How is currency converted at a foreign ATM from US Dollars?

Question

Credit cards are not widely accepted at smaller vendors in Taiwan that I often go to, so I'm forced to use local cash. Upon calling my bank (Chase), I learned that they charge $5 plus 3% for withdrawing money overseas at another bank's ATM. I know that the Taiwan bank also charges a fee for using their ATM on top of what Chase charges. What I'm unable to get a clear answer for is how the rate at which the money is transferred is determined. I'm told by Chase that I should get the XE rate, but I'm not convinced.

This is a two-part question:

The first part deals with the conversion and transfer process itself.

1. How does the process of transferring and converting money between two banks in different countries work? Is the money converted from USD to TWD at Chase and then sent to the Taiwan bank, or is the money simply sent as USD to the Taiwan bank to let them do the converting. If it's the first case, then I can believe that I'll get Chase's rate, but if the money is sent as USD and converted by the Taiwan bank, I would assume that I get the Taiwan Bank's rate and not Chase's.

The second part of the question deals with the foreign ATM's own fees.

2. How do foreign ATMs charge fees? Is it like using any other banks debit card at their ATM? For example, if I use Taiwan Bank A's card at Taiwan Bank B, Taiwan Bank B will probably charge me a fee because I'm using a different bank's card in their ATM. If I use a Chase card at Taiwan Bank B, do I get charged the same as if I used a Taiwan Bank A card, or do I get charged some other fee because Chase is a foreign bank in Taiwan?

Any insight as to how this works would be greatly appreciated. It has been frustrating trying to calculate real exchange rates with all these entities that take their piece out of the whole pie.

Answer 1

There may be differences in the contract details between specific participants, but usually, the process is not particularly complex and run along the same lines independent of exactly which companies are involved.

Just as an example, assume that we have your domestic bank called DB, you have a credit card issued by the credit card company CC and you are using your card either at a foreign merchant called FM or at a foreign bank called FB.

• DB will have a contract with CC, allowing DB to issue credit cards in the name of CC.
• FM will usually not have a direct contract with CC, but with a so called acquiring bank as intermediator and FM's acquiring bank will have a contract with CC.
• FB will often have a contract directly with CC. Smaller banks may be part of an association or a banking group, which has a contract with CC.
• Your credit card account is maintained in a main currency, usually the domestic currency of the issuing bank.

Let us further assume that DB is a US bank, the credit card is kept in US$ and you want to withdraw money at FB, which happens to be in Taiwan.

• So you go to an ATM operated by FB in Taiwan, insert your card and request a TWD 5,000 withdrawal.
• FB will know that you have a credit card from CC and will through the interbanking network send a clearing request for that amount to CC. If FB charges an additional fee for withdrawals with foreign cards, the fee will already here be added to the requested amount. It is usually at this stage not possible anymore to distinguish e.g. a TWD 5,000 withdrawal with an additional TWD 100 fee from an actual withdrawal of TWD 5,100 with no additional fees. Some foreign banks may offer you to charge your card in your home currency. In this case, FB will perform the currency conversion and ask CC for an amount in US$ instead of TWD. This is usually to the disadvantage of the customer.
• CC will receive the clearing request from FB and associate your card number with DB. CC will convert the amount to your currency and forward the clearing request to DB. Credit card companies usually set their own currency exchange rates, just as any other bank. These rates may and will deviate from mid-market rates, usually to the disadvantage of the customer. VISA's exchange rates can e.g. be found here. Had a request for TWD 5,100 been processed by VISA today and forwarded to a US bank, the forwarded request would have been for US$ 174.76.
• DB will receive the clearing request from CC with an amount of US$ 174.76 and either accept or reject the request. This all happens while you are still waiting at the ATM in Taiwan. At the same time, DB will place a so called reservation for the specified amount on your account. Your account is technically not charged yet, but the amount is reserved to be used for this transaction and can not be spent otherwise.
• At some point later, it usually takes a few days, DB will actually charge your account and lift the reservation. If DB charges a fixed fee of US$ 5.- and another 3%, which amounts to US$ 5.24, your account will be charged exactly US$ 185.-.

Paying for your purchases at a foreign shop, the process is mostly the same, except that FB is replaced with FM in the first two steps and that the clearing request is usually routed through FM's foreign acquiring bank. Credit card issuers usually charge lower fees for purchase payments than for cash withdrawals.

Answer 2

In principle, it can go either way. The bank/credit card networks can process transactions in whichever currency the recipient specifies the amount in. This becomes the currency the banks will settle the transaction in between themselves, and exchange rates will apply at the end where the currency of the transaction is different from the currency of the account the money comes from (or goes into).

For an ATM withdrawal, usually the currency of the transaction will be the currency you actually got your cash in. The ATM owner may add a fee of their own to the amount you get in hand (how loudly they're supposed to warn you if they do that differs from place to place), and your bank may then add an ATM fee, and in general apply an exchange rate spread, which can often be several percent.

It is not uncommon -- but by no means universal either -- for ATM owners to charge a specific fee for withdrawals with foreign cards. A sort-of justification for this is that international payments clear through different systems than local ones, and the international ones may have higher cost of connection or slower settlement. Mostly, though, it is simply "because they can".

Some ATMs will detect that the card being used is foreign and "helpfully" offer to submit the transaction in your currency instead. The prevailing wisdom is that this will generally result in a worse exchange rate than you'd get at your own bank -- the ATM owner has no lasting relationship with you and may not care a lot about whether tourists later figure out they've been fleeced.

I haven't heard of ATMs that will only submit transactions in the cardholder's currency, though in principle they could exist somewhere. We have seen anecdotes about merchants that insist on doing this (and then charge exorbitant exchange fees).