American Travelers Abroad: The Chips Are Down

[Note -- it is hard to believe, but this is my 100th post!  That's a lot of hot air!  Thanks for listening.......]

Despite the title, this blog is actually another in my "Banker's Math" series. Or maybe a dual entry -- the other being my "Traveler's Woes" series.

My wife and I travel regularly to Western Europe. For example, a year ago last fall we returned for our fourth visit to Italy, that time to northern regions just in time for mushroom season. This spring we flew to Holland for tulip time, then continued down to southern France for three weeks.

Over the years it has become easier for us to travel independently in Europe, thanks in part to the availability of internet technology for booking hotels, finding restaurants and attractions, and obtaining information about the local region. Language problems have nearly disappeared as English has become the universal travel language (we often hear other travelers talking to locals in heavily accented English, then return to their native language among themselves). Navigation GPS devices make it easier to drive yourself through the maze of ancient streets and web of country roads, assuming you don't always believe the instructions (that will be another blog!). Europe has also become increasingly hi-tech in the sense of allowing (and even requiring) payment by credit card and providing access to local currency via ATMs.

Although we have thoroughly enjoyed all of our trips to Europe, we recently have encountered some problems due to our antiquated American financial technology. I'm referring to the "swipe and sign" credit card that has facilitated several high-profile hacker attacks recently, for example the infamous Target data breach.  These attacks are the work of nefarious ne'er do wells, of course, but their efforts have been made much easier by the vulnerability of the credit cards issued by U.S. banks. The information on the magnetic strips is easy to hack, the cards are easy to counterfeit, and the information transmitted by data terminals at retail outlets is easy to intercept. 

The weaknesses of "swipe and sign" credit cards have been known for some time, and most of Europe has moved to a much more secure system which involves embedding a small integrated circuit chip (called the EMV chip) in each card that encrypts the user's data and protects it with a pin number. Point of sale machines can read the chip (once the pin is supplied) and the data is then encrypted for transmission.  Though there have been a few hacks of this kind of system, it is much less vulnerable than ours. As Tom Groenfeldt of Forbes magazine describes it:

Much of the rest of the world uses a small chip on the credit card to validate with a transaction. The chip employs cryptography and a range of other security features and measures that create a multi-layered defense against card fraud. When combined with a Personal Identification Number or PIN code (the sort used on ATM cards), it substantially raises security. Even with just a signature it makes a marked improvement over a simple magnetic stripe. (Groenfeldt, 2014).

Now enter the hapless American traveler abroad, equipped with banking technology widely regarded as woefully insecure and antiquated.

As my wife and I discovered last month while exploring Holland and France, the issue isn't so much the insecurity of our cards -- they aren't more insecure when we use them in Europe as when we use them here in the U.S.  Rather, the difficulty comes from the fact that Holland and France are very advanced countries, and credit/debit cards are used for nearly everything.  For example, here in the U.S. getting cash from ATM is a matter of convenience. In Holland and France, only banks in the largest cities have human tellers who can dispense cash on demand, so using an ATM is nearly a necessity for getting currency.

The ubiquity of card transactions (and the weakness of our swipe and sign card) was brought home to us the very first night we were in Holland.  We had driven to a restaurant for dinner and learned that nearly all parking in the town required payment -- not to a human being but to a central machine that only accepted coins or...you guessed it...cards with the EMV chip.  Having just arrived we didn't have any coins and we were going to have to find a nearby store to get change -- not something most merchants are keen on doing, particularly since all we had were large bills. Plus unless one of us stayed with the car we ran the risk of getting a ticket. Fortunately a nice Dutch family waiting to pay gave us the minimum required in coins -- about $1.40.  Of course, they then stepped up to the machine, stuck in their chip card, keyed in their pin and away they went.

Parking machines aren't the only places where our credit card failed us -- trying to buy train tickets went from a simple matter of interacting with a machine to having to stand in a long line to pay at a counter -- only to have the agent's machine refuse to read our magnetic strip. On another occasion we had a major hassle when we tried to use a Park and Ride system in Amsterdam. Without the EMV chip we were unable to buy a special discounted ticket for city transportation and were forced to locate the parking structure attendant and try to explain our predicament. Again, the helpfulness of locals (and maybe their pity) won the day, and the attendant unlocked the machine and manually forced the discounted fare somehow.

Getting gas for our rental car also proved to be a hassle without the EMV chip, as I discovered the first time I inserted my swipe card into a pump's pay terminal, thinking this would work like it does here in the U.S. The station attendant came on the intercom and said something in rapid fire French, which of course I couldn't understand.  The tone, though was very clear.  I tried to fill up anyway, but the pump didn't have any obvious way of allowing for filling and then paying inside.  Soon the attendant came out of the kiosk and with more rapid fire French and a bit of charades she communicated that I had to move our car to the "penalty pump," which she would activate for filling and then paying inside. By the way, the security of the chip and pin cards allows many service stations in Europe to remain open 24/7 without any attendants at all after normal hours. We would have been out of luck -- and out of gas -- had this happened late at night.

Fortunately, most merchants, hotels, and restaurants in both Holland and France have machines that can (for the time being) process our cards -- in addition to the slot where the machines read an EMV chip, they also have a slit that allows swiping a card.  In fact most of these European machines are portable -- in a restaurant the waiter brings the machine to your table when you are ready to pay your bill and the whole transaction takes place right there.  Since your card never leaves your sight, this is another way in which the European system is more secure. Although we never had a problem with a merchant refusing our swipe and sign card, this isn't always the case. Tom Groenfeldt quotes one credit card vendor as saying that merchants, especially in France where they have had EMV the longest, are very resistant to taking a card that isn’t chip and PIN, and restaurants sometimes don’t want to accept cards with just a mag stripe. In other words, unless you want to wind up washing dishes for your delicious meal in Cannes or Monaco, take plenty of cash as a backup.

So why haven't American banks switched to the new cards?

According to an analysis posted on the Credit Card Forum there are several reasons:

Why? Well, there isn’t exactly a huge demand for them. Unless you’re traveling abroad, you don’t really have an everyday need for a chip card, as few merchants have upgraded to payment terminals that accept them. Add in the fact that chip cards a more expensive to produce, and you wind up with three parties (consumers, merchants and issuers) who haven’t been in a big hurry to make the switch.

From a Banker's Math perspective the expense to card issuers of covering fraudulent charges is less than the cost and inconvenience of changing to the chip system. The public concern over identity theft and insecure credit card transactions may be changing that equation, however.  Credit card issuers now see the chip technology as a possible competitive advantage in attracting new accounts and have begun to offer them in limited markets -- but almost always in connection with yearly fee cards and not necessarily with cards that have no foreign transaction fees.  For current lists of who offers what, see posts by The Points Guy,  Credit Card Forum and NerdWallet.

To make things even more confusing, most of the chip cards now being made available to Americans are "chip and sign," not "chip and pin."  (If a pin is issued with these cards, it is for obtaining cash advances at ATM's, not for point of sale purchases.) And a quick search of internet forums will reveal many reports of people being unable to use them in Europe, or finding that they will work in some instances and not others.  Not a good solution but still better than the old system.

For now we have adopted a wait-and-see stance.  But before our next trip abroad we will have one of the chip cards The front runners right now are Barclaycard Arrival Plus ($89) and the Chase Sapphire Preferred ($95).  The Barclaycard is a true chip and pin card.  The Chase Sapphire is chip and signature now and likely to have chip and pin later in the year.  We'll keep you posted.

Happy travels, happy banking.........

Fasten Your Seatbelts: Your Reward Miles Are In For A Bumpy Ride

I predict that airline reward "miles" will soon disappear, judging from a recent move by Delta.  In a stunning display of "it's a feature not a flaw," the company announced that starting in 2015 it will determine the number of reward "miles" on the basis of the ticket price, not the miles flown, and tried to tout this as an improvement for customers. As one Delta executive said in an interview with CBS news, the change was necessary because people paying top dollar for Business and First Class were having difficulty because so many seats were already taken by award travelers who had upgraded using their miles.  Imagine the gall of those riff-raft -- actually cashing in their award miles!  (Obviously my snide addition).  By changing to a revenue-based reward system, the company wished to recognize those travelers who contribute most to the bottom line.

Most industry analysts have determined that the new change effectively cuts the miles awarded for most travelers by 20-50%.  Despite what Delta says, this includes those who purchase more expensive tickets in Business Class because Delta is also dropping the bonus for this higher class of service. For instance, in a careful analysis by The Points Guy, the current award for an economy Delta ticket from Seattle to Boston is 4,992 miles versus 2,240 under the new system. For Business Class it is currently 7,448 miles (including the bonus) but will be 7,050 miles next year. The only time Business and First Class will actually benefit from the new system will be on very long haul flights, such as New York to London. Economy travelers, though will see dramatic cuts on these routes.

And there is still another shoe to drop -- Delta has held off announcing what the new requirements will be for obtaining award travel (i.e., cashing in your miles), which will likely be raised (again).  In other words, fewer miles awarded and more miles required to actually benefit from being in the Delta loyalty program. Hmmm.

Airlines have been moving in this direction for some time by issuing reward credit cards that allow people to earn miles for purchases that have nothing to do with travel.  The more you spend, the more miles you accrue, whether it is on buying milk or magazines.  Delta has now completely disconnected actual travel and reward miles -- the only thing that drives the reward process is money spent.  The more expensive the ticket the more you earn.  Period.  At this point it will be more accurate and honest to drop the "miles" and use a term like "points" or "units."  This seems to also be more in the spirit of what drives our economy -- spending, not saving.  Perhaps we should just give Delta credit for being honest:  you get what you pay for -- nothing is really free -- and the more you have the more you get.

In fact, I have to admit that if airlines had begun their rewards programs with this kind of structure I think I could have easily accepted it.  I use other programs that are based on this idea -- cash back credit cards, for example, and they seem perfectly reasonable to me.  I think what irks me here, though is the change from one kind of philosophy to another, and the motivation behind it.  It feels like a "bait-and-switch" -- I joined reward programs because I saw the value of the reward structure, but now the structure has been altered in a way that doesn't recognize my past loyalty and seems not to care much for my future loyalty, either. But then, I've never paid for a Business Class or First Class ticket and never will, and Delta is making it very clear that unless I do they aren't interested in rewarding me for using their airline.

The other irksome thing to me is that this kind of change comes when Delta is earning great profits and is hardly cutting corners in some areas.  For example, based on a $1 billion profit for 2012, Delta boosted CEO Richard Anderson's total compensation by 42%, to $12.6 million (about $ 3 million in cash, the rest in stock options and deferred retirement compensation).

I suspect he'll get a big bonus this year, too.  Perhaps we should give it to him in Reward Miles.
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Some Relevant Resources and Related Blogs:
Delta to Frequent Flyers: Distance Mileage Is Over, Show Us the Money - Businessweek
Taking a Deeper Look at Delta’s New Mileage Earning Structure for 2015 and Beyond | The Points Guy

Delta Air Lines boosts CEO's pay package by 42%|USA Today| 

Top 10 Reasons Why I Dumped Delta | The Points Guy
Business Math + Banker's Math III:  Flying High (Snow Crash)
Flying the (Un)Friendly Skies (Snow Crash)

Business Math + Banker's Math III: Flying High

Airlines are having a tough time these days.  For example, the recent merger between United and Continental apparently didn't go as smoothly as hoped and the company lost $723 million last year.  Poor Jeff Smisek, United's CEO, suffered from his mistakes in handling the merger -- his total compensation for the year dropped a whopping 41% leaving him with a mere $7.9 million, down from $13 million the year before.  Barely enough to make ends meet, I'm sure. Though Jeff's compensation is still extravagant (IMHO) at least this is one case where it appears to have been influenced by the company's financial performance.  This is rare, however -- industry-wide studies of the connection between CEO income and company profits have repeatedly shown that overall there is very little correlation between the two.

As airlines have struggled to cut costs and increase revenue it has more often been the passengers, not the CEO's who have borne the brunt -- more crowded planes, charges for food, baggage fees, extra fees for booking over the phone, no blankets or pillows or snacks, charges for reserving seats in advance, higher change fees, greatly diminished rewards for miles flown (see my blog, "Flying the (Un)Friendly Skies"), etc., etc.

These are the obvious ways of raising income, but there are a number of costs that are hidden in the price of the ticket itself.  One I came across for the first time recently was a KLM ticket my wife and I purchased online for a European trip. When it came time to pay for the ticket we were stuck with a 15 euro fee (about $20) for paying with a credit card.  The only way to avoid the extra charge was to purchase the ticket via a direct debit transfer from our bank. The 15 euros is a flat fee, the same regardless of the cost of the ticket.  In our specific case it amounted to a rather stiff 5% of the total that goes to KLM, not to the credit card company.  I'm sure U.S. carriers are watching public reaction to this very carefully and would love to do the same thing if they can get away with it.

Extra charges and fees can add up to a substantial portion of the total cost of a ticket.  In the case of our KLM ticket (Amsterdam to Nice, France) these add-ons comprised a stunning 61% of the total!  Don't think this is just true of European carriers, either -- for our ticket on United Airlines from the U.S to Amsterdam the extra charges were less, but still a hefty 44% of the total price. Note, both of these are international tickets but differ in two ways:  KLM is a European carrier and the flight is within Europe. United is a U.S. carrier and the flight is from the U.S. to Europe.

So what are these add-ons, exactly and are they different for the two tickets?  A close look at the ticket cost breakdowns suggests the following categories, along with the %  for each category in the case of the two tickets described above:

• Extra Airline Charges: booking fees, international surcharges, credit card fee (26% KLM, 33% United)
• Airport Fees: airport service charges, airport international airport service charges (16% KLM, 2.3% United)
• Security Fees: "Security Charge" (8.4% KLM), "September 11th Security Fee" (3.4%United)
• Taxes and Government Fees:  "French Aiport Tax, Soilidarity Tax, Netherlands Noise Isolation Charge" (11% KLM),  "U.S Customs User Fee, U.S. Immigration Fee, U.S. APHIS Fee, U.S. Federal Transportation Tax, U.S. Flight Segment Tax" (5% United)

There are a few things I find interesting about the breakdown.  First, most of the extras don't go to the airlines themselves but to other entities.  Second, the KLM add-ons are greater in every category except for the portion going to the airline itself.  Perhaps we shouldn't blame KLM for the credit card fee -- they're just trying to bring their portion of the ticket to the same level as other major carriers based in the U.S.

Third, it is interesting to note that the biggest difference by far is the portion going to the airports (16%% for KLM versus 2.3% for United). I don't know if this is true of other countries and carriers, but at least in this case it seems that some the funds for building and maintaining airports are coming from the users of those facilities.   We have found a general superiority around the world in foreign airports compared to those in the U.S.  -- perhaps this might be a good idea for us to consider as a way to upgrade U.S. facilities.

Fourth, the next biggest difference is that our concern with security in the U.S. isn't reflected in the portion of our tickets that supports security efforts -- KLM adds more than twice as much to a ticket as United does, 8.4% versus 3.4%.  Of course, this might be due to the way security is funded -- in the U.S. it is through general income taxes to fund the TSA's budget ($7.6 billion in 2012), whereas in Europe it may again be supported more by user fees assessed through ticket charges.

Finally, the amount added specifically for government taxes and fees is greater for the progressive European countries of Holland and France than for the U.S., but the absolute levels (11%, 5%) don't seem to me to give much support to the "damn taxes for big guvment!" folks.

Now for some disclaimers.  My analysis is not very general and different results might be obtained using different airlines and different countries.  I invite you to do your own research.  Also, my analysis is limited to international travel in which a sizable portion of the add-ons were those assessed because of this.  Indeed, when I did a quick check using domestic travel the add-ons dropped to 48% for KLM and just 12% for United.

The lesson I got from this analysis is that increases in airfare are not necessarily under the control of the airlines.  To maintain profitability and competitiveness they have turned to those things they can control, like baggage fees, configuration of seating, charging for food, etc. I can't blame them for that, though it has made air travel particularly unpleasant these days.

However I'd feel a whole lot better if airlines would show frugality in another area they can control -- CEO compensation.  Or, if you are still going to pay someone like Jeff Smisek nearly $8 million in a year the company lost $723 million, at least make him fly to Europe in the middle seat of the last row of the plane, with the video of him breathlessly touting all the wonderful changes coming to United looping over and over on the screen.

Business Math + Banker's Math II: The Shoe That Didn't Drop

In my first installment in this series I recounted how Budget Rental Car padded their CEO's bonus by adding 4% to my rental bill in Italy for a foreign currency conversion charge, even though I thought I was avoiding it by using my Capital One credit card.  Apparently I had agreed to this fee when I signed my contract in Italy, though I don't recall reading it there and unfortunately I've misplaced the contract and can't check the exact wording.

I contacted Budget's Customer Service and asked how I could avoid this in the future, particularly since I had reserved two more foreign rentals, this time in Chile.  I'll let you go to the first blog the read the email exchange that ensued in which I received confusing and contradictory advice, ending with the rather astonishing admission that there is no universal policy about this fee:

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.

As I pointed out previously the problem with "making a currency request" is that in one Budget email I was advised to request that the charge be in local currency, and in another email told to request that it be in U.S. dollars.

I gave it one last shot by contacting the Customer Service people in Chile directly:

Me:  My wife and I have reserved Budget cars in two locations for our upcoming trip to Chile:  Santiago (#xxx192US3) and Puerto Montt (#xxxxx5US1). I would like to avoid any currency conversion charges for these two rentals by Budget.  My credit card does not assess these and I would like to take advantage of this feature.

 How can I be certain that Budget will not assess me currency conversion charges?

 After considerable delay I received the following reply:

Budget Chile:  Dear Mr. Richard Sherman: According your request, inform you that is difficult for us confirm that you will not have any currency conversion charges, because we do not have any control over foreign banks, also our values and charges are systematized, maybe you could leave the guarantee with your credit card and pay of lease in cash.

 Everybody clear?

My interpretation of Budget Chile's email is that either (a) they were being deliberately unhelpful and if I wanted to avoid the Budget charge I would have to obtain wads of Chilean Pesos to pay the final bill, or (b) they had no idea what I was talking about because they never levied conversion fees themselves, unlike the Budget folks in Italy.

I went ahead with these rentals last month when we visited Chile, mainly because Budget's rates were very competitive and because I felt prepared to do battle over this.  Each time we picked up our car I asked the agent if there would be any additional charge for converting Pesos to Dollars, and I asked the same question again when we returned the cars.  All four times the answer was "no."

Of course, the proof is in the credit card statement, and so I have been waiting to see what the final charge amounts would be, as compared to the official exchange rates. The answer is now in, and to be "fair and balanced" (I can't believe I just said that), I have to report that Budget Chile did NOT add a conversion charge!

The lesson here is to travel to Chile and avoid Italy.  No, wait -- that's not it.  The lesson is that we consumers have to be constantly vigilant about business and banking practices in order to avoid unnecessary and unjustified charges.  And we can't become complacent just because we think we are prepared, like my use of a fee-free credit card. This becomes really difficult when you're in a foreign country and foggy from jet lag, but that's when you're most vulnerable.

Confusion, complacency and lack of information are a banker/businessman's best friends.

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

Bankers' Math -- Part Sept

The first blog in my Bankers' Math series was three years ago and dealt with some of the self-serving manipulations my bank went through when my wife and I refinanced our mortgage.  Since then I've documented several excesses of the financial industry that I've encountered first-hand, and you can find links to these blogs below if you haven't read them.  Caution -- those readers with high blood pressure are advised against exposure to this material.

In this installment of "what-are-the-folks-who brought-us-the-great-recession-up-to-now" we return to mortgage refinancing, an ordeal we have just undergone once more.  We chose to endure this again because we could get a new mortgage rate that is more than a percentage point less than our old rate. Most personal finance experts say a drop of this magnitude is worthwhile -- provided the length of time it takes to recoup the umpteen bank fees and charges is reasonable.

In January we contacted our bank (Bank of Hawaii) and started the process.  Because of my tendency toward obsessiveness when it comes to keeping financial and personal information, we quickly got all the required records together -- tax returns for the last two years, mutual fund and investment statements for all of 2011,  payment statements from our pension funds, birth certificates, life history, retinal scans, DNA samples, diplomas, fingerprints, Kirlian photographs, urine analyses, etc., etc.   We completed the application by the end of January.  After 2 1/2 months BOH finally deemed us worthy of their blessing and we "closed" -- the bank's term for an hour-long session in which you sign several thousand documents, all designed to give the bank every possible legal advantage over you.

Of the many irksome aspects of this process, one stands out.  It occurred when we received the official Loan Approval Notice which said:  "We are pleased to inform you that your application for a mortgage loan on the terms set forth is approved, provided the conditions and terms below outlined are satisfied prior to the expiration date of the loan approval and loan closing."  (In other words, keep jumping through hoops until we tell you to stop.)  Some of the conditions listed were simply not under our control, for example "Lender (my italics) will provide customer with an IRS 4506-T to be signed at closing."  Huh???

But one condition was truly rankling:  "Borrowers must provide proof of liquid assets required for closing."  (The money required for closing had been spelled out in the application and amounted to just a few thousand dollars.)  We puzzled over this because it seemed obvious to us that we had already documented all of our assets, including those that were liquid. But bankers apparently see the world differently than the rest of us....

In our view the documents we provided with the initial application established the following facts that would seem to be relevant to whether we would be able to show up at the closing with enough cash:

• Our financial records clearly indicated liquid assets five times greater than the value of the loan itself  and dozens of times greater than the estimated closing costs.
• We had been through this process twice before with BOH and both times we successfully paid the closing costs.
• For six+ years we'd faithfully made mortgage payments to BOH showing, one would think, that we have enough liquid assets to meet our financial obligations.
• The appraised value of our house is twice the value of the loan we were asking for, clearly indicating we were not in over our heads.
• We have no other debts of any kind -- no other obligations competing for our liquid assets.
• We both have credit scores over 800 -- only obtainable if financial obligations are fully met over a long period of time.

So what did we do?  We printed a screen shot of our Vanguard accounts showing the up-to-the-minute balances and wrote a letter suggesting that this "proved" we had enough money to cover the closing costs. This seemed to mollify the bank and we oozed closer to a closing date.

However, about a week from D-Day we got a message demanding the latest statement of some accounts Karen has with DWS, a mutual fund company.  We had furnished a summary with the initial (now accepted) application, but apparently someone decided that wasn't enough and now they wanted a recent detailed, transaction by transaction statement.  I quickly complied and just for good measure I also sent the latest monthly Vanguard Statement showing transactions for all the rest of our mutual funds, and I even threw in a copy of our 2011 Federal Tax Return that I had just filed.  Again, the bank bean-counters seemed mollified and we continued oozing.

Until four days later.  "Please furnish the most recent monthly statement for your......[wait for it]......Vanguard Accounts"  (!!!!!!)  Yes, the very same information I had given them four days earlier!

I drew their attention to the fact I had just given them this statement (with great restraint, I might add) and we moved forward.  I never received an apology, an explanation or even an acknowledgment that they might have made a mistake.  But it's clear they weren't really looking at the information we were providing to them.

It's over, and I'm very glad to have it behind us.  But I have to think that if this is how we were treated -- someone with excellent credit and a solid financial status -- then people with even slightly less fortunate circumstances must suffer tremendous insults during this process. 
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Other Blogs in the Bankers' Math Series:
Bankers' Math -- Part Six
Bankers' Math -- Part Cinq
Bankers' Math -- Part Quatre
Bankers' Math -- Part Trois
Bankers' Math -- Part Deux
Bankers' Math -- 29=31=$

Flying the (Un)Friendly Skies

One of the worst things about traveling is...traveling.  Specifically, air travel. This once-glamorous mode of transportation has now become a stressful, hassle-laden, uncomfortable, and often degrading experience.  My wife and I visit other other places for fun and enrichment, which usually makes up for some of the negatives of getting to our destination.  We have great sympathy for business travelers who endure flying for their jobs and don't have this compensation.

My wife and I fly quite a lot, often to places that are far from home (see my blogs on Bhutan and on the Middle East).  We can't afford Business Class or First Class, so these journeys are in "steerage" unless by some increasingly rare miracle we get a free upgrade. It isn't unusual for the total flying time on these trips to be 15-20 hours, usually but not always broken into two or more segments of 5-10 hours each.  Once we suffer through the cattle-pen atmosphere of checking in, the indignities of going through security, the elbow-fest of getting our share of overhead bin space, and finally shoe-horning ourselves into our seats, the rest of the trip is primarily a matter trying to cope with excruciating boredom and physical discomfort.

At this point I should acknowledge that we have it incredibly easy compared to the days before air travel, and we forget that commercial aviation is a very recent technological marvel.  Someone from the late 1800's would find our complaints trivial in light of the wondrous feat of traveling half-way around the world in a day or two.

But human nature leads us to use a more restrictive basis of comparison, namely how things have changed in the recent past.  Geopolitical events, like 9/11, have led to tightening of airport security. Financial pressures on airlines have led to a host of cost-cutting measures, including reducing the number of flights, cramming more seats in each aircraft, charging for luggage, meals, and on some airlines even for the privilege of reserving a specific seat in advance.  In short, it seems like the situation is getting worse and worse.

The latest round of decline for us involves the recent merger of United Airlines and Continental Airlines.  For years we have been members of United's frequent flyer program primarily because United has offered the best mainland and international connections.  Of course, actually cashing in our award miles has always been a little difficult because we live in Hawai'i -- a popular destination for people to use their miles to visit, making competition for available award seats fierce.  Still, we've managed to take advantage of the program often enough that it has balanced some of the negatives of air travel.

One of the best features of United's program was that if your paid travel in a year totaled 25,000 miles or more you were rewarded with some extra perks (please note -- these must be miles flown, not earned in other ways, like with a credit card):  You could reserve seats in economy with more leg room, check two bags free, and board the plane earlier (thus avoiding some of the slug-fest for overhead storage).  On our marathon journeys these things have made a big difference, particularly having more comfortable seats, and have kept us loyal to United's program.  And given the amount of money required for us to achieve 25,000 miles in a year, these perks seemed a fitting gesture of appreciation from United for our business.

The merger has changed all that -- for the worse, naturally.

A few weeks ago we received notice from United about the new "wonderful" and "exciting" features of the merger, including the merged frequent flyer programs.  Cutting through all the breathless corporate hype revealed new policies that represent a dramatic downgrade of benefits for customers like us at the 25,000 mile level.  The most irksome change is that now reserving seats with more leg room requires 50,000 miles in a year -- double the earlier number and certainly out of reach of the ordinary traveler.  Even many business travelers might have trouble meeting that requirement.  You can, however, pay extra for those seats -- an additional $150-250 per person for trips of the length we usually take.  There is one shred of this perk left -- 24 hours before the flight we can vie for the unsold premium seats with all the other 25k-milers.  Of course, this means that we may not find seats together, or that the available seats will be in those wonderful "middle of the middle" locations.  Spending 15-20 hours in one of those seats is decidedly unappealing, something you might wish only on the CEO who masterminded this new policy.

For us these changes no longer give United an edge compared to other airline frequent flyer programs. The new policies convey that our loyalty and considerable level of spending don't count for as much as they did.  So be it, and we wish United a profitable future. Their profit probably won't be coming as much from us, however, because we will be much more likely to consider alternative carriers.

Bankers' Math -- 0+0=5

Banks are scrambling to find new ways to charge for their services now that new regulations restrict some of their more lucrative practices, like automatically signing up people for high cost overdraft protection for debit cards, or charging merchants $.40 per debit card transaction.  I've already written about higher ATM fees, which have risen in some cases to $4 or $5.  Other increases include charges for returned items like checks or bounced electronic payments -- charges which are in principle justified, but not at the levels now being levied (for example, $30 for a declined ACH electronic transfer which requires little human intervention).   And one of my favorites is a $1 to $2 fee just to find out your balance via an ATM.

The fee hikes and increasing number of fees are bad enough, but banks are apparently reluctant to reveal publicly what their fees are so that consumers can make comparisons.  According to a research study presented in Consumer Reports, when 400 banks across the country were contacted "...fewer than half of the bank branches complied easily with a request for fee schedules. Under the Truth in Savings Act, banks are required to provide this information. However, only after two or more requests did 55 percent of branches provide fee schedules."

Of  course, providing information in a clear and informative way may have negative results for the banks.  For example, a recent study also by Consumer Reports found that only 22 percent of bank customers have opted-in for debit card overdraft protection now that new Federal regulations require banks to get permission before signing them up.

My own local bank, First Hawaiian, has recently shown that the Aloha Spirit is fine as long as it doesn't interfere with profits.

In the envelope with my monthly statement the other day was a little slip of paper detailing changes in account fees.  There were the usual hikes like those mentioned above plus a couple of particularly puzzling ones.  The first was an "Inactive Account Fee" of $10 for each month the account is considered inactive.  Does it really cost the bank $10 per month to keep an account in its electronic database when there are no transactions into or out of it?   Damn, the price of electrons must be skyrocketing!

Another one is a particularly good example of Bankers' Math.  First Hawaiian doesn't charge a fee for receiving a paper statement each month (yet).  If you elect to go Green and have only electronic statements sent to you that also is free.  However, if you choose to have both a paper and an electronic statement the fee is $5 per month, despite the fact that the electronic image used to print and mail a paper statement is likely the same one available for viewing online.

In other words, according to Bankers' Math, 0 + 0 = 5.


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Related Blogs:

Bankers' Math -- Parts Un, Deux, Trois, Quatre, Cinq

Punishing the Victims II -- The High Price of Being Poor

I yearn for the good old days when I didn't get a headache trying to follow the arguments of our political leaders and when I had the feeling that even though they disagreed they were willing to compromise to keep the government running.

Before the recent budget deadlock that nearly brought the country to a standstill, I voiced my disagreement with the Republican/Tea Party strategy for balancing the books because it seemed to put more of the burden on those least able to afford it, Americans of modest means who have suffered most from a recession caused by the investment decisions of Wall Street bankers.

As a central feature of their strategy, the Republicans/Tea Partiers (RTP) adamantly refused to increase revenue by allowing the Bush-era tax breaks for corporations and the wealthy to expire, and even proposed lowering their tax rates while simultaneously cutting spending for social programs that benefit ordinary people. Another idea was to reduce the amount companies have to pay workers, the logic being that this will stimulate growth by increasing profits. For example, one RTP proposal was to repeal an act that requires companies receiving federal contacts to pay workers at least at the level of prevailing local salaries and benefits.  In short, the conservative economic strategy is to increase the income of corporations and the wealthy but cut the income and benefits of middle and lower class workers.

And now the latest development, which is perhaps the most difficult for me to follow, is that the RTP may push for allowing the temporary payroll tax break enacted as part of the Tax Relief Act of 2010 to expire next year, according to a recent AP report.   Payroll taxes are levied only on payroll income, not income derived from capital gains, dividends, or other investment sources, and only on salaries up to $106,000.  In other words, these taxes apply primarily to people in the middle and lower income brackets. Allowing the tax reduction to expire would increase revenue and help balance the budget, but it is exactly the kind of revenue increase the RTP fought so fiercely against during the debt deadlock when the expiration was for temporary income tax breaks for the wealthy.

The Regressive logic of this seeming contradiction is expressed by Texas Republican Representative Jeb Hensarling's comment, "...not all tax relief is created equal for the purposes of helping to get the economy moving again."  That is, tax cuts for corporations and the wealthy are good because they may lead to investment and expansion, but tax cuts for workers aren't so good because they only allow families to buy groceries and pay their mortgage.  Bottom line: to get the economy moving again, lower taxes on corporations and the wealthy and raise them on middle and low income workers.

The latest wrinkle in this drama is in President Obama's just-announced Jobs Package, in which he proposes temporarily continuing and increasing the reduction in Payroll Tax for workers (which the RTP should be against) and also reducing the employer contribution as well (which the RTP should support).  The upcoming gymnastics of Regressive logic will be "interesting" to watch.

Time to buy more aspirin......

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Related Blogs:
Punishing the Victims (Part Un)
Misperceiving Wealth in America

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.

Terminate Me, Please!

**Warning: The following blog may cause hypertension, nausea, and/or strong feelings of indignation. If symptoms persist longer than four hours, too bad.**

Times are tough. As we all know, our economic downturn has led many middle-class Americans to lose their jobs, their retirement savings, and even their homes. Many more are hanging on by a financial thread, their income lowered from forced furloughs and pay cuts.

And don't think that this misery is confined to the middle class. Nosiree! According to a recent report by Forbes financial magazine regarding 2009 CEO salaries:

For the third consecutive year, the chief executives of the 500 biggest companies in the U.S. (as measured by a composite ranking of sales, profits, assets and market value) took a reduction in total compensation. The latest collective pay cut, 30%, was the biggest of the past three years (11% and 15% declines in the prior two years). This marks the first time in the past 20 years that total compensation declined in three consecutive years.

So there you go.  These guys are suffering, just like the rest of us.

Or maybe not.  According to the same Forbes report, "In total, these 500 executives earned $4 billion in 2009, which averages out to $8 million apiece."  (You can see the complete list here.  About 1/3 of the average compensation was in the form of exercised stock options.) Though certainly a cut from the average $14 million a few years back,  these CEO's are not exactly in the same dire straits that many of their workers find themselves in.  A study by UCSC professor G. William Domhoff cites some recent data that breaks this down more finely: 

...the median compensation for CEO's in all industries as of early 2010 is $3.9 million; it's $10.6 million for the companies listed in Standard and Poor's 500, and $19.8 million for the companies listed in the Dow-Jones Industrial Average. Since the median worker's pay is about $36,000, then you can quickly calculate that CEOs in general make 100 times as much as the workers, that CEO's of S&P 500 firms make almost 300 times as much, and that CEOs at the Dow-Jones companies make 550 times as much.

Thirty years ago top CEO's salaries were 30 times the average worker's.  In 1992 that ratio had risen to 82 times the average worker's salary,  and in 2004 it was 400 times .  Even with the recent economic downturn, top CEO compensation is still 344 times the average worker's salary.

Oh, and although the CEO's have suffered reductions in their direct compensation, during the latest period their retirement benefits (deferred compensation) have actual gone up 23%.  Well, that's some solace for them, at least.

It is often argued by those who defend this kind of disparity that CEO compensation is justified by the performance of CEO's in enhancing the profits of their companies, and that their pay is linked to how well the company is doing relative to its peers.  Unfortunately that argument doesn't hold water.  Data presented in the UCSC paper mentioned above shows that over the past 15 years the increase in CEO compensation is nearly independent of corporate profits, but instead is closely correlated with the stock market as measured by the S&P 500 Index.  (The average production worker's pay, which has increased only about 4-5% in the same period, isn't related to either corporate profits or the performance of the stock market.)

A number of other analyses reach the same conclusion regarding the lack of connection between executive pay and performance.  A 2010 Business Week article describes the work of  compensation consultant Graef Crystal, who examined last year's pay of 271 chief executive officers. His conclusion was that  "companies don't pay for performance."  According to the article, no matter how he parsed the numbers, Crystal discovered no relationship between shareholder returns and CEO compensation.  Another example is an analysis by business columnist Jeffrey Pfeffer, who has himself has served on executive compensation committees.  Pfeffer reports two key findings from his research:

First, the relationship between pay and performance is astonishingly small. One meta-analysis found that firm performance accounted for less than 5% of the variation in CEO pay, while company size explained about 40% of the variation. Second, there is no evidence that attempts at reform, such as more disclosure or ensuring that the compensation committees of publicly traded companies are comprised solely of independent directors, has had any effect... The problem: nothing in the process of setting CEO compensation produces a pay-performance link.

As disturbing as all this is, there is more to ponder.  As we know, many people have lost their jobs as a result of the downturn.  The average worker can expect a period of unemployment benefits that are barely enough to live on, and thanks to some recent government interventions, a continuation for a while of health benefits (COBRA) at reduced premiums.  Though helpful, this assistance hardly represents a windfall.

For the CEO's we've been talking about, however, termination is often quite lucrative.  One specific case in the news most recently is Mark Hurd, the CEO of HP who "stepped down" after a company investigation of sexual harassment charges against him.  The harassment allegations were not substantiated, but the company found he had falsified expense account records on numerous occasions to cover up his relationship with the woman involved, who was an independent contractor working with HP.  As Hurd admitted when he resigned, "I realized there were instances in which I did not live up to the standards and principles of trust, respect and integrity that I have espoused at HP."  He will lose his $24 million a year compensation package, of course.  But it may be hard for the average person to feel too sorry for him.  Hurd's termination agreement totals about $40 million --12.2 million in cash and the rest in HP stock.  Oh yes, and he'll get the government health benefits, for which HP will pay the premiums.

Although Hurd's termination package is considerably higher than the $5.8 million average for CEO's, it isn't nearly as large as some other high-profile cases.  As the Kellogg School of Management reported in 2007, Robert Nardelli, the former CEO of Home Depot, received $210 million, Disney’s Michael Ovitz received $140 million (after a mere 14 months on the job),  and Conseco’s Stephen Hilbert received $72 million.  Hurd did, however, do better than his predecessor at Hewlett-Packard,  Carly Fiorina, who received only $21 million when she was terminated.

According to the Kellog report,  three reasons why firms grant such lucrative severance packages to CEOs within their initial employment contracts are:  (1) to encourage risk-taking, (2) to provide insurance for an incoming executive, and (3) to compensate CEOs for entering into confidentiality agreements. The argument regarding risk taking is that since CEO compensation is 30-50% stock options, a CEO would hesitate to do anything that might drive down the stock price without a guaranteed cash severance package.  The insurance angle goes like this:  CEO's need to be protected against company downturns not under their control, which of course would lower the stock portion of their annual compensation.  The confidentiality compensation argument is that the terminated CEO may be hampered in future jobs because he or she can't use the specific information about a previous company in their new positions -- the severance package compensates for a possible lower salary due to such restrictions.

These arguments seem to me to imply a rather negative view of the average CEO.  That is, that CEO's are so attached to their salaries they will only work for companies who remove the negative consequences of risk (both risk resulting from their own actions and from factors not under their control), and who promise to compensate them in advance for possible future jobs where their proprietary knowledge might be relevant.  But then BP's Tony Hayward comes to mind, who certainly fulfilled the company's wish for risky behavior.  Hayward's severance package is estimated to be around $18 million.

We seem to have created a corporate world where performance and compensation are unrelated at the highest levels of management, and where those at the highest levels reap the rewards of risk and proprietary knowledge but do not suffer the potential downsides.

I've said before that I believe in meritocracy and that someone with a special, unique talent or skill or knowledge that is beneficial to society can be rewarded extravagantly and I don’t mind.  But this is something else, and it is something that isn't healthy for either our economic system or for the fabric of our society.

Bankers' Math -- Part Quatre

We've all heard about the financial industry profits being way up lately, even as banks are stingy about loaning money and as their CEO's are making big bonuses. Here's another example of why they have certainly lost my respect.

My wife and I travel quite a bit outside of the U.S. We've found that one of the most economical ways to get foreign currency is by using an ATM card in a local machine. Withdrawals and balance inquiries used to be free, in the good old days. Over the years, though, banks have found it lucrative to charge if you use an ATM not in their network. These transactions are electronic and probably cost the bank almost nothing, yet the going fee is $2.50 for a withdrawal, possibly levied by both your bank and the one that owns the ATM. In the case of a foreign transactions, most banks, including ours, tacks on an additional 1% currency conversion fee. Even with these fees, however, it is still generally cheaper than paying 3% per transaction with a credit card, which is the going rate for most card companies (most, but not all -- see below).

Well, the CEO of our bank (First Hawaiian) must be bucking for a bigger bonus, because we received a notice recently that the fee for each ATM transaction in a foreign country will now be $5 -- double the old fee!! Five dollars to have the bank give me back some of MY money?! So, if we go to an ATM say, in France and withdraw $100 in Euros, it will cost us at least $5 + $1, or 6%, and possibly as much as 7.5% if the foreign bank levies a $2.50 fee, or 11% if they raise their own ATM fee to $5. Ridiculous!

Our way around this is to obtain a free debit/ATM card offered by Vanguard, with whom we have a retirement money market account. Because we have a lot of our retirement funds invested in Vanguard, there are no transaction fees at all, though for foreign withdrawals they will still levy the %1 conversion fee. We also recently obtained a Capital One credit card, which doesn't add the 3% foreign transaction fee most other cards do, at least not yet.

So for now we've found away around banker greed. But I'm sure those CEO's are thinking of more ways to get us. After all, it's how they earn those big bonuses!

Who IS S. Larson?

My wife and I just canceled our CitiCard credit card. We did this because CitiCard very badly mishandled a dispute over a hotel charge. The whole saga of the dispute, however, is not the subject of this blog (though maybe I'll write about it later).

Instead, the focus is on the CitiCard mystery person who corresponded with us during the dispute process and whom I'd like to blame for screwing things up -- except that I suspect the person doesn't really exist.

As the dispute progressed we received several letters from "S. Larson" at CitiCard. Despite attempts to make the letters seem like they were personally addressed to us, their disjointed obliqueness and lack of specifics unique to our case made us begin to suspect they were composed of chunks of boilerplate. I began to envision S. Larson as some overworked lackey in a CitiCard bullpen cutting and pasting letters to us from a standardized set of approved responses.

We also noticed that the signatures on the letters were always exactly the same. And since they didn't smudge, we decided S. Larson was using a graphic signature file rather than taking the time to actually sign the letters.

At one point in the dispute I became frustrated with the lack of progress and called one of the merchants involved myself. The person I spoke with informed me that a CitiCard representative named Debbie had been in contact with him, not "S. Larson." At this point I began to suspect that S. Larson was a cover name to shield CitiCard's customer service workers from being contacted directly. This might explain why the name is genderless, making it very difficult to even address a letter to S. in personal terms.

For the heck of it I Googled the name S. Larson. Go ahead, I'll wait while you try it yourself. It turns out S. Larson is quite the continuing hot topic and nearly all of it very negative. One of the Google hits I found particularly interesting was the long-term discussion going on for several years regarding the existence of S. Larson on Daggle, the Blog of Danny Sullivan, who has had a CitiCard for about 20 years.

He's been getting letters from S. Larson the entire time, always signed the same way, and always impersonal. Beginning to suspect S. wasn't real, Sullivan went to great lengths to investigate, and his sleuthing efforts are documented in the blog -- really fun reading. Bottom line to his probing is that even if S. Larson does exist, it is quite likely that he or she is NOT the author of each letter and instead underlings send them out with the signature file attached. Most of the posts responding to Sullivan's blog give similar stories and similar frustrations in attempting to communicate with CitiCard. A couple of posts are from people who say they were employees of CitiCard and knew S. Larson (referred to as Sue, Sandy or Sandi, depending on the post) personally. However, aside from identifying her as female, not much information is given that might put this to rest.

The idea of signing all letters regarding customer relations issues with a genderless, computerized signature (even if the signer exists) is just plain bad business practice. And if the signer does not exist at all, or actually doesn't have any personal involvement in the issues addressed in the letter, this is deceptive and insulting to customers. But I guess we've now come not to expect much more than this from the financial industry.

I wonder if S. Larson got his/her bailout bonus this year?

Banker's Math: Part Trois

I’ve written about this twice before in blogs about refinancing our mortgage and about bank charges for free services. A recent incident with my credit card (none other than Citibank) prompts yet another rant now.

My wife and I recently traveled to Australia. Some of the hotel arrangements were prepaid through Travelocity (prepaying is often cheaper, so it can be a good deal if you’re sure your plans won’t change). In going over my credit card statement after we returned, however, I noticed that one of the hotels charged us for the room even though it was prepaid. They must have caught their error, however, because a couple of weeks later the charge was reversed. No problem, right?

Wrong.

The erroneous charge was made in Australian dollars. Citibank graciously converted this to U.S. dollars — for a 3% “foreign transaction fee.” The 3% was calculated on the U.S. dollar amount. This is irritating enough, but it gets much worse. During the several weeks after the erroneous charge the Australian dollar became stronger against the U.S. dollar so that when the hotel reversed the charge for the same # of Australian dollars, the refund in U.S. currency was less than the original amount. Let me emphasize this – the reversed charge after conversion was less than the original charge, and we are out the difference. In other words, WE paid for the HOTEL’S mistake. Now for the kicker – Citibank refunded the foreign transaction fee, but recalculated it on the new U.S. dollar amount. Got it? Citibank PROFITED from the hotel’s mistake and we got screwed twice!

To be fair, I guess this whole thing might have worked to our advantage if the U.S. dollar had gotten stronger during the interim between the erroneous charge and the refund. But I just bet that buried somewhere in the fine print of the 30+ page contract with Citibank there is a clause that says if the exchange goes in the client’s favor then the excess will be nullified. The real point, though, is that the refunds for both the hotel’s error and Citibank’s conversion fee should be the same in U.S. dollars as the amount initially charged, regardless of whether the exchange rate goes up or down.

Anything else is Banker’s Math.

Banker's Math: Part Deux

In an earlier blog I described the delightful process of refinancing our mortgage. A few days ago we received an offer from our bank that prompts me to offer a follow up.

The offer was for us to pay the mortgage every two weeks instead of the usual once per month, with each payment being ½ the usual monthly amount. Why, you ask would this be to our benefit? The enticement was that over the course of a year this would amount to 26 payments, the equivalent of 13 monthly payments. That extra payment over the course of the loan would save a considerable amount in interest and result in paying off the loan more quickly.

Now for the fine print. For helping us save all this money, the bank would assess a service charge for each payment, and a one-time start up fee of $299. Cha-ching! Plus, of course, the bank receives more money sooner, which allows it to invest, loan out, pay executive bonuses, etc., etc. Keep in mind, the terms of our mortgage allow additional principal payments at any time for free – if you pay them an additional amount each month it will accomplish the same thing without incurring any charges at all.

The bank’s offer is now confetti at the bottom of my shredder.

New Meaning to “The Economy is in the Dumper”

I’ve written in a couple of previous blogs that one of the revelations of the current economic meltdown is that we have created an economy that depends on ever greater spending and borrowing by consumers. Specifically, if we don’t buy more and more goods – and borrow the money to do so – the system collapses. A recent Associated Press report by James Hannah shows that we must also throw away the stuff we buy.

It seems that an unexpected negative (yes, negative) consequence of the downturn is that people are throwing away less trash, with dire economic consequences: “With consumers cutting back on new purchases, there is less packaging to throw away. The downturn in new housing means less waste from construction materials such as insulation and from discarded drywall and lumber. Restaurant waste is down because people are eating out less...Landfills in Ohio received 15 percent less waste from August to January than they did for the same period a year earlier. The waste stream at Miramar Landfill near San Diego has dropped 35 percent over the past year. Waste at Puente Hills Landfill near Los Angeles is down from 12,500 tons of trash a day to about 8,500.”

Although this might be a good thing for the environment it turns out that in our waste-based economy it’s downright tragic: “To deal with the drop-off in dropoffs, landfills are laying off workers, reducing hours of operation and hiking disposal fees, with the increases passed along to cities, businesses and consumers...About 82 temporary workers have been laid off at Puente Hills and its two sister landfills, shrinking the work force to about 280 and forcing permanent employees to take over traffic control, windy-day litter pickup and landscaping. Several landfills operated by Waste Management Inc. - which runs about 270 active landfills in 47 states - have gone from operating six days a week to five or have reduced hours of operation, said spokeswoman Lisa Kardell.”

Clearly, this may mean we will need a government bailout of the trash industry. “Waste Management's fourth-quarter profit slid 29 percent on declines in its recycling business and one-time charges. But in its earnings report, the Houston-based company also mentioned declines in the collection of industrial waste.” Companies such as Waste Management are bravely coping with this problem in a good old capitalistic way – raise prices. As Hannah explains, “Landfill operators rely on disposal fees to fund operations. If the amount of waste decreases, operators have to cut costs, dip into reserve funds or increase the fees, which are passed along to consumers. In the Columbus suburb of Grove City, the Solid Waste Authority of Central Ohio landfill- with 10 percent less waste - has raised disposal fees by $2 a ton to $35.50 and dipped into its reserve fund. The landfill also is considering accepting trash from out of the district.”

There you have it. We have economy based on consuming, borrowing, and disposing. Can this really be sustainable?

Domains of Pirates: High Seas, Cyberspace, and Boardrooms

I think there is a connection between three recent world developments – the activities of Somali Pirates (particularly the hijacking of the American freighter Maersk Alabama and the rescue of its Captain by the U.S. Navy), the spread of the sophisticated Internet Worm Conficker, and the subprime lending practices of financial institutions that led to economic chaos (and to the invention of the catchy term, “toxic asset”).

These developments aren’t directly related, of course. To my knowledge the Somali Pirates aren’t hackers, and although bank executives may have boats, they’re more likely to be found sailing near cushy resorts than on the high seas. Still, all three share some common qualities that are fun to ponder.

First, all three are motivated by greed. The Somali Pirates are collecting millions of dollars by holding ships and crews for ransom. The authors of Conficker seem to be positioning themselves to sell certain services, like computer system sabotage and spamming, to the highest bidder. Financiers at companies like AIG, Citicorp and Goldman-Sachs collect huge salaries and bonuses for enticing people with questionable creditworthiness to take out loans.

Second, all three have arisen from environments that lack normal restraints against unethical behavior. Somalia is essentially a country without a government, where the rule of law is in the hands of local warlords. The internet by design lacks centralized control and makes detection and enforcement very difficult. The de-regulation of financial markets is blamed by many analysts to be a major cause of today’s economic melt-down by allowing questionable activities to go unchecked.

Third, all three require victims that are vulnerable because of ignorance, impotence, self-interest, or some combination of these. Somali Pirates have been successful because the ships they have preyed upon are undefended and therefore impotent to withstand even a small force of attackers. The spread of the Conficker worm was possible only because computer users lack the knowledge and motivation to update their computer systems, and infected machines at first show no visible signs of being host to the Conficker program. Homebuyers with less than adequate means were ignorant of the long-term consequences of over-extending themselves, and were eager to take advantage of high-risk loans promoted by lenders.

Finally, all three of these developments contribute to the general feeling that things are out of control and that our old beliefs just don’t seem to apply any more. It is very uncomfortable to face the possibility that an economy based on “the American Dream” may not be sustainable, or that unethical behavior can’t be punished without hurting even further the victims of that behavior, or that lawlessness can’t be stopped. This is a feeling that makes people very vulnerable to political and religious leaders who offer simple fixes. Simple fixes can’t really work in this complicated environment, but believing that they will solve our problems will certainly make us feel better. On the other hand, if the current crises can somehow lead to a more realistic assessment of the true nature of our economy and its impact on society as whole, then perhaps all this will have been worth it.

Banker’s Math: 29=31=$

My wife and I refinanced our mortgage a few weeks ago. We were fortunate to be among the few who qualify these days, given that the banks have now decided to be more responsible in their lending practices. To their credit, they scrutinized us oh-so-carefully, despite the fact that our loan to value ratio was less than 50%, we have no other debts, we have credit scores over 800, and we have a record of over 35 years of never missing or being late with a payment on anything, including mortgages.

For those of you who haven’t been through this process, be prepared to see just how it is that banks and others involved in the loan business make money for doing essentially nothing, and how everything is set up to favor the lender, not the borrower. For example, even though the new loan is with the same bank as the original loan we took out five years ago, we had to pay for them to do another title search and issue a new title insurance policy (note, there had been no change of ownership to the house and they knew it). Then we have all the fees – a fee to close the old loan, a fee to prepare the documents, a fee to record the documents, a fee to check our credit scores, a fee to calculate the fees, etc., etc.

The coupe de grace came when we received the figure needed to pay off the old loan. The day of reckoning, when the old loan was paid and the new one began, was March 2nd. Our last payment on the old loan had been for interest to February 1st. Since 29 days had gone by (28 in February, plus 1 in March) I expected to pay 29 days’ worth of interest. Wrong. According to bankers’ math, a standard month (30 days) had gone by, plus one more day for a total of 31 Bankers’ days of interest required for the payoff. Seriously – to our bank, February has 30 days, not 28, and we had to pay for those 2 extra days as well as the 29 that had actually gone by. I called the bank about this and of course got nowhere. Banker’s math trumps the borrower’s math every time. Cha ching!