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How Does Visa's Exchange Rate?
The Travel Troubleshooter · August 23, 2002

Q: I have a question about the charges for currency transactions on my credit card. Visa charges 1 percent for its foreign currency transactions, and issuing banks are now often adding another 2 percent.

But what I can't figure out is what number this is based on. It's a real mystery. For instance, I looked at the interbank rate - the interest rate applied to credit operations between banking institutions - for the day of a Visa transaction I did in Colombia. I kind of figured that Visa would be able to get the interbank rate, or at least the ask rate - or the lowest interest rate - for that day, and that they then would deduct their 1 percent fee from that figure. But no. It had deducted its 1 percent fee from a figure that was about 3 ½ percent below the interbank rate.

My question is: what happened to that 3 ½ percent? In other words, why did Visa deduct its so-called 1 percent fee from a rate 3 ½ percent below the interbank rate and not from the interbank rate itself?

Everyone seems to be worried about the 1 percent fee and the new 2 percent bank fee, but no one is talking about why they figure their fees on a number that is so much less than the daily interbank rate. What is going on here?

-- William Gregg

A: Good question. I asked Michael Sherman, a vice president for Visa International to explain the percentages.

Technically, Visa doesn't use the interbank rate. For the world's 25 major trading currencies it uses the average of wholesale market spot rates fixed at 2 p.m. EDT each working day. "The average market spot rate used in the conversion system is always compared with spot rates quoted by the banks, based upon the real-time Reuters money and foreign exchange date transmission service," he says. "This check is carried out by Visa International to ensure that the rates used in the system are fair to both cardholders and Visa's members."

Sherman told me that Visa offers currency rates to its member financial institutions at a wholesale market rate plus one percent of the transaction amount. Your issuing bank then decides whether to absorb that cost or to pass on its currency conversion costs to the cardholder, and it may or may not mark up the rate it receives from Visa.

"Members decide what currency conversion rates to charge their cardholders, and they do charge different rates, so consumers should shop around for the card offering that best suits their needs," he advised.

In other words, if you have a problem with the rate on your Visa card, contact the issuing bank.

Sherman points out that using Visa cards for currency exchange is still less expensive than other exchange services, which often charge a hefty commission, and it is safer than carrying large sums of cash on your person.

However, Sherman's response left several questions unanswered. It wasn't immediately clear what the difference was between the wholesale rate and the interbank rate. In a series of follow-up e-mails, I also asked why an exchange rate offered by MasterCard was more favorable, and to clarify some of the fees. Sherman didn't respond to those follow-up queries before deadline.

Bottom line: using a Visa card for foreign exchange may be convenient, but there are better ways of paying for something. Sherman noted that carrying large sums of cash can be dangerous, and I agree. I personally prefer to make major purchases with a credit card and to carry a small amount of cash for incidentals. If you're withdrawing so much cash that you have to begin worrying about the exchange rate, it's possible that you're taking out too much money.

Christopher Elliott is National Geographic Traveler's ombudsman. The Travel Troubleshooter appears weekly on this site.