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 dejeuner 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.
American Express charges 2 percent, as it has "for decades," said AmEx's Desiree Fish. "We take whatever the [exchange] rate is and increase that by 2 percent," she said. "We don't do the dynamic conversion."
Visa, MasterCard and their banks could, of course, simply treat dollar-denominated transactions as if they were U.S. transactions, but some in the industry say it isn't that simple.
"A lot of credit card fraud is associated with international transactions," said Nessa Feddis, senior federal counsel at the American Bankers Association. In addition to the losses these generate, the card associations spend large sums devising ways to combat fraud, she said.
The result of all this is that U.S. cardholders planning to travel abroad need to educate themselves on their cards' terms and fees -- and perhaps do a little shopping around if they don't like them.
Both Visa and MasterCard require that merchants offering dynamic currency conversion spell out all their charges, so the cardholder can understand them and perhaps compare that cost with allowing the purchase to go through in the foreign currency and be converted by Visa or MasterCard.
But if they do accept dynamic conversion, will they be charged by their own bank anyway? Some of the disclosure notices sent by issuers aren't models of clarity.
For example, one recent notice put it this way: "Transaction fee for purchases made in a foreign currency: 3 percent of the amount of each foreign currency purchase after its conversion into U.S. dollars." Conversion by whom? One might assume that if the holder of this card allowed dynamic currency conversion, and the transaction was thus transmitted by the merchant's bank in dollars, there would be no fee.
Another issuer says: "International Transaction: 3 percent of the U.S. dollar amount of the transaction, whether originally made in U.S. dollars or converted from a foreign currency." That suggests you will get charged 3 percent on any transaction abroad, and if you opt for dynamic conversion, you'd be charged for that, too.
Given that uncertainty, officials of Visa and MasterCard and other experts all recommend you call or visit the bank that issues your card and ask specifically what you will be charged on a foreign transaction in a foreign currency and a foreign transaction that's converted into dollars. And if you're going to a country where dollar-denominated transactions are common anyway, ask about that, too.
Depending on what you're told, you may want to shop for another card or perhaps use American Express.
Then, armed with what you know about your bank's fees, you can, if offered dynamic conversion, compare that cost with letting it go through in euros or whatever.
For example, said Nilson's Robertson, if your issuer charges 3 percent for foreign currency transactions but there is no fee on those in dollars, you know that "should you refuse dynamic conversion, you are going to pay 3 percent. So you have to comparison-shop. If the merchant charges 2.5 percent [for conversion] then you know you're [half a percent] ahead" by agreeing to it.
The good news is that credit cards do remain one of the best deals in currency conversion available to the ordinary traveler.
Consumer Reports, the magazine of Consumers Union, recently compared a credit card, even with a 3 percent fee, with getting cash from a foreign ATM or an exchange shop or foreign bank, using traveler's checks or changing money at a hotel or airport, and found the credit card remained the least expensive way to go.