Abroad, See How The Fees Translate

As the summer travel season gets into full swing, many Americans are about to head off to foreign lands -- and they are planning to put most of their overseas spending on plastic, remembering that U.S. credit cards have long offered the lowest-cost way of buying things in foreign currencies.

Not so fast. Before you say Buon giorno , take a look at your cardholder agreement: You'll likely see a special provision about charges for transactions that take place abroad. Take note of it. As you wander around the globe you may encounter merchants who have a new, high-tech way to get around these fees, but it's also possible you could end up paying twice.

Visa and MasterCard, along with the banks that actually issue their cards, have long charged consumers for foreign transactions, but for many years those fees and markups were simply folded into the amount that appeared on your card. And since Visa and MasterCard could get good "wholesale" exchange rates that were better than most travelers could get on their own, consumers didn't usually object -- in fact, they were sometimes pleasantly surprised that something cost less than they themselves had calculated.

Now card issuers are spelling out the charges on transactions that take place abroad. Some of these may reflect fees that Visa and MasterCard charge the bank and that the bank is simply passing on, and some may be the bank's own charges. But since you may be offered alternatives when you buy something, keep the total in mind.

Fees of 3 percent of the transaction amount are common, so, charge that $15 petit déjeuner and, bingo, you'll automatically find you've been billed for $15.45 on your next statement. And tack an extra $9.60 onto the $320 Hermes scarf that you charge.

Behind these fee disclosures lies a new battle over who gets to charge what for these overseas transactions. A small but growing number of foreign merchants and their banks offer you the option of converting your purchase into dollars on the spot when you buy something abroad. With this option, called "dynamic currency conversion," the merchant's bank converts the purchase from euros or pounds or whatever into dollars and sends the report of the transaction along to your bank already converted.

Done that way, the merchant and its bank get to charge for doing the currency exchange. Visa and MasterCard, which would normally do the exchange for your bank and charge it a fee -- which the bank would then pass on to you, perhaps with a bit tacked on for itself -- must now choose between losing that revenue and imposing fees on dollar-denominated transactions.

Typically, such transactions generate both fees and a markup on the currency conversion, according to industry experts, so there's real money involved.

"It's in the last five years that new technology has emerged so that merchants can enter into that picture and take a piece of that revenue," said David Robertson, publisher of the Nilson Report, a credit card industry publication based in Carpinteria, Calif.

It's thus worth it for merchants to offer this "service" to customers at the point of sale, Robertson said. "There's money on the table" for them.

Visa and MasterCard are waffling over whether they should charge banks a fee for foreign transactions that have been converted into dollars. Visa this spring began imposing a 1 percent fee -- the same as for transactions involving currency conversion -- but suspended it on June 9. "Visa is now reviewing the fee structure related to single-currency cross-border transactions," the association said in a statement.

MasterCard has announced it intends to impose a tiered fee, starting in October. That fee would be 0.8 percent on all "cross-border" transactions, whether in dollars or a foreign currency. Transactions in a foreign currency would be assessed an additional 0.2 percent -- for a total of 1 percent -- spokeswoman Sharon Gamsin said, though she indicated that MasterCard is still thinking about whether to go through with the fee.