Foreign exchange and false advertising

I’m currently in Johannesburg, en route to Malawi to work on one project that is close to the end of data collection, and another project still in the field (note to self: neither of these are on my “Work in Progress” page! Time to update that.) Malawi recently introduced a $75 visa fee (which you can’t pay in the local currency, amusingly) for Americans that I always forget about until I am already outside the US. So I had to change some Rand into dollars.

Changing currencies is much more complex and expensive than it looks. I went up to four different ForEx counters at JNB, and each one had huge hidden fees for my transaction – 25%, on top of their aggressive exchange rate. This has always been my experience with these counters: these fees are not on their signs, and are often hidden in the transaction amount.

I suspect that there is a behavioral-type story here: it’s quite hard to detect how bad you are getting gouged on fees and commissions given all the arithmetic you need to do just to translate currencies. Firms can exploit the difficulty of understanding these fees to extract rents from their less-sophisticated customers. Laibson and Gabaix’s 2006 QJE paper is the classic reference on this idea.

In Laibson and Gabaix, though, sophisticates can dodge the hidden fees. There is no “out” at the ForEx counter – everyone has their own secret fee schedule. But there is a side effect: everyone who walks up is getting gouged. So my solution was to wait for another person who was offered a shockingly terrible rate and beat that price. Worked like a charm, and now I can get into Malawi.

The lesson of this experience, by the way, is the opposite of what you might think: never bring US dollars with you abroad! Or, rather, bring only what you need for the fees and a small emergency fund. Changing cash abroad will get you killed on fees.

2 thoughts on “Foreign exchange and false advertising”

  1. I’m surprised that on this blog, of all blogs, you don’t recommend using the Charles Schwab debit card to withdraw the local currency at an airport ATM, without fees, and at Schwab’s presumably extremely competitive interest rate. Of course, having to get back any of your home country’s money is a different problem.

    So if I understand correctly, you found somebody who walked up to the counter and wanted to exchange USD to Rand? How frequent are flights from the US to Johannesburg?

    (Also I think your 3rd paragraph might have an incomplete sentence right before the link.)

    1. I definitely meant to mention Schwab, which is the greatest. No one should use any other checking account. I do promote them often and don’t get any compensation for doing so – I kind of wish I did, as I just had dinner with four people who all switched thanks to me.

      No idea how often people come in from the US – I lucked out. A contributing factor is that people probably carry and use dollars in other countries too. Maybe they were in Zimbabwe.

      Thanks for catching that editing error, I fixed the sentence.

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