Although the euro does not yet exist in physical form, currency-exchange transactions between euro-zone countries must be converted through the euro. This process, known as "triangulation", has caused some concern to consumers. A Family Money reader rang to say he had recently travelled in Spain and used his National Irish Bank (NIB) Visa card. When he checked his statement he saw various currency conversion rates. After failing to receive an answer from the bank our reader called the Central Bank who told him the conversion rate between Irish pounds and Spanish pesetas was 211.26. He wants to know why, if the currencies are fixed against one another did his credit-card statement rates vary from 211.25 to 211.33?
National Irish Bank says a number of customers have queried the reason for varying exchange rates on their credit-card statements since the euro was introduced. Our reader "is correct when he states the rates are fixed and the conversion should be always exactly the same, irrespective of amount, when passed through triangulation". However, the indicative rate will vary depending on the transaction value. The smaller the transaction value, the further away from the indicative rate it will move.
Basically, the currency is correctly converted using triangulation, but rather than showing customers all the complexities of euro-zone calculations, some banks provide an indicative rate.
"The indicative rate is calculated by simply dividing the original currency amount by the converted amount. However, the conversion itself will always be done through triangulation and is therefore exactly the same for any bank or exchange agent," said NIB spokeswoman, Ms Pamela Yey.
The Euro Changeover Board says NIB's calculation is absolutely correct and that the indicative rate varies because of rounding. The indicative figure will change depending on the amount converted, but the conversion rate does not change. There will be tiny variations or distortions in the indicative rate the smaller the amount converted. However, the indicative rate will never affect the actual conversion process which will be done correctly using triangulation, he said.
The following example shows how distortions due to rounding may occur. For a conversion of an amount from Spanish pesetas (ESP) to Irish pounds (IEP) we first need the currencies' fixed rates to the euro. ESP is fixed at a rate of 166.386 to one euro and IEP is fixed at 0.787564 Irish pence to one euro. The conversion transaction for one million pesetas is: ESP 1,000,000 divided by its fixed euro rate 166.386 which equals 6,010.121043 and rounded to three decimal places as required is 6,010.121. This amount multiplied by 0.787564 equals £4,733.354935 which is rounded down two decimal places to £4,733.36. To show an indicative rate the original amount of ESP 1,000,0000 is divided by £4,733.35 to equal 211.2668617 or 211.27.
Smaller conversion amounts will change the indicative rate as follows: ESP 100 divided by 166.386 equals .601012104 or .601. This is then multiplied by the Irish rate 0.787564 to equal 0.473325964 or 0.47. To show an indicative rate in this case ESP 100 is divided by 0.47 for a rate of 212.7659574 or 212.77.
Some banks calculate the indicative rate as shown above while some use a fixed indicative rate. For more information call the Euro Changeover Board at 1890 201050 or visit website: www.irlgov.ie/ecbi-euro or Aertel, RTE 1 page 678.
Price points and the euro: Price points, the combination of numerals meant to attract consumers to products, are one of the trickiest aspects of the euro conversion process. Imagine the confusion when sale items like Tshirts costing £14.99 or 44.95 guilders become €19.03 in Galway or €13.27 in Hamburg.
Marketing experts think these numbers will look awkward to consumers and make them less inclined to buy. The theory is that if customers see a 9 or a 5 as the last digit in a price rather than a 0 they believe they are getting a discount.
Many European consumers are mystified by the particulars of the euro change-over, but Irish shoppers are particularly suspicious given their experience with decimalisation in the 1970s. In fact, a European study last year found that 44 per cent of Irish surveyed believed the euro would cause creeping price inflation. The cities where the highest percentage of doubt was registered in the survey were Dublin, Paris, Milan, Hamburg and London.
Retailers do not want people to think the change-over is an opportunity for shops to increase their profit margin by raising prices. However, it is fear of competition rather than consumer animosity that may force sellers to round a price down rather than up. For example, if a can of Coca-Cola costs €1.07 two neighbouring shops may opt to sell it at €1.05 or €1.10. The theory is that the shop with the more expensive cans may sell fewer colas than the shop offering it at €1.05 Another option being considered by manufacturers to protect their profits and market share is changing the size and packaging of products to fit the new euro price points.
Irish financial services companies are also facing difficulties with price points and the euro.
"When people buy investment products they tend to go for round numbers. People making single premium investments generally go for amounts in multiples of £10,000," Ms Kathryn Desmond of the IT consultancy, the Harvard Group, has said: "The big question facing life assurers is whether the £10,000 single premium investor will switch to €10,000 or €15,000 in the future. The exact equivalent, €12,697.38 will not be in demand." It is expected that more people will pick the lower figure on account of the perceived inflation involved, she said.
According to the Harvard Group, for most companies there is a minimum premium which must be paid to maintain the profitability of a product. Most consumers making regular contributions have a particular fondness for £50 or £75. When rounded down the danger of a consumer picking a lower figure would make what was previously a successful product now unprofitable for the company to offer.
European law expressly forbids companies using the conversion surreptitiously to increase the price of goods and services, forcing companies to change their product design if they want to avoid reducing margins to meet new strategic price points.
In response to these difficulties, the Harvard Group just launched the Euro Impact Guide, a spreadsheet for life and pensions companies highlighting the shifts in strategic price points following conversion. For a copy of the guide, contact Kathryn Desmond at e-mail: kathyrn@harvard-group.com
Eurofacts
The euro is the new single currency for 11 EU member-states: Austria, Belgium, Finland, France, Germany, the Republic, Italy, Luxembourg, Netherlands, Portugal and Spain. Both Denmark and the UK decided not to join the euro zone immediately. Greece and Sweden did not meet the necessary conditions for membership.
The euro came into cashless form on January 1st, 1999. Notes and coins will come into circulation on January 1st, 2002.
One euro equals 0.787564 IEP. One Irish pound, with rounding, equals one euro and 27 cents.
To convert an Irish pound to a euro divide the Irish pound amount by 0.787564. Round the resulting euro amount to two decimal places.
To convert from a euro amount to an Irish pound amount multiply the euro amount by 0.787564. Round the resulting Irish pound amount to two decimal places.
