Choose the cheapest way to pay abroad and avoid the hidden charge people pay most often.
When you pay for things overseas, most of the money you lose goes to fees rather than to exchange rates. Each fee is small and easy to miss, so they add up over a trip without you noticing. Once you know where they come from, you can compare the ways of paying by one figure: the total Singapore dollar cost of the same amount of foreign currency.
When a Singapore card pays in a foreign currency, two things happen in sequence. First, the card network, such as Visa or Mastercard, converts the amount into Singapore dollars at its own exchange rate for that day. Second, a foreign transaction fee is added. The card network charges your bank an international transaction fee on the transaction, so this fee is not one your bank sets entirely on its own. Some cards and accounts charge no foreign transaction fee, and many charge a few percent. Check the current fee in your own card's fee schedule.
The fee is easy to miss because it is either bundled into the S$ amount on your statement or shows up as a separate small line a few days later.
Siti, a traveller from Singapore, spends 100,000 yen on her card during a trip to Japan. Using made-up example figures, say the network rate is S$0.900 per 100 yen, so the 100,000 yen converts to S$900. Her bank's 3% fee adds S$27, and she pays S$927 in total.
At the end of a dinner in Kyoto, the waiter hands Siti the card terminal. It asks whether she wants to pay in JPY or SGD. SGD feels safer to her, because she would know exactly what she was paying and there would be no surprise on her statement. Most people choose SGD for that reason, and on most occasions it is the more expensive choice.
Choosing SGD at a terminal is called dynamic currency conversion (DCC). The merchant's payment provider converts the bill into S$ at a rate it sets, and that rate usually includes a markup well above the network's rate. You pay for the certainty of seeing a S$ figure with a worse rate. Because a DCC transaction is still processed overseas, some banks also charge their foreign transaction fee on top, even though you were billed in S$.
If Siti chose SGD and the terminal offered S$0.95 per 100 yen, her 100,000 yen bill would become S$950. If her bank also added a 1% fee, that would be another S$9.50. DCC would cost her S$950 or more, compared with S$927 for paying in yen on the same card.
When a terminal, an ATM or a website abroad offers to charge you in Singapore dollars, decline and pay in the local currency. If a merchant has already charged you in S$ without asking, you can ask them to reverse it and charge you in the local currency instead.
A trip usually gives you three or four ways to pay, and each one costs you in a different place.
Cash from a money changer. Rates vary between changers and by the amount you change, and the better changers in Singapore are often close to the market rate. Cash has its own costs: if you change too much, you lose again when you change the leftover back, and cash can be lost or stolen. A multi-currency account or card. It converts your S$ into the foreign currency at a rate the provider shows you, and you then spend in that currency abroad. Some charge no spending fee, but their rate includes a margin, and some have limits or charges for withdrawals. An ordinary credit or debit card, which uses the network rate plus your bank's fee.
The only fair comparison is the total S$ cost of the same amount of foreign currency, counting the rate and every fee. Some people also weigh card rewards in the comparison.
For Siti's 100,000 yen, again with made-up figures, a money changer quotes S$0.905 per 100 yen, so the cash costs her S$905. Her multi-currency account offers S$0.902 per 100 yen with no spending fee, so it costs S$902. Her card costs S$927, and DCC costs S$950 or more. The gap between the best and worst option is about S$50 on one week's spending, before any card rewards.
Many travellers watch the exchange rate for weeks, waiting for a good moment to change their money. It feels productive, but it usually saves very little. A fee is a certain cost, while a rate move is equally likely to go either way. To save the same S$27 that Siti's bank fee costs her, the yen would need to fall about 3% against the S$ in the weeks before her trip, and it is just as likely to rise. A 2% move in either direction would shift her cost by S$18.
Lesson 6.1, "Why exchange rates move", explained that short-term exchange rate moves are hard to predict. Cutting a fee gives you a sure saving, and timing the rate is a guess.
Get the fees right first. If you want to go further, change money in two or three parts before the trip rather than all at once, so you are not betting everything on one day's rate.
Before your next trip, find out what each method you have access to would actually charge, using the same amount of the local currency for each.
Before your next trip, work out what 1,000 units of the local currency would cost you in Singapore dollars using three methods you can use.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).