Are currency conversion charges a rip-off? Ask Susan

Susan Edmunds, host of RNZ’s No Stupid Questions podcast, addressed a listener’s concern about whether currency conversion charges imposed by banks and credit card companies are a form of profit-padding rather than genuine cost recovery. The question centered on whether these fees reflect actual expenses incurred by financial institutions or merely serve as a means of generating additional revenue. The listener expressed skepticism, noting that banks often offer less favorable exchange rates compared to the wholesale rates reported on RNZ broadcasts, suggesting potential double exploitation of consumers. Westpac, one of New Zealand’s major banks, responded to the inquiry by stating that its currency conversion fee on consumer credit cards was intended to offset the costs associated with processing such transactions. According to the bank, this fee was considered cost-neutral. Claire Matthews, a banking expert at Massey University, offered a more nuanced perspective, acknowledging that while there are real costs tied to non-NZ dollar transactions, such as maintaining foreign exchange reserves and managing exchange rate risks, the fees also contribute to bank profitability. She explained that the disparity between the wholesale rates used by large institutions and the retail rates available to individual customers stems from differences in transaction volume and associated costs. The wholesale rates, applicable to high-volume transactions, benefit from economies of scale, whereas retail rates include additional markup to account for operational overheads. Matthews further pointed out that the rise of alternative platforms offering competitive exchange rates and lower fees presents viable options for consumers seeking to minimize their exposure to currency conversion charges. These alternatives, she suggested, could help individuals avoid paying excessive fees while still accessing reliable international payment services. In addition to addressing the currency conversion issue, the conversation touched on broader financial planning topics. A listener asked about the maximum amount that can be contributed to a KiwiSaver account. The answer was straightforward: there is no legal limit on how much can be invested in KiwiSaver. While mandatory employer contributions are capped at 10% of gross income, individuals are free to make additional voluntary contributions. This flexibility contrasts with systems in other countries where tax incentives often come with contribution caps. In New Zealand, the absence of such incentives means that retirees and savers can continue contributing indefinitely, provided they meet eligibility criteria. Another query focused on the optimal use of a substantial cash reserve. A couple, recently retired and owning a mortgage-free home valued at approximately $2.6 million, had $900,000 in liquid assets held in a bank term deposit. They planned limited travel and sought advice on how best to allocate their funds. Ana-Marie Lockyer, CEO of Pie Funds, advised that holding such a large sum in cash, while safe, might not be the most effective strategy for long-term wealth preservation. She highlighted the risks of inflation eroding purchasing power over time and the potential for missed growth opportunities. Given their moderate risk tolerance and openness to exploring investment avenues, Lockyer recommended diversifying their portfolio to include equities and other asset classes, thereby balancing safety with growth potential. The discussion underscored the importance of tailored financial strategies that align with personal goals, risk appetite, and life stage. Whether navigating currency conversion fees or managing retirement savings, informed decision-making based on accurate information remains crucial. As the conversation unfolded, it became clear that financial literacy plays a vital role in empowering individuals to make choices that support their long-term economic security.