Banks are hitting holidaymakers with an ‘extortionate’ charge of almost 5 per cent for withdrawing money abroad by using a confusing double-fee policy on debit cards. 

HSBC, NatWest and First Direct all charge 2.75 per cent for the currency exchange plus a 2 per cent ATM fee on top for their current accounts. So if you withdraw £100 from an ATM you will be stung by a hefty £4.75 fee.

Lloyds charges a 2.99 per cent foreign exchange fee plus a 1.5 per cent ATM withdrawal fee. Santander currently charges 1.5 per cent plus 2.75 per cent.

From October, Barclays will increase its foreign exchange fee from 2.75 to 2.99 per cent, on top of a 2 per cent ATM withdrawal fee, making it the highest charging bank for overseas withdrawals.

A Barclays spokesperson justifies this by saying: 'Barclays has kept the charges incurred when customers use their Barclays debit card overseas the same for over 10 years. However costs have risen in this time so, following a recent review of the charging structure, the exchange fees for overseas debit card transactions will be amended from 1 October 2010.'

Until recently, the Nationwide FlexAccount was the exception to these high-charging banks, as it was the only one to provide a debit card with no fees attached for using it in the EU. However, from 1 November there will be a cost of 2 per cent, plus a £1 cash withdrawal fee, with this account.

Banks are also slow to own up to their double-fee policy and provide misleading information, according to Money Observer research. When asked about its fees, Santander has on several occasions outlined only one of its charges, instead of the two fees it charges on all of its current accounts.

In addition it’s hard to locate the exact fees on banks’ websites and very rarely do they state the exact amounts associated with withdrawing, anywhere other than in the small print.

One of our readers, Jenny Mathieson, was charged a whopping £80 on a recent holiday for only using her Alliance & Leicester (now Santander) card twice abroad - once to withdraw some cash from an ATM and once to pay a hotel bill.

James Hickman, managing director at prepaid card company Caxton FX, suggests the banks have increased their fees to try and claw back some money from customers during the recession, and says there is no reason for banks, like Barclays, to charge anywhere near 5 per cent.

‘Banks are charging an extortionate amount in foreign withdrawal fees and by raising their prices, they’re just increasing their own profits,’ he adds.

First Direct, Lloyds, Santander and now Nationwide have all put up their rates in the past five years.

Many people are also losing out by exchanging money at the airport. According to Currencies Direct, it can be around 9 per cent more expensive to change money at Gatwick, Heathrow and Stansted, compared with other foreign exchange vendors. This means if you were to change £1,000 into euros you could lose out on £104 by changing at the airport.

To avoid rip-off fees on debit cards and the uncompetitive exchange rates at the airport, there are several options available.

Bizarrely, withdrawing money abroad on certain credit cards is now cheaper than doing so on a debit card. Both the Halifax Clarity and Santander Zero credit cards offer no fees for cash withdrawals, foreign exchange or balance transfer fees. However the Halifax card will charge interest at a rate of 12.9 per cent APR, which works out around £1 a month for every £100 withdrawn.

The Santander card charges 27.9 per cent interest on cash withdrawals. So the full balance should be paid off as quickly as possible to prevent the interest stacking up.

Another option and one that is becoming more popular is to use a prepaid card.

Caxton FX is one such FSA-regulated provider and you can use its cards almost anywhere in the world where the MasterCard logo is displayed for free ATM withdrawals. The cards can be toped up online, by text message, or in person. Hickman says although Caxton takes a slice of money when they exchange money, this is still substantially lower than the uncompetitive exchange rates that the banks use.

Hickman adds: ‘Prepaid currency cards are a holiday must-have, it’s not only a hassle-free way of carrying your holiday cash; they also act as a great budgetary tool.’

FairFX is another good choice and they will even add £5 on for every £500 you add to the card. Both of these cards must be applied for online, so if you don’t have internet access the Travelex Cash Passport is a useful option as you can buy one at a Travelex outlet, however, there is a 2 per cent charge when you top up.