While credit cards are now accepted widely, there are still many places where cash is the primary form of payment. Cash is also almost always the best backup when you need to make purchases. In the past, in order to obtain the local currency, you had to bring US dollars with you to exchange, either in the form of bills or traveler’s checks. The international interbank networks, most notably PLUS (of VISA) and Cirrus (of MasterCard), now allow us to make cash withdrawals at ATMs around the world from our US checking accounts, much like the way those two companies facilitate international credit card transactions.

(You can also use your debit card to conduct Point-of-Sales (POS) transactions overseas. VISA through Interlink, and MasterCard through Maestro also control the networks. The network structure is similar to a credit card transaction, so I will skip it for now in this series. However, it is important that you understand how much you will be charged for using a debit card at a merchant overseas. Similarly, you can withdraw cash with your credit card as a “cash advance”, but it comes with a much higher fee. You can read more about these topics here.)

So what costs are associated with utilizing such networks? Before any transaction has been made, the banks and independent ATM owners need to pay a membership fee to join the international network. (On the back of your debit card, you will usually see a PLUS or Cirrus logo, which represents the network your card is allowed to access. There will also be a logo for some other network, such as Star, which is a national network in the US.) In addition, they pay the network a switch fee per transaction. In order to be compensated for the service they provide, banks and independent ATM owners charge a surcharge fee for deploying and maintaining ATM machines, and an interchange fee for transmitting account information to your bank. The banks may either have an in-house processor or outsource the authorization and settlement to a third-party processor, which presents another layer of cost to the bank. (For a detailed description, you might be interested in this paper.)

And how do these operating costs translate to the fees you pay for withdrawing cash at an ATM overseas? Unlike credit card transactions, where parties involved usually directly pass along the cost to the merchant or the consumer, the fee structure consumers get is less transparent.  While the ATM owner, interbank network, and your bank all want to charge you to recuperate the cost, it is up to your bank to decide how much cost to pass along. Depending on the bank, these fees may simply be added on to your withdrawal and show up as one transaction. Since you are withdrawing in local currency, it is usually difficult for you to tell what the exact exchange rates and add-on fees are. The following diagram illustrates where the fees come from.



Let’s say as in our credit card example, you need to purchase something for 75 Euros in Germany. However this time, the merchant only takes cash. Therefore you go to withdraw cash from the nearest ATM using your Bank of America debit card. Much like using a different bank’s ATM in the US, the ATM owner would want to charge you a flat surcharge fee (let’s assume 1 Euro), and ask you to approve it before accessing your account information. Once you agree, the transaction goes through the PLUS network, where PLUS adds on a 1% international service assessment and exchanges the currency based on the available wholesale rates, like VISA does for a credit card transaction, before sending the information to your bank (or your bank’s processor).

Now your bank has to decide how much to charge you for all the fees the transaction accrues along the way, and for the service the bank provides you. Unfortunately, Bank of America would add on a $5 flat fee for using a non-BoA ATM, which is the same “Foreign ATM Fee” you will get if you do so in the US, albeit slightly lower. (“Foreign” simply means it’s not of your bank. The term applies to a domestic ATM as well.) In addition, it will charge another 2% of the international transaction fee on top of the 1% fee PLUS network charges, and may also pass along the surcharge you agreed on. Overall, you would pay 9% of the 75 Euros, or 100 US dollars you withdraw in this made-up scenario.

Note that only the ATM surcharge and the 1% international service assessment actually go to a third party one hundred percent. The flat “Foreign ATM Fee” and additional percentage of the international transaction fee are only nominal for the bank to recuperate its cost of establishing an infrastructure to serve its customers.

As mentioned, it is entirely up to the bank to decide how much cost they would pass along to you. Some banks choose to absorb the cost all together, while others choose to simplify the fee structure to either a flat fee or a percentage, but not both. Some banks explicitly refund you the surcharge the ATM owners charge to your account. You can find a list of banks that offer no foreign transaction fee, and a list of current fee structures for other banks here. (As a side note, if you decide to stay with Bank of America as in the example, you may benefit from the Global ATM Alliance that the bank is a part of, which waives the $5 flat ATM fee. However, you are still responsible for the 3% international transaction fee.)

Since many banks choose to charge a flat fee on your international ATM cash withdraw, needless to say it is to your benefit to withdraw as large an amount as possible each time. Nevertheless, many banks post a maximum daily ATM withdrawal limit for security reasons, usually at $500. If you have the need to conduct larger cash transactions in local currency, such as buying a car or paying rent, taking cash out of ATM and or paying with credit card may not meet your need. Furthermore, what if you lost your US ATM card and have an urgent need for cash? We will explore the options of sending money online through Internet money transferring service providers next.

Missed part one of this series? Read more about international credit card transactions.

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