Did you know?
Even if you have a credit card with a 0% foreign exchange fee, Visa and MasterCard are still taking a commission from you. For Visa cards, this is up to 1.2% of the value of the foreign currency purchases you make, and up to 0.42% for MasterCard - which obviously remains the better choice.
Prior to December 2016, MasterCard consistently charged less than 0.03% - a fantastic rate, however this is sadly no longer the case.
The full story
Many banks now issue credit cards offering 0% commissions & fees on transactions made in foreign currency. This is clearly a huge improvement over the 2.5 - 4.5% fees that they have historically charged for this “service” - and indeed still are charging for the vast majority of credit and debit cards on issue to customers.
All, however, is not as it seems.
As is so often the case; “0% commission” or “no transaction fees” doesn’t necessarily mean that you, the customer, are not being ripped off.
The best known example of this is foreign exchange desks at airports. Most, if not all, are claiming to offer foreign exchange with “zero transaction fees”, but some basic arithmetic to compare the buy and sell rates offered shows that they are in fact creaming up to 10% of your cash in profit on the transaction.
This brings us to the critical point: The difference between the buy and sell rate, also known as the spread. This is how banks, credit card companies, foreign currency desks, etc actually charge you fees without directly disclosing them.
Visa and MasterCard FX Spreads
One of the more nefarious aspects of this situation is that neither your bank, nor Visa or MasterCard are disclosing to you the size of the spread. Your credit card statement will merely show that you received a certain exchange rate on a certain day, but you have no way of easily knowing if this rate is fair, and how large a commission Visa or MasterCard have taken with it.
Happily, both card issuers provide their daily exchange rates via their websites. Even better, you can determine the buy and sell rates - and therefore the spread - by comparing the rates they’ve used for a card issued in one currency, with the reverse rate they use for buying that currency with a card issued in a different currency.
Having collected this data and calculated spreads over many months, we’ve uncovered some interesting data.
First, avoid Visa. Throughout the entire survey period, Visa’s commission was substantially higher; between 20% and 2000% higher. At no time has Visa offered a better deal than MasterCard.
MasterCard increases commissions
More interesting, though, is that on November 28 2016 MasterCard began to gradually increase their commissions.
This can be clearly observed on our charts, where the spread - seen as the gap between the MasterCard buy and sell rate - grows steadily over time from that date onward.
It appeared to stabilize around 6 weeks later, with the average spread on EUR/USD transactions having grown from 0.02% to 0.2%; a ten-fold increase.
We can only speculate as to the reasons for this, but it seems fair to assume that MasterCard, in the absence of competitive pressure from Visa, decided to quietly take this action which would add many, many millions of dollars a year to their operating profit - whilst scarcely being noticed by the customers footing the bill.
We’ll remain vigilant as to what plays out in future. Check back in here for updates!
Technical notes
Spread vs Commission. The spread is the difference between the buy and sell rate. The commission is equal to half of the spread; i.e. the distance from the midpoint between buy and sell. The midpoint is the theoretical “true” exchange rate.
There is no “true” exchange rate on any given day. Foreign exchange is a market; which is an almost constant succession of transactions occurring at constantly varying prices - or “rates”. In fact there is not even a single market; there are many distinct markets hosting foreign exchange dealing throughout the world.
Accordingly, most rates you see published are a snapshot in time, or the final - “closing” price for that trading day; which is just the price of the last transaction that occurred before that market closed. It tells you nothing about the price variation throughout the trading day.
To help with this, our charts show the lowest and highest price of each trading day, from one of the largest wholesale markets - you can toggle the display of this series that we’ve called: FX Market Daily Trading Range.
The midpoint between the high and low prices for each trading day gives you a very good indication of what the theoretical “true”exchange rate would be on any given day. Note that our wholesale market is only open Monday - Friday, which is why you see gaps at the weekends.
Visa’s spread is the daily trading range
Viewing this chart series alongside the Visa series also gives us some interesting insights. Firstly it is clear that Visa’s spread (and hence commission) is in fact determined by the high/low spread of the wholesale markets.
More volatile days on FX markets result in Visa customers paying more for foreign currency, even though there is little sound rationale for this practise. More likely it seems that Visa could attempt to justify higher fees on the basis of higher risk due to the higher volatility. Such a stance would not hold up to scrutiny at Visa’s scale.
Visa time lag
Also noteworthy is the one day time lag of Visa’s rates with respect to the wholesale market. This can be explained by Visa’s policy of using the exchange rate on the date the transaction posts to your credit card bill; whereas MasterCard uses the rate on the day of the actual transaction.
You may have noticed that, by default, we adjust the Visa series by -1 day so that it aligns with the wholesale market rates for easy visual comparison. If you want to compare transactions on your Visa credit card statement, make sure you click the “no time shift” option first.
Weekend rate freeze
Whilst FX wholesale markets are closed on weekends, credit cards obviously still need to provide you with foreign currency for your purchases on weekends. Accordingly we note that they use their Friday rate for Saturday and Sunday.