Currencies in some of the world’s most popular travel destinations have slid in value relative to the dollar in the last several months. This is due to a combination of factors that include geopolitical events, differences in economic policy and the dollar’s attractiveness to investors.
For travel businesses that serve global travelers, navigating the currency markets has always posed complexity. But oversimplification of currency exchange can create unrealistic expectations on the part of travelers about the true cost of cross-border travel payments, because parity isn’t really equal.
Let’s take the euro for instance, which hit parity with the dollar mid-September. For months, the euros’ weakening relative to the dollar has created buzz that it is an excellent time for U.S. travelers to explore countries in the eurozone. On its face, that statement is mostly true. Once a U.S. traveler obtains actual euros from their bank, the act of paying in euros for an exquisite European meal, a once-in-a-lifetime tour, or even a snow globe from a souvenir store will be, for all intents and purposes, a good deal as compared to when the euro was 1.5x the dollar’s value 10+ years ago. But when we consider the way people actually book and pay for trips, it’s much more nuanced.
At a high level, there are two reasons for this. The first involves remembering that the “Google” FX rate isn’t the same as the rate at which a consumer actually obtains cash. The rate we often see online or in the newspaper is the so-called mid-market (or more descriptively, the inter-bank) rate, that is exactly that: what banks and large financial institutions trade currency at. U.S. consumers are of course not banks or large financial institutions, and the actual cost of obtaining euros will almost always be higher than the mid-market rate because of the fees charged by the partners involved in the trade.
The second reason is the way that most travelers prefer to pay for the very important parts of their trips isn’t in cash, and it isn’t piecemeal. It’s all at once and by credit card.
Earlier this year, we fielded a survey of luxury travelers to zero in on some of their needs and wants in 2022. Two points of data stood out for our purposes here: They plan to spend a lot – nearly $5,000 per person on a trip in 2022 – and they want to be able to pay for the different parts of their trip all at once. A full 87% said how easy it was to pay for all parts of a trip – including accommodations, travel and excursions – all at once is important.
How do they prefer to pay? By credit card. We surveyed more than 800 frequent travelers globally – all of which took at least one international trip in the last two years, and half of them from the U.S. Nearly 80% said a credit card was their preferred method when paying for travel. For more evidence, look no further than Visa and Mastercard’s last two earnings reports, which point to cross-border travel payments as a major reason for their strong quarters. (That said, payment choice is very important – small percentages of those surveyed also expressed preferences to pay by debit card, digital payment and and even by wire transfer).
The fees associated with international credit card transactions make a difference in the actual cost of the transaction – both to the traveler, and the travel business. When using a credit card for international travel, both those parties incur additional fees. For the business, that fee (often bundled) includes the acquirer or processor’s margin, the fee from the card networks (such as Visa or Mastercard), the so-called interchange fee from the issuer bank (such as Citi or Bank of America) and an international card fee charged by the acquirer.
Depending upon their payment processor, those are typically somewhat visible for the business. But that’s not often the case for the international traveler.
Fees often total a minimum of 4% when paying for international travel on a credit card, and payers don’t often know that until they get their bank or credit card statement. That’s because when a foreign payer uses their card, they’re paying an FX fee or currency conversion fees charged by the issuing bank of 2% or more. (There are cards available that carry no foreign transaction fee, but most travelers don’t have them. 70% of cards in circulation will require a foreign transaction fee). And everyone, regardless of the card they hold, pays a Foreign Exchange Markup. This is an additional charge levied by the card scheme on top of the mid-market exchange rate that a payer may Google and see on sites like XE.com. FX markup can range from 1-3%. What’s more, it can be hard for payers to determine exactly what the FX markup is before they make the purchase, because regulations differ around whether it must be made known.
The dollar’s strength still makes it appealing to travel overseas, but as we can see, parity doesn’t mean equal. Working with a payment software provider that offers the most competitive rates and is transparent about fee structures can help your travel business capitalize on currency-led enthusiasm for trips.