Foreign exchange has long been a confusing process for the consumer and a lucrative business for most bureaux de change, banks and building societies. The European Commission investigation into alleged overcharging for exchange between euro currencies is doing little to allay fear among consumers that the advent of the euro means more money for financial institutions.
Before January 1st this year, Irish consumers buying foreign currency banknotes paid a foreign exchange fee and a margin, or spread. A spread is the difference between the buying and selling rates offered and involves a charge which was not obvious to consumers. The total cost for foreign exchange depended largely on the institution and the amount of funds being converted.
After the euro introduction date, the conversion rate was fixed between all 11 countries participating in the euro. As a result, no foreign exchange margin now arises from the transactions in these currencies. Therefore, consumers should only pay a commission charge.
Prior to the changeover, Irish financial institutions told the Director for Consumer Affairs, Ms Carmel Foley, that commission alone at its present level would not cover the cost of providing foreign exchange services. The banks claimed that the old spread charges included staff payment and costs associated with transporting, storing and sourcing currency. In other words, when the spread charge was eliminated, the commission had to be increased to cover items which used to be included in the spread.
Ms Foley said the banks commercially justified their charges and she approved the new charges under the Consumer Credit Act.
However, Ms Foley told foreign exchange providers that they must publish current and proposed charges for the most common foreign exchange transactions in mid-December and the beginning of January last. The director believed charges would fall significantly in the following months as publishing charges would result in "new competition and means consumers can finally compare the institutions' rates." The accompanying table shows this did not occur.
In fact, the advertisements revealed that the financial institutions have actually increased their commission charges to compensate for the loss of earnings from the elimination of the foreign exchange margin. For example, before January, Bank of Ireland charged a commission of £1 and a foreign exchange margin of £2.50 (total charge £3.50) when exchanging £100. It now charges £2.25 commission when changing £100. Some financial institutions have set minimum and maximum commission rates, meaning larger transactions cost less. For example, National Irish Bank charges a minimum of £2 and a maximum of £40 for a euro currency exchange. Irish Permanent charges 3 per cent or 2.25 per cent plus £2, whichever is the lesser. The lower rate comes into play for euro exchange transactions over £267.
Irish institutions are not the worst offenders, and institutions in Italy, France and Germany are charging higher transaction fees.
The Consumers' Association of Ireland's (CAI) Mr Eddie Hobbs says if the banks under inspection by the European Commission were targeted, rather than chosen randomly, the Director of Consumer Affairs may want to revisit her earlier decision on banks' euro exchange charges.
He believes the idea of charging fees for a single currency is ridiculous. "Banks don't have to go buy and sell foreign currencies on the market for their customers any more. If, for example, every county in Ireland had a differently denominated Irish punt, why should the bank charge customers for changing from Cork Irish punts to Tipperary Irish punts."
Mr Hobbs suggests that euro exchange should be seen as part of the overhead transaction charges of a bank and not charged to the customer.
