Paying in foreign currency with PayPal: when your bank charges more

Paying in foreign currency with PayPal: the bank trick doesn't always save you money

Turning off PayPal's currency conversion so that your bank applies the exchange rate can end up costing you more than letting the platform do the work. This tip has been circulating for years as a money-saving trick: instead of accepting the exchange rate PayPal offers when paying in another currency, you choose to pay directly in the seller's currency and let your bank apply its own rate. The logic behind the advice is that PayPal applies an exchange rate worse than the official one, and that banks, even with their foreign exchange fee, would come out ahead. One participant in the discussion claimed that for years he checked this with his linked account and was always charged less than the euro price PayPal displayed.

The problem is that the trick doesn't work the same at every bank. One user recounts a case with concrete figures that contradicts this supposed saving: a purchase of 519.99 pounds that PayPal converted to about 622 euros ended up costing over 632 euros when it went through La Caixa. Ten euros of difference against the bank. The affected customer went to the branch with the transaction printed out; the employee, according to his account, couldn't explain it.

The fee you don't see: why PayPal always wins on the exchange rate

The mechanism, as participants describe it, is both simple and opaque. PayPal doesn't charge an explicit conversion fee on the statement; what it does is apply an exchange rate worse than the official market rate. That difference is the margin the platform pockets, and users only notice it if they compare the euro amount PayPal offers with what their bank charges them afterwards. The problem is that this comparison can't be made at the time: PayPal applies the rate instantly and communicates it, while the bank applies it days later, when it processes the charge. The exchange rate may have moved in the meantime, and the user discovers the final result when it's too late to do anything about it.

Some argue that Visa's rate plus fee beats Mastercard's, and that both beat PayPal's, even including the bank fee. The most optimistic calculation assumes a 2% bank fee, a figure that has been mentioned for ING. But the pessimistic scenario involves banks that charge far higher surcharges. La Caixa, according to the case described, came out above PayPal by ten euros on a transaction of just over 600.

The bank that charges more than PayPal: the La Caixa case

The anecdote is interesting because it flips the logic of the saving. The affected customer had trinc the advice for years with his account at Cajasol and always came out ahead. It was Cajasol's conversion into La Caixa that, according to his account, changed the picture. The bank went from being cheaper than PayPal to charging ten euros more for converting pounds to euros. It's not a problem with the pound or the amount: it's a problem with each bank's fee policy, which the user doesn't choose when opening the account but which trinc them on every international payment.

The warning extends to other cases. Some have found that a Bankia prepaid visa charged them more than PayPal's conversion. And others point out that the general trend has turned against the trick: for a while card conversion was better, but banks have been raising fees and the balance has tipped toward PayPal in several cases. The tip, therefore, is neither universal nor permanent. It depends on the bank, the amount, the currency and the day.

What about refunds and small purchases?

There's a detail almost nobody considers when turning off automatic conversion: refunds. According to one participant, when the merchant has to return the money due to lack of stock or a cancellation, the amount that comes back is usually lower. The exchange is applied twice, and in both directions the bank takes its cut. Those who have tried PayPal's automatic conversion in these cases have no clear point of reference, because most people turn the option off after the first tests and never compare again.

With small purchases the difference is cents and goes unnoticed. One example from the thread: a purchase of 2.24 dollars that at the official rate came to 1.68 euros ended up charged at 1.72 euros with an ING visa. A 2% surcharge that matters on large amounts and slips through unnoticed on small ones. The practical conclusion is uncomfortable: there's no single answer. You have to check your bank's conversion fee, compare it with the amount PayPal offers before confirming, and accept that the perfect comparison only comes days later, when the charge appears on your account.

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The trick of turning off PayPal's conversion works as long as your bank doesn't decide to change the rules. And banks do change them.