There is always a brief moment of panic when you are standing at a shop counter abroad and the shop assistant asks if you want to pay in dirhams or the local currency. The answer - so memorise this - is always to opt for the local currency.
This is because when you choose to pay in dirhams (your ‘home’ currency’) at a cash machine, shop or restaurant abroad, you are also paying an invisible fee, which can add anything from 3 to more than 12 per cent to your bill.
This is known as dynamic currency conversion, meaning you have opted to allow the foreign merchant to set the exchange rate, rather than your own bank.
It may look simpler because you can see instantly, in dirhams, how much the transaction will cost. But you will not know until you receive your bank statement - when it is too late – the cost of converting your money.
The advantage of paying in dirhams, “ostensibly”, says Jon Richards, the chief financial officer of the UAE financial comparison site Yallacompare, is to avoid paying your bank’s foreign exchange fees, which come in at between 1 and 4 per cent on your purchase.
But you are replacing this with an “unknown” rate set by the merchant or receiving bank, he says: “You may end up paying more than if you’d just paid in dirhams and accepted the foreign exchange fees from your card issuer.”
At Emirates NBD, Dubai’s biggest lender by assets, customers pay 1.84 per cent as a foreign currency conversion fee to make a non-dirham (or local) payment on a dirham-billed card, says Suvo Sarkar, the senior executive vice president and head of retail banking and wealth management at the bank. That is on top on top of a standard processing fee (charged by MasterCard or Visa) of around 1.15 per cent.
To pay in dirhams for a non-dirham purchase, the foreign currency conversion fee is a slightly lower 1.15 per cent … but then, he says, you will also pay processing fees of up to seven per cent, as charged by the merchant.
“Foreign currency conversion fees will be charged for non-dirham billed transactions, whether you pay in dirhams or non-dirham currency,” Mr Sarkar points out. “It is therefore advisable to pay in the currency of the country you are transacting in to avoid high charges.”
Bluntly put, choosing your “familiar” UAE home currency is a “costly mistake”, says Ambareen Musa, founder and chief executive of financial comparison site Souqalmal.com. “Essentially, the convenience of being billed in dirhams is not worth bearing the unfavourable exchange rates involved in this on-the-spot currency conversion,” she adds.
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The European Consumer Organisation has been vocal in calling this practice “The Great Currency Conversion Scam”.
“All bodies dealing with consumer issues are unanimous - consumers should never accept dynamic currency conversion,” it writes in a November 2017 paper calling for an EU-level ban.
The watchdog cites a study by a Norwegian bank of 1,500 transactions by Norwegian customers in 2016; there were only four occasions when the cash withdrawal was cheaper when charged in Norwegian krone than where the withdrawal took place in the local currency. Converting was, on average, 7.6 per cent more expensive when dynamic currency conversion was applied, and the largest mark-up was a massive 12.4 per cent.
The European Commission is currently debating new rules on dynamic currency conversion fees. If successful, a customer will have to be shown the different rates being charged to decide whether to pay in their home or local currency. If made law, potentially in January, firms will have three years to comply, during which time a temporary cap may be applied on the use of dynamic currency conversions.
Complicated language is often used by banks at cashpoints too, such as the option to “continue with or without conversion”, or offering the option of ‘yes’ for dirhams and ‘no’ for euros, leading customers to think ‘no’ is the wrong answer.
There are “numerous examples” of consumers being directed towards a more costly currency conversion option, the European Commission says in its consultation document.
Meanwhile in the United Kingdom, the country's Cards Association advises that if dynamic currency conversion is used without a customer's permission, they should remind the retailer they did not want to pay in their home currency and ask for the receipt to be voided.
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Rasheda Khatun Khan, a UAE wealth and wellness planner, says if you travel somewhere regularly then it makes sense to transfer at a good exchange rate and keep a “cash pool” in that country too. “Dollars, sterling, dirhams - I have accounts in those currencies and use that first,” she says. “That way there are no ATM charges or currency conversion rates to pay. You’re not playing the currency market; you’re making it available for when you need it.”
Another option, says EmiratesNBD’s Suvo Sarkar, is to use a pre-paid currency card. The bank’s GlobalCash card, for example, allows customers to load up to 15 currencies popular amongst UAE residents: US, Australian and Canadian dollars; pounds sterling; euros; Indian, Pakistani and Sri Lankan rupees; Philippine pesos; Saudi riyals; Turkish lira; Swiss francs; Thai baht; South African rand and the UAE dirham. Most banks and currency exchanges offer similar pre-paid options for travellers.
Locking in an exchange rate “at the time of transfer instead of at the moment of spending", makes currency cards a “smart way” to manage foreign currency requirements, he says, as well as minimising the need to convert or carry cash.