Business Math + Banker's Math: 0 = - 4

That's right, Business Math.  In my previous series of Banker's Math blogs I have railed against some of the practices of the banking industry that I consider excessive, like 9% ATM fees and unnecessarily high mortgage refinancing costs. Today's topic, though, is an example of how business calculations in conjunction with banking practices can sneakily take more money out of your pocket.

My wife and I travel internationally quite a bit.  As I've mentioned before, we've managed to minimize fees for transactions in foreign currency by using a credit card that waives the usual 3-4% extra charge and an ATM card that doesn't have fees on our side of the transaction.  For the past several years this has worked out well, and we've probably saved hundreds of dollars.

But after our most recent trip -- a very enjoyable three weeks in northern Italy -- I discovered a new wrinkle in the foreign transaction boondoggle, this time by a U.S.-based rental car company, not a bank.  Of course, rental car companies have long been notorious for some pretty sleazy practices, so maybe this should not have been a surprise.  But after researching this more thoroughly I have learned that a number of businesses, including local merchants are also joining in.

The practice is known as DCC, or "Dynamic Currency Conversion."  A merchant can bill you in local currency, say Euros, then convert the amount to Dollars through a financial services company, add on 3-4% and charge your credit card the total dollar amount.  Merchants make money off of this because they keep the conversion charge (minus some fees they have to pay to their financial services company).  If you have a credit card that charges international transaction fees (ours doesn't but most do), you could also pay your own company another 3-4% even though they didn't do the conversion because the fee is for any transaction that goes through a foreign bank regardless of currency.  Total cost of the charge then is 6-8%.  And this may happen even without you being aware of it.

In our case we rented a car from Budget which we picked up and returned in Milan.  When we turned in the car the agent gave us a receipt in Euros which was the exact amount we had been quoted when reserving the car online, and so we were satisfied. We left thinking our credit card would be charged the total on the receipt, in Euros, with the conversion to Dollars handled by our credit card company for which there would have been no fee.  Nope.  When the charge appeared on our statement it was 4% higher than it should have been.

I emailed Budget's customer service and asked why the amount was too high.  Here are excerpts from the subsequent exchange.

Budget: Thank you for contacting the E-mail Customer Service team.
I truly apologize for the inconvenience and confusion; however, the total indicated on the final rental receipt is showing as 399.59EUR which was converted to 548.21USD.  Please note that, because the conversion to be made by AvisBudget was signed for on the rental agreement rather than allowing your banking institution to process it, an additional 3-4% conversion fee was also assessed.  This may explain the slight difference after conversion.  I hope this information helps clarify.

Badabing!  In other words, I apparently agreed to this when I signed the rental agreement though I don't recall seeing it in the fine print (unfortunately I can't find my copy of the contract to check) nor is it to be found anywhere in the online conditions listed when you reserve the car.

So, is it possible to avoid this? 

Me:  Thank you for your fast reply.  Is there any way I can avoid this additional 3-4% in future international rentals with Budget?  I have a credit card that explicitly waives international transaction fees and I would like to take advantage of it (I thought I was doing so in this case).  If other companies allow the rental to be processed by my banking institution then I will likely use them instead. 
Budget: Thank you for contacting the E-mail Customer Service team. When you get to the counter to pick up your rental you need to tell them that you do not want to be charged in US dollars. This way you will be charged in the currency of the country and your credit card company will do the conversion. If we can be of further assistance, please let us know.

There you go, all you have to do is ask.

Maybe.

Fast forward to planning for a trip next year to Chile, where we are going to rent cars in two different locations.  Budget does business in Chile and our research found their rental rates to be competitive.  Encouraged by Budget's emails we reserved cars with Budget, but I thought I'd check on the conversion policy just to make sure I had it right. So I emailed customer service again.

Me: I have reserved Budget cars in Chile for our trip next year and will use a U.S credit card to pay for the rentals.  How can I make sure that the currency conversion from CLP to USD will be handled by my Credit Card issuer rather than Budget?
Budget: Thank you for contacting the Budget E-mail Customer Service team. You will need to request that you are billed in USD when you arrive at the location to avoid this. [my emphasis]

Whoa! Note that this is exactly the opposite advice I received earlier (and very likely wrong).  Confusing?  I wrote back pointing out my experience in Italy and asking if the conversion policies were different in Chile.  Here's the reply.

Budget: Thank you for contacting Budget. Budget locations in Italy and in Chile are independently owned franchise locations and may have different policies in place which deviates from standard policy. As advised, renters are to make their currency request [my emphasis] at the beginning of the rental. We apologize for any misunderstanding or inconvenience. If we can be of further assistance, please let us know.

Not helpful.  The advice is for renters to make their currency request at the beginning of the rental.  But which request?  Dollars?  Local Currency?  Do you still sign the same contract?  If you do sign it what recourse do you have later if they don't follow your request?  What do you do if they refuse? Try on the spur of the moment to rent from another company?

Well, at least the customer service person was polite.

Now I know some of you are saying,  "Just use a different company."  But a little internet research reveals that others do this as well.  For example, I found a forum exchange from 2010 in which Hertz did exactly the same thing to a customer.  And as my email exchange above shows, it isn't easy to find out a company's policy in advance, even if you contact them directly and ask.

And now for the coupe de grace. On Budget's web site they offer to show you the estimated total for your rental in either dollars or in pesos.  If you reserve your car based on the dollar estimate, then show up and get them to charge you in pesos instead (thus avoiding DCC), what rate do they use to calculate the pesos total?  Answer:  compared to the global standard rates available on www.xe.com, Budget adds 1 %!!  (It could be worse -- Thrifty adds 2%).  So even if you pay in pesos and use your no-fee credit card, you will still pay at least 1% more.

There you go.  My smugness in thinking I had achieved a consumer victory by using a credit card with no international transaction fees was unjustified.  In Business Math + Banker's Math: 0 (no fees) = - 4 (gotcha anyway!).

I'll let you know how the Budget rentals in Chile turn out.
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Here's some additional reading on this topic if you're interested:

• A succinct statement of the practice and the potential problem: http://www.cardhub.com/edu/dynamic-currency-conversion/
• A statement by FEXCO, a financial services company to merchants touting the benefits of the DCC program.  FEXCO was apparently the company that came up with this wonderful "service" back in 1996:  http://www.fexcoms.com/products/dynamic-currency-conversiondcc/
• A statement by KeyBank, a major financial services company in the U.S. and Europe, touting the financial benefits to merchants and supposedly to customers:  https://www.key.com/business/collecting-payments/dynamic-currency-conversion-banking-service.jsp 
• A 2008 forum discussion started by a credit card holder describing the difficulties in trying to opt out of this practice:  http://www.flyertalk.com/forum/credit-card-programs/916377-dynamic-currency-coversion-should-illegal.html
• A 2011 blog that offers a critical look of the DCC practice from the consumer's point of view.  Includes a reader who had a similar experience as ours with Dollar Rental Car: http://www.askmrcreditcard.com/creditcardblog/the-foreign-conversion-scam/
• A 2005 study by a consulting firm regarding DCC's acceptance by merchants and customers: http://www.psel.co.uk/pdf/articles/acquiring/dcc_myth_vs_reality.pdf

Breathing Again .... Again

Four years ago November 5th I wrote that I was Breathing Again after the divisive and derisive campaigning of McCain and Palin failed to win the White House for the GOP and Obama was elected by a substantial margin.  I also cautioned, however, that the euphoria over his election was likely unwarranted by political reality -- though at the time I didn't foresee the magnitude of the obstructionist tactics the GOP/Tea Party would employ to limit his effectiveness.  During this campaign I was holding my breath again because the strategy of Romney/Ryan was working and it seemed there was a very real prospect of not only a GOP president but also both House and Senate controlled by fiscal and social conservatives with no interest in compromise or consensus (recall John Boehner's adamant rejection of the word "compromise").  And so I'm breathing again....again.

But once again I'm not euphoric.  It is clear that nearly 1/2 the nation's voters saw Romney and Ryan in a positive light and therefore any solutions to the nation's economic and social problems have to consider their conservative viewpoints.  There was no mandate given here, other than through the polls that repeatedly show that most Americans want government to solve problems, not remain paralyzed by unbending adherence to a single philosophical agenda. And I can hardly be encouraged by the fact that this election may have simply maintained the status quo in congress of the last two years which showed a stunning inability to solve anything.

It is correct to say that our congressional leaders have become polarized and the distance that must be bridged in order to reach agreement is greater than it has been in a long time.  However, the GOP has moved farther to the right than the Democratic Party has to the left.  There was a time when I could have accepted a GOP dominated government because accommodation and negotiation (aka "civility") were still the norm.  But not now.

Maybe the positive impact of the election will be in causing the GOP/Tea Party to re-examine its position on the political spectrum and its relationship to a broader electorate.  Michael Gerson of the Washington Post recently offered an analysis of this possibility that I think is very insightful and I'll close with his words:

Some of the most important intellectual groundwork is needed on the role of government. Mitt Romney had a five-part plan to encourage job creation. He lacked a public philosophy that explained government’s valid role in meeting human needs. Suburban women heard little about improved public education. Single women, particularly single mothers, heard little about their struggles, apart from an off-putting Republican critique of food stamps. Blue-collar workers in, say, Ohio heard little about the unique challenges that face declining industrial communities. Latinos heard little from Republicans about promoting equal opportunity and economic mobility.

Neither a vague, pro-business orientation nor tea party ideology speaks to these Americans — except perhaps to alienate them. Conservatives will need to define a role for government that addresses human needs in effective, market-oriented ways. Americans fear public debt, and they resent intrusive bureaucracies, but they do not hate government.  [Emphasis added]

 We'll revisit this topic in another couple of years to assess if the situation has improved.  In the meantime I'll keep breathing, but I will also keep my fingers crossed.