April 27, 2009

Beware: latest scam from banks

Posted by: Andoni

I've been reading about this scam now for two years, but it's the first time it has happened to me. Although I did not see it once in the UK countryside, it was present at almost every turn in London.

The way the scam works is that when you are overseas and you purchase something with a credit or debit card, the merchant informs you that "for your convenience" you can pay in US dollars (USD) instead of the local currency (in this case Great Britain pounds - GBP).

Note: when outside the US, never pay in USD, always pay in the local currency.

Under most countries' laws, only its own currency can legally be used for transactions within that country. That means that in the US, only USD can be used and in Britain only GBP can be used. So if you choose to pay in USD in England, the merchant must use a middleman currency trader who is willing to do the transaction. It's all done internally behind the scenes on the computer - and you never see what's happening. But once that middleman gets involved the exchange rate goes from the pre-set international banking exchange rate of less than 1% (plus 1 to 3% that your card company may tack on) to 10% or more that these private middlemen may charge. That's an extra 3 to 10% profit that is probably split between the merchant and the behind the scenes private currency exchange banker just to see dollars on your receipt.

The problem now is that many merchants in London aren't even giving you the choice of GBP or USD. When they see a US credit, debit or ATM card, they simply put the charge through as USD, raking in an extra 10%.

The first time it happened to me was at an ATM machine upon arrival at Heathrow Airport. The only thing that tipped me off as to what happened was the receipt which read like a legal document. It said that I had been given the choice to do the cash withdrawal (from my own checking account back in the US) in USD or GBP and that I chose dollars. It then said that the transaction is final and cannot be disputed or changed.

That was a blatantly false statement, but there was no one to protest to. I called my bank in the US, but the money was already gone.......at a 10% premium over what my banker (a friend, actually) told me was the international exchange rate for that day. I paid an extra $46 to get 300 GBP out of an ATM because of this ripoff.

Upon returning my car to Heathrow Airport, Hertz gave me a choice of paying in GBP or USD and I chose pounds. At Harrod's on our first visit, my partner fell for the gimmick and chose dollars when asked, and he ended up paying an extra $4 on a 20 GBP purchase.

On the last night of our stay in London, I paid our hotel bill and the charge came out in dollars. I objected, but the night clerk said that was the only way the machine would allow with a US credit card. I ended up waiting for the manager to arrive the next morning and insisted on being charged in pounds. After it was done, by paying in pounds, my bill was $50 less than it had been the night before.

As Paul Krugman points out in today's column, many of today's money people know only how to make money on unnecessary paper transactions that makes money for them but doesn't do anything for anyone else or for the economy in general. Even though I'm an experienced traveler and a savvy buyer, I got taken. The only way to stop this sort of thing is that if everyone is informed and super cautious.