Why you pay more to use credit cards abroad

By STEVE HART

Reading through her credit card statement, Jane couldn't figure out why the bottom line seemed more than she expected after a week in Sydney. Each item was a fraction more than she had calculated in her head. Maybe it had been a bad week for the New Zealand dollar ...

Her hotel bill was a good few dollars more than she recalled and the gift for her boyfriend didn't seem quite the bargain it had.

She shrugged, not realising her bill had been inflated by 2.25 per cent.

What Jane (not her real name) didn't know is that as each foreign payment was converted into her home currency, her credit card company - Visa - added 1 per cent to each transaction. MasterCard adds 1.1 per cent.

But then her bank added another 1.25 per cent to the bill and called it a currency conversion fee. But hasn't the conversion already taken place? It happened before Jane's bank printed her bill.

She didn't see these charges declared separately on her bill as they were invisibly merged into each item. Only a mathematical genius knowing the actual exchange rate used would discover the additional fees.

We scoured Jane's ASB Visa bill and could find no details showing that 2.25 per cent had been added. The exchange rate wasn't listed either. And there was no mention of the conversion fees in the small print on the back of her bill.

How much does it really cost a bank to handle a credit card transaction abroad? It seems impossible to get figures but a court case in the United States offers a taster to what's going on.

In documents from the Superior Court of California, Visa reveals that between 1996 and 2000 it charged its US card holders more than US$630 million ($1 billion) in currency conversion fees. The actual cost to Visa was US$6.9 million ($11.7 million).

Alameda County Superior Court Judge Ronald Sabraw says Visa and MasterCard should return to US card-holders fees totalling more than US$800 million ($1.3 billion) because, while the charges are not illegal, they were not clearly disclosed. Both companies are appealing the April decision.

David Tripe, senior lecturer of banking at Massey University, worked with Visa and so knows a thing or two about the credit card and banking industry.

"My view is the banks charge a currency conversion fee because they can get away with it. There is no economic rationale in cost recovery - they are just taking a profit opportunity. The charges have only been introduced in recent years - they haven't always been there."

Some banks say they charge the currency conversion fee to cover losses through fraud abroad.

"That is a vaguely plausible argument," said Tripe. "But I don't believe the banks have actually worked out the fraud cost in calculating their loading. I am sceptical of that claim."

If fraud really is the reason for the loading, why don't the banks call it a "special charge in case you are ripped off abroad and we lose money fee"?

Clayton Wakefield of the ASB said: "It costs more to do a transaction overseas and those costs fall both to Visa and the bank. It's one charge but separated by the two parties. At the end of the day international transactions cost more."



In the 12 months to June, New Zealanders chalked up more than $2 billion in credit card payments abroad. Of that, an estimated $25 million went to local banks in currency conversion fees.

Overall it is a huge amount of money, but for each individual it is likely to be a small sum and many will not complain about it. But some do.

Banking Ombudsman Liz Brown says complaints made to her office on this issue often lead to refunds from the bank.

"Banks normally refund these fees out of goodwill, for customer relations," she said. "But we are talking small amounts, which doesn't deal with the underlying issue.

"When I get complaints of this kind I recommend these people also contact the Commerce Commission and bring it to the attention of its fair trading team."

Coincidentally the Commerce Commission has launched what it calls a "wide-ranging investigation" into the relationship between banks, credit cards and the fees they charge. The investigation is at present in the information-gathering phase.

Using a credit card abroad is such a common occurrence one wonders why there's a special charge attached to it at all - isn't the protection of using a card abroad one of the reasons many of us pay an annual fee to have one?

The bottom line is that using the plastic overseas is the safest and easiest way to shop and pay for services.

Jane is philosophical.

"I'm always travelling and use my cards almost every day. I carry two different credit cards in case one stops working when I'm away.

"But I'm not sure that a 2.25 per cent loading is a reflection of the true cost of converting one currency into another with everything done electronically."

What they say



Some of the comments banks give for their "currency conversion fee"



* For handling and processing the transaction and foreign exchange costs.

* Pays for the convenience of having the card.

* It's a common practice - all banks charge a fee.

* The fee covers our cost for being members of the Visa and MasterCard network.

* It covers the high costs of overseas transactions.

* Pays for credit-card fraud.

* Helps to pay for assisting card-holders in trouble overseas.

* Covers charges to replace a card overseas.

* The charge reflects the higher risk of using a credit card abroad.

* Pays for the security of not carrying cash.

* Pays for the points rewards schemes.


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