Beware of the Foreign Exchange Gouge

Although I’ve written extensively about foreign credit card charges, some travelers are still unclear about key details. Here’s a question I received last week, which I’m including at greater length than usual because of the remaining uncertainties it reveals.

“I booked a reservation and bought a ticket on Air Canada‘s website, using my regular Visa card. The ticket was priced in U.S. dollars, so when I got my card statement, I was surprised to find a “foreign transaction fee” of 3 percent tacked on to my charge. This happened even though the flight was codeshared and actually operated by United and even though Air Canada labeled the site I used as its ‘U.S. site.’ I couldn’t find anything on Air Canada’s website or the Visa site which makes any of this clear. When I contacted Visa, the representative said this fee is applied even if the purchase is paid in U.S. dollars with no currency conversion involved. I can understand a fee for Internet purchase for goods shipped into the U.S. from a foreign country but I would be surprised to learn that major airlines and hotel chains don’t have any bank accounts in the U.S. and suspect that no actual currency conversion is taking place! It feels like one more nickel-and-diming bedevilment for the weary traveler.

“The representative also warned me that using my card in foreign countries (specifically Europe) may be termed a cash advance by the vendor and I’d be billed the associated fees. You would be doing a great service if you could report on any credit cards that don’t do this and also warn travelers about codeshared flights.”

Briefly, my reader’s problems are with the bank that issued her card, not Visa or Air Canada. And I suspect when she said she contacted Visa, she really talked with someone in the credit card department of the bank that issued her card, not Visa International. One thing, however, is sure: She’s 100 percent right about the “nickel-and-diming.” Much of the following repeats what I’ve reported elsewhere, but it bears another look in this context.

Visa’s Cut

Visa International adds a 1 percent conversion fee to foreign-currency billings on Visa credit cards. It adds this fee when it takes the transaction information from the merchant’s bank and transmits it to the buyer’s account, with conversion if necessary. For a variety of reasons, Visa bills the bank for that 1 percent rather than adding it to each individual charge.

Banks’ Cut

Most banks that issue Visa cards add 3 percent to any transaction that originates outside the U.S.—1 percent to cover Visa’s conversion fee, 2 percent pure profit—because they can. As I’ve noted before, that extra 2 percent is a complete gouge: By the time the bank first gets the charge from the Visa network, it’s already in U.S. dollars, so the bank performs no conversion function at all.

However, a few banks—most notably Capital One—do not add a surcharge for any foreign purchase, regardless of the currency. And a few add less than 3 percent.

On Dollars, Too

Among the banks that do add the 3 percent fee for foreign purchases, most add it regardless of the currency of the original transaction. As far as I can tell, the banks base their foreign fees on the location of the bank the merchant uses to process credit card charges, whatever the original currency.

In my reader’s case, regardless of where Air Canada’s “U.S. site” is physically located—and whether or not Air Canada has any U.S. bank accounts—if the bank Air Canada uses to process its credit card sales is in Canada, my reader’s bank considered that the transaction actually took place in Canada and added its 3 percent.

Pin Confusion

As I’ve noted, most European banks now issue “smart” Visa cards, with a chip, that require both a PIN and a signature. As a result, many European merchants automatically ask for a PIN on any credit card purchase. That’s fine for people with European cards. Unfortunately, those merchants sometimes ask Americans with “dumb” cards to use a PIN, too, but when an American uses the PIN, some (but not all) issuing banks treat the resulting charge as a cash advance. Visa says that Americans should not use a PIN and instead should tell the merchant to process the charge without it and follow the instructions on the machine.

Nevertheless, travelers to Europe can expect to encounter refusals when they use American “dumb” credit cards without a PIN—and maybe even with one. A reader recently reported being totally unable to use either his American card or debit card (with PIN) to obtain a ticket in a Danish rail station. The office was closed, an automatic ticketing machine was the only way to buy tickets, and the machine rejected all of his valid cards.

AmEx and MasterCard

The international MasterCard network also adds 1 percent to foreign currency charges, and most banks that issue MasterCards hike the total fee to 3 percent. American Express adds 2 percent to foreign currency charges but does not add it to foreign charges originated in U.S. dollars.

Bank Confusion

During the entire period I’ve been looking at this topic, I find that even credit card “customer service” agents at many banks are woefully ignorant of some of these details. Clearly, the representative at my reader’s bank was unclear about the PIN problem.

And, as a bottom line, clarifying the system doesn’t make it right. Those 2 percent foreign transaction fees are inexcusable and, in my view, any “cardholders’ rights” legislation ought to ban them. And Visa clearly has a foreign traveler problem on its hands that it so far isn’t treating with appropriate priority.