for the euro (€), pound (£) and US dollar on the same day and found that three – ANZ, Westpac and NAB – had exchange rates that were about 4.5% higher than midmarket rates for cash and travel cards, not including fees. Commonwealth Bank (CBA) transactions were about 5.3% above mid-market rates for cash and travel cards. Boyle reported that the respective differences on 24 April 2012 were about the same as in a rate comparison exercise he undertook in February.

If you withdrew cash overseas using a debit card on the test dates, the fees and charges made matters even worse. A withdrawal from a CBA savings account or debit card while overseas would have had you out of pocket by 11% more than the mid-market rate for €200, and about 17% more for €50 once the fees were tacked on.

To test the extreme end of the exchange market, we teamed up with Boyle to obtain a quote over the phone from one moneychanger at Sydney Airport. It would have cost you $86.40 for €50 on the day we tested in April as a result of their miserly exchange rate and minimum commission of three per cent, while the exchange at the mid-market rate would have cost $64.10.

Transferring small amounts of money bank-to-bank via the CBA offered another extreme example. A €50 transfer would have cost $89.92 – or 40.3% more than the mid-market rate on the day we tested, including fees.

Conversion costs

Robin Boyle’s table below provides some examples that illustrate the difference in rates and fees, with 28 Degrees MasterCard giving the best deal and Travelex at Sydney Airport offering the worst on the day the rates were analysed. Boyle used the CBA as an example of the big four banks in general, although the CBA exchange rate was somewhat worse than the others on the day Boyle tested when it came to cash or travel money cards.


Hide and seek

Boyle’s number-crunching exercise found that, on the days he tested, the big four banks applied different exchange rates depending on the transaction option, and the rates varied widely from the mid-market rate.

Getting to the bottom of which rates, fees and charges will be applied was a tall order for a financial mathematics expert, let alone the average consumer. As both CHOICE and Boyle discovered, the average bank customer service rep also seems to be in the dark. The ones we spoke to could not clearly explain the foreign exchange rates applied by their respective institutions. Bank websites can also be misleading. Some provide a currency converter tool, but it may not factor in other fees and charges, which only widen the cream-off gap.


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What's the real rate?

In the slippery world of foreign exchange, the banks make it too hard to work out the cost of a transaction in Australian dollars and figure out the exchange rate you’ll end up paying. 

One straightforward alternative for consumers is to choose a financial product or service that offer exchange rates as close as possible to mid-market rates, with minimal extra fees, commissions or charges. and the RBA are two well-established sources that publish mid-market rates against which you can measure the rates on offer, but always be sure to check for fees as well.

Avoid confusion

James Dimond’s experience illustrates the foreign exchange confusion faced by many consumers. “I had to book accommodation in Quebec City for a trip in July,” he tells CHOICE.

“I have an everyday ANZ Visa debit card that I use in Australia and an ANZ Travel Card that I have previously used overseas. My question to ANZ was simple: which card would be cheaper for me to use? The customer service representative kept implying it was the travel card, as I would avoid the currency conversion charge.

“If I used the Visa debit card, I would pay a currency conversion fee of three per cent, but that transaction is processed according to Visa’s everyday consumer exchange rates. On the day I checked, $1 bought me $1.008 Canadian dollars ($C). Therefore, my $C1397.42 purchase on my Visa debit card will cost me $1427.92 in Australian dollars.

“If I had processed the same transaction on my travel card, I would have avoided the currency conversion fee, but the transaction would be processed at a currency conversion rate that applies to the travel card, which is different from the Visa rate. When I checked, ANZ confirmed that $1 would buy me $C0.9507 using the travel card. So, while I would have avoided the three per cent currency conversion fee, I would have been screwed to the tune of five per cent by ANZ on the currency conversion rate. The cost of my $C1397.42 purchase on the travel card would have been $1469.88 – $42 more than on my everyday debit card. That’s a scam.”

Keep the cream

Determining the cream-off factor for a range of currencies using every financial product or service available in Australia is only useful on the day it is done due to the constantly changing rates.

The best option Boyle found on 24 April 2012 was GE Money’s 28 Degrees MasterCard – a recent CHOICE Award winner for Best Travel Money Card. It applies the MasterCard exchange rate with no fees or charges, and can be used as a travel card with pre-loaded currency or a traditional credit card.

Other payment options take a healthy cut but don’t cream off nearly as much as some travel money cards or foreign exchange booths at airports. Foreign currency transactions and cash withdrawals using a CBA MasterCard, for instance, cost consumers only about three per cent more than the mid-market rate, even after you add the fees.

For bank-to-bank transfers, OzForex was a better alternative than the CBA. The local foreign exchange service came in only two to three per cent higher than mid-market rates, although the transfer minimum is $2000.

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