Forex card vs debit card: Which helps save on markup fees?

A more economical option is a prepaid forex card, which allows you to carry foreign currency in the form of plastic in place of cash. A forex card is cheaper because the markup charged on currency conversion is lower compared to what banks apply to debit cards when they are swiped outside India. However, they come with their own fees and charges.

Know the various costs

A forex card allows users to buy and load single or multiple currencies. When you load the currency on the card, the bank converts it according to its prevailing exchange rate. The key difference compared to debit cards is that the markup charged on international payments done with debit cards is, in most cases bigger than the spread that a bank or financial institution charges over the mid-market exchange rate while selling forex.

For example, the US dollar exchange rate offered by HDFC Bank on 8 November was ₹85.99. If a user of an HDFC multi-currency forex card loaded the card with $500, they would pay about ₹43,070 (including the ₹75 loading fee charged by the bank). Now, for foreign currency transactions on debit cards, HDFC Bank charges a 3.5% markup. The exchange rate applicable on debit card transactions is the Visa/MasterCard wholesale exchange rate on that date.

Assuming the cardholder used a debit card on the Visa network, swiping the card for payments worth $500 would debit ₹43,683 from his bank account, as per the Visa exchange rate calculator, approximately 1.5% more than using a forex card. To be sure, these calculations do not consider the 18% GST and service tax applicable to both forex card and debit card payments.

It is worth noting how the various fees attached to forex cards can eat into the savings vis-a-vis a debit card.

In the same example above, the difference in the net amount paid is rather small at 1.5% for two reasons: HDFC Bank adds a 2% spread over the mid-market rate, and the bank charges ₹75 as loading fee for each purchase order. It should also be noted that HDFC Bank charges the highest issuing fee of ₹500 (GST extra) on its multi-currency forex card compared to other entities. Such costs can add up to impact the real savings one can expect in using a forex card over swiping debit cards.

A forex card can offer meaningful savings when the exchange rate is close to mid-market rate and there are nil to minimal charges on loading, unloading, issuance and inactivity.

As per Mint’s research, forex cards offered by forex marketplaces such as BookMyForex (BMF) and Thomas Cook offer the best value on all these metrics compared to cards offered by major banks (see grfx). Among all banks and other financial entities, Thomas Cook and BookMyForex offer the lowest exchange rates.

Sudarshan Motwani, founder and CEO, BookMyForex, said the company does not charge fees for loading, unloading, issuance or forex markups on their forex cards. “Our revenue primarily comes from the Merchant discount rate (MDR). This MDR allows us to earn a commission on each transaction made, without passing additional fees on to cardholders," he said.

Along with the buying rate, one should also check whether the issuer is giving reasonable sell rate so that you don’t lose much while transferring the leftover balance to your bank account.

Key Features

Multi-currency cards: Forex cards allow users to load single or multiple currencies. Multi-currency cards are better for frequent international travellers as they can save on cross-currency conversion charges. For instance, if one travels across Europe with only euro loaded on it and goes to any country using a different currency, say Switzerland that uses Swiss Franc, they would pay a 2-4% cross-currency conversion markup in each swipe.

Moreover, with a multi-currency card, the cardholder doesn’t have to unload the old currency and reload a new one whenever they plan a trip. Even if there are no unloading charges, the cardholder loses money every time they sell a currency as the selling rate is always 1-5% lower than the buying rate.

While multi-currency cards support 10-20 major currencies, those of smaller countries like Sri Lanka, Vietnam and Turkey, among others, and less popular destinations, which include all African countries except South Africa, are typically not supported. So, using a forex card in such countries will be a costly proposition as you will pay a cross-currency charge with each swipe. A debit card or cash may be a better option for such trips.

How to load money: Forex cards can be bought without opening a bank account with the issuing bank or financial entities. However, buying a card with your bank makes the process of loading the card easier with net banking. “While travelling overseas, a customer can seamlessly load (or reload) Kotak World Travel forex card online with foreign currency either through net banking or mobile banking by transferring funds from the linked bank account," said Ambuj Chandna, head – products, consumer bank, Kotak Mahindra Bank.

Non-customers can load the card by visiting a bank branch. They have to fill form A2 and provide other necessary documents.

LRS rules:The total amount you can load and store in forex cards is governed by Liberalised Remittance Scheme (LRS) rules. The maximum amount allowed to be loaded is the overall $250,000 limit allowed per financial year under LRS. However, this doesn’t mean cardholders can store this much forex in their card at all times. “Upon returning to India, a customer is required to surrender the available balance within 180 days of return, with upto $2,000 allowed to be retained," said Chandna.

Note that the $2,000 limit includes all currencies and cash and balance in forex cards.

Acceptability and security:Forex cards are largely secure against cyber fraud. “Forex cards offer better security over debit cards because they aren’t directly linked to your bank account. In case of fraud, only the loaded amount is at risk, unlike a debit card where the entire bank account balance is at risk," said Sumanta Mandal, co-founder, Technofino.

As for acceptability, it is as good as any other plastic. “A forex card’s acceptability depends on the card network, so any Visa or Mastercard forex card will be widely accepted around the world," said Motwani.

Some countries where a forex card is not accepted are Bhutan and Nepal, as per FEMA rules and any other countries under conflict, such as Afghanistan, Israel, and Iran.

Adhil Shetty, CEO, BankBazaar.com, said the only reason forex card transactions could be declined is due to security reasons. “If the value of the current transaction is different from the other transactions undertaken till date, the forex card may be declined due to suspicion of fraud. This is common especially when you try to transact in countries that are known centres of fraud origination. In some cases, it could be a payment gateway issue. This happens rarely, but in some cases, there are compatibility issues though the cards are expected to work seamlessly."

ATM withdrawal: Forex cards can be swiped to withdraw cash from ATMs in the country you are travelling in. All forex cards charge a fee and these vary across different currencies (see grfx).Note that cross-currency charges apply in this case, too, if the currency being withdrawn differs from the one loaded into the card.