Friday, December 17, 2010

Bankers' Math -- Part Cinq

My wife and I just returned from a delightful month traveling in Argentina. One thing we discovered that was not so delightful is that Bankers in Argentina are just as bad as everywhere else, particularly in how much they control people's access to their own money and how they profit from routine transactions.

We found that small merchants in Argentina prefer cash over credit cards as payment -- this saves them paying the credit card companies a percentage for each transaction and fees for maintaining a credit processing account. Many of the restaurants and hotels we stayed in were managed by the owners themselves. These operations usually have a small profit margin, so giving 2-4% to a credit card company can really hurt. There is also a certain ... uh, shall we say "flexibility" in reporting cash transactions for tax purposes. Several of our hotels would not accept credit cards at all, and others offered discounts up to 10% for paying in cash. The same was true in many restaurants. I should note that this practice is not confined to Argentina -- we've encountered it with increasing frequency in other countries as well, for example in Belgium and France when we were traveling there a year ago and in Greece this past June. And we've found that it isn't restricted to mom-and-pop retail operations -- even Government-run museums and cultural sites in these countries increasingly refuse credit or debit cards.

The bottom line is that we need cash as we travel. In the old days that meant carrying a wad of traveler's checks (parents, you might have to explain to your kids what these are) and then regularly cashing them at intervals at some bank or currency exchange office, often a time-consuming process. These days traveler's checks are the most expensive and inconvenient way to get cash and we don't carry them any more, or we may take just a small amount as emergency backup funds.

ATM's (MSM's -- "money spitting machines," as we call them) are now the primary way for travelers to get foreign currency, even in the poorest and least developed countries. Of course, both the local bank and your own bank will charge you a fee for each transaction, and these fees have gone up considerably in the last year or so. As I wrote in Bankers' Math, Part Quatre , my bank here in Hawaii, First Hawaiian, recently doubled their fee for a foreign ATM withdrawal to $5.00 per transaction, presumably because the cost of electrons has skyrocketed. To our great irritation we found that all the banks in Argentina charge about $4.00 per ATM transaction, so potentially a traveler in Argentina will pay $9 every time he or she gets money! If you get $100 worth of pesos, that's a 9% surcharge -- rather exorbitant in my humble opinion.

One way to counter this is to withdraw as much as you can. For example, if you take out $500 in foreign currency, the fees will amount to just 1.8% of the transaction, and you will also reduce the number of withdrawals you'll need to make during the trip, lowering the total amount spent in fees.

Ah, but the banker's are on to this strategy!!! They limit the maximum amount of a transaction, and it is clearly to their advantage to keep it low so that you will have to visit the MSM more often. By the way, it isn't your bank that places this limit -- it is the bank that owns the ATM. On our recent trips to Europe and Greece we were able to withdraw $400-500 routinely. However, in Argentina we were limited to $250 at every bank we tried, which amounts to a charge of 3.6%, slightly worse than a credit card fee (as explained below, we do have a strategy for getting around this, but it isn't available to everyone). I wouldn't be surprised if lower limits and higher fees have also been instituted in Europe, but I don't know for sure.

Bankers' Math: lower limits + higher fees = more profit for us!

My wife and I are fortunate enough to qualify for an ATM card from our retirement investment company (Vanguard) that waives the transaction fee, and we also have obtained a Capital One credit card that does not assess foreign transaction fees. For the time being, then, we have held our own against these forms of Bankers' Math. However, our advantages here may be lost at any time because they are under control of .... you guessed it.... Bankers.

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