Banks, the thinking goes, have never met a fee they didn’t like. Yet one credit card charge that has been standard for years—the “foreign transaction” or “foreign currency” fee, which tacks on an extra 3% or so to every hotel stay, meal, or tchotchke purchased outside the U.S.—is slowly but surely being dropped by more and more card issuers. Why?
For years, nearly all credit card agreements stipulated in the fine print that a fee would be applied to all card “foreign transaction” purchases. In many cases, it didn’t matter if the actual transaction was in dollars or the local currency. Some people even found themselves zapped with the fee just for buying something online from a merchant based in another country. No passport or leaving the U.S. required.
Capital One was a notable exception; it built an advertising campaign around how it didn’t charge any foreign transaction fees. Now, Capital One has plenty of company, as it appears that banks have seen the error of their ways. While the vast majority (82%) of cards still have foreign transaction fees, nearly all the biggest banks in the credit card business now offer cards without the fee. According to Odysseas Papadimitriou, founder and CEO of card comparison site CardHub.com and former Capital One executive, the number of credit cards that carry these fees have dropped by a little more than 8 percentage points in only a year, and the average amount of that fee has fallen by roughly 6% in that same time frame.
A J.P. Morgan Chase & Co. spokesman says the bank has been eliminating this fee on many cards over the past few years. Citigroup rolled out a trio of new cards last year that are all free of foreign transaction fees, while Bank of America just debuted one small-business and two consumer cards earlier this month that don’t charge users this fee. Discover Financial Services did away with foreign transaction fees across its portfolio last year.
What’s behind the shift?
For starters, there’s not much need to charge the fee anymore. Despite the well-publicized multibillion-dollar trading loss at Chase, banks have gotten a lot better about hedging their risk brought about by foreign currency fluctuations. The Eurozone crisis and sharp fluctuations of the Euro and other currencies forced big banks to get smarter in their hedging strategies, says Mike Moebs, economist and CEO of research firm Moebs $ervices. “They have it down to a science,” he says. As a result, card-issuing banks can afford to process those foreign currency transactions less expensively.
Banks also don’t need that fee revenue as much anymore because their credit card portfolios are shaking off the effects of bad debt written off during the recession, says Dennis C. Moroney, research director of bank cards at CEB TowerGroup. CARD Act reforms notwithstanding, they’re making good money again. With the benchmark interest rates at nearly 0% and average credit card APRs in the teens, and with credit card balances creeping up once again, “You don’t need to mess around with those silly fees,” he says.
Besides, banks never made that much money from foreign transaction fees anyway. “It’s not that big a driver of their profitability,” Papadimitriou says. A credit card company might only net $30 when one of its customers spends $1,000 on a trip abroad.
That 3% or so invariably was a much bigger deal for travelers than for the credit card company. Even though it wasn’t a lot of money in nominal terms, it really ticked people off—sometimes to the point that they canceled their cards. “The competition for good customers is very intense,” says Moroney, estimating that it could cost an issuer up to $200 to replace a customer. The goodwill, positive press, and customer loyalty banks earn by ditching the fee are valuable enough to make up for the minimal revenues lost.
For most people, a foreign transaction fee isn’t a deciding factor in which credit card they use. Only about 30% of Americans have passports, and a much smaller percentage of consumers is likely to get up in arms about a 3% foreign transaction fee. But the customers who do get riled up are exactly the customers that banks are willing to bend over backwards to try to keep. “The people that care about that fee are the most affluent, most rewards-driven types of consumers,” Papadimitriou says. “No matter how much money you have, when you hear you can get it for free, no one wants to pay for it.”
Banks want these big-spending, low-risk consumers with high income and high credit scores as customers not only for their value as credit card users, but also because they’re great targets for cross-selling all sorts of other financial products and services. The problem, from the perspective of banks seeking to attract new high-income customers, is that this group tends to stick with the cards they’ve been using for years, says Ken Lin, CEO of CreditKarma.com. “Historically, the high-affluence customers tend not to churn as much,” he says. “They tend to be stuck onto loyalty programs.”
So how do banks woo these affluent consumers away from their existing cards? One way is by dropping the foreign transaction fee—a charge that an outsized portion of this demographic finds utterly annoying.