Best exchange rate at ATMs?

Have you ever seen an ATM offer to make a currency conversion for you? For example "This ATM offers conversion to your home currency" or something similar. I, for one, have always wondered what's behind this sneaky question. Could it really be that the bank is actually offering a deal where you win?

I decided to test it to find out for myself. Last Monday I used an ATM in Gatwick airport, using my EUR denominated credit card from a friendly Estonian bank.

I picked 100 GBP as an easy amount to test.

Based on the mid-market exchange rate for the day, 100 GBP should have equaled 126.01 EUR. I never expected the amount to be exactly the same on my credit card statement, but I hoped the difference wouldn't be too far away.

To test it out, I made two transactions.

First, I took 100 GBP from the ATM without performing a currency conversion.

Second, I went for the conversion option and let the ATM perform the currency conversion for me (sometimes noted in the ATM as the option to 'Pay in your home currency').

Later, when I looked at my credit card statement, I was shocked.

For the 100 GBP transaction without conversion, 126.12 EUR had been deducted from my account - a really good result!

For the 100 GBP transaction with conversion done by the ATM, my credit card statement showed 135.51 EUR had been deducted. Holy moly!

I couldn't believe that I was charged almost 10 EUR more for letting the ATM do the conversion for me. At almost 7.4% more expensive, that's a real rip-off.

The moral of the story is - never let ATMs perform currency conversion for you. Make your withdrawal in the local currency and let your bank do the conversion. Though credit cards often have extra charges when used overseas, these charges are usually in the 1-3% range - far less than the 7.4% I calculated.

The guys behind the ATMs are taking 7%. When, oh when, can we all use banking services without a commission-hungry banker taking 3, 5 or 7 percent from every move we make?

Taavet @ TransferWise