Canadians Shocked at Cr Card Foreign Exchange Charges - Rip Off?
 

What Americans went thru the past few years - the 3% foreign transaction fee on credit card purchases abroad, Canadians only recently are finding out.

CBC TV last night says Canucks buying stuff in U.S. with credit cards are the first ones to get the shock - 2.5% added on for foreign exchange - previously was none i guess.

And many called this a rip off and were indignant.

And that led me to think too - what is the justification for this 3% flat surcharge on foreign transactions. After all in the computerized world what is the cost for large banks to change money - 3% - i don't think so and it does just seem a plain rip off.

Is there any justification for the charge.

Or are banks just taking us for a ride?

Hi PB,

Are these charges hidden in the exchange rate? I use my Amex and Corp Amex on my trips to US and there are no "identified" surcharges. Can't remember seeing any for CIBC Visa either. Since US banks (in general) all seem to be doing this, I guess we're just catching up.

P-Bob asks: why do banks charge
Answer: same as why dogs lick themselves? Because they can.
Razor blades don't cost anywhere near $10 a pack, but they do.
Economic theory dictates that the price be set where maximum revenue is derived. Note that cost (which in this case is probably a fraction of a penny)isn't part of the concept.

My understanding is that the charges have always been there, but they've been disguised in the exchange rate. Recent rules have required separate disclosure of the added fee, but in effect the total $ cost has not changed.

The justification is that we live in a free market economy. The cc companies are providing a service (extending credit to us, and freeing us from carrying cash) and we are free to accept or reject the terms.

I'm not saying I like the 1% or 3% added, but nobody is forcing me to use my credit card.

There's been a lot of discussion about this. I've followed kathie's advice and just acquired a CapitalOne credit card, with no foreign transaction fees. The other thing to watch out for is the same fee on ATM transactions.

most ATM fees are worse IME - though European ATMS seem never to charge - it's just your local bank fees - most now seem to charge the same 3% plus a $3-5 transaction fee everytime you use the ATM

Thus credit cards seem better to use for any purchases possible.

I'll give the unpopular answer. Banks, believe it or not, are businesses.
Why does a restaurant charge $ 3 for a bottle of water it buys for 15 cents? Why does a clothing store sell a dress for $135 that they bought in bulk for $28 each? Why does a plumber charge $12 for a part that he paid 17 cents for? Why does a car rental company add on a license fee of $2.50 for an entire year when a few rentals will have paid for the license? Why does your phone company charge a 911 or a franchise charge for things that are literally costing them nothing?

The answer to all these is the same -- because they are in business to make money and they can.

But PalenqueBob, I think you are wrong in that "MOST" banks charge 3% plus the fee for foreign ATM withdrawals. MOST seem to charge 1% only for that. But I'd agree that MOST credit card companies charge a 3% conversion charge on foreign purchases.

Foreign transaction charges have been on many US CCs a long time, it wasn't added just last year. IN fact, I think there was a law suit about them years ago in terms of disclosure (which is why they now itemize it on the bill).

What kind of a question is why a business charges fees for something -- because they want to make money and figure out various fees and ways of doing that to maximize their profit. They figured out how much money they can make by that fee and it looked pretty nice (especially since so many people don't pay attention to it and don't understand or know about it).

I'm always amazed at people who are outraged at bank charges. Banks are businesses. Their objective is to make money. If they provide services at no charge then they LOSE money.

Andy bank will charge you a fee for electronic exchange transactions. It's fine to look for those with the best rates/deals - but to expect them to do it for nothing is silly.

(ANd do check all of your options - many banks offer different services at different fees depending on how much business you have with them.)

And - just keep reminding yourself that this is way less than the 7 to 10% you pay (in poor rate of exchange - not fees) changing cash or Trav Checks. (We all did that for years and never complained at all - since there was no choice. And apparently many of us never noticed the difference between the interbank rate and the much worse rate we got at the bureau de change.)

By the way, years ago most banks charged for all kinds of things. You paid for your printed checks. You paid a monthly service fee on checking accounts. You often paid up to 5 or 10 cents for every check you wrote. Did anyone have total "free" checking in the 1950's? I don't think so. But over the years, competition led banks to offering "free checking" with all those services above for free, and other benefits as well. Some will argue this point, but whenever one fee is taken away, you can be sure any business has figured out another way to recoup those "losses". It's business, folks.

Michel_Paris, these charges are generally hidden in the exchange rate. The rate that AMEX adds for transactions on Canadian cards used in the US is 2.75% and the last I read, CIBC Visa adds 2.50%, both calculated over the interbank rate.

One justification I heard about the credit card surcharge is that transactions abroad are more frequently challenged and more difficult to resolve for the card-issuing bank. I could accept this as logical based on my own experience of contesting not more than 5 transactions in 20+ years of credit card use (99+% of them in the US) -- two of those five were outside the US. However, that 3% on every transaction looks like the issuing banks just see traveling cardholders as a profit center; my hunch is that a fraction of a percent would cover their alleged additional costs for foreign transactions. I do use credit cards for hotels and major purchases overseas because the convenience is worth it to me, but I make sure to use the card with the smallest markup.

P-Bob: another aspect of your question involves accounting: specifically, the allocation of overhead, or expenses. A bank has plenty of indirect costs, and few direct costs. The young person who helps customers balance their checkbooks: how many customers would avail themselves of such a service if the bank charged full cost for the service? Those who need it most would be charged more than they might be able to afford. Same with other services.

"Canadians Shocked at Cr Card Foreign Exchange Charges - Rip Off?"

There was a thread here about Canadian credit cards earlier this year, and I think we concluded that all Canadian cards charge some kind of foreign exchange fee. Here's what CIBC, for example, says about their Visa cards:

"VISA International converts all foreign transactions to Canadian funds at a preferred rate. The exchange rate also includes a conversion fee, presently at 2.5%. This fee is to offset the costs incurred by VISA International and CIBC in offering a worldwide VISA service. It is important to note that this is a more expensive transaction than a domestic transaction."

I'd say that's pretty clear.

Is it a rip-off? It mutter about it every time I travel, but then again, Canadian bank dividends are helping put my daughter through university, so let the profits roll ...

Anselm

Welli'm feeling a tad, just a tad better about banks - the charges have always been there and actually it's better now because we know it and compare others.

thanks for clarification

it does seem US and Canada should have no such fees - what happened to NAFTA?

<i>&quot;VISA International converts all foreign transactions to Canadian funds at a preferred rate. The exchange rate also includes a conversion fee, presently at 2.5%. This fee is to offset the costs incurred by VISA International and CIBC in offering a worldwide VISA service. It is important to note that this is a more expensive transaction than a domestic transaction.&quot;</i>

- that would be a dandy explanation <i>IF</i> there were actually any cost above the conversion VISA performs, at 1%. The banks are simply tacking on additional % for no value provided. All of the justifications given in above prior posts imply something of value in return for the fee. The banks may certainly pass on the 1% it costs them, but they add +% for no additional value or service. That is where most would object.

That's where you and I disagree Travelnut. I can go to a machine 5000 miles from my house. I can put in a card and get money -- in local currency rather than my own in a matter of seconds. Someone is able to give me money that I was holding in safe keeping thousands of miles away and give it to me when I want it and in a form that is more usable that when I put it in the bank.

You don't think there's any &quot;value&quot; there, or that it isn't worth something because you can't justify their cost for doing it. I don't care if it doesn't cost them a penny -- I think it's an INCREDIBLE service that I have no objection to paying for.

Since you don't think you're getting any &quot;value&quot; for the charges, I assume you NEVER use foreign ATMS. There certainly isn't any point in doing so if there is no &quot;value&quot; or &quot;service&quot; being given to you as you imply. I personally think I am getting value and service for my fee.

&quot;That is where most would object.&quot;

I can understand how many people might feel that way, but I think J62 explained it perfectly at 12:13 pm. If a customer doesn't like the fee, they can choose some other way to pay for goods or services abroad. Or some other bank can lower their fee and scoop up loads of new business.

As someone who owns a piece of the bank, I'd like the bank to set the fee high enough to make lots of profit (which they pass on to me) and low enough not to drive customers to someone or something else.

AA

Do you people who claim a transaction costs the bank <i>nothing</i> really believe that? Let me set you straight.

See, there's this thing called <u>infrastructure</u>, and it consists of all the computers and terminals and wires and switches and network access and building rents and maintenance and payroll and plant overhead and all the other costs that change hands in order for you to be able to go to an ATM in Bath and get USD out of your checking account in Pittsburgh.

Visa charges 1% to help offset the cost of their part of the ride. Banks may charge 0-3% and write off any shortfall as a cost of doing business - some use low fees as an incentive. But whether the cost to the consumer is $0 or $5, those costs are in the banks' financial models. Smaller banks generally can't offset the cost with increased business - so they have to charge customers some or all of it. I don't think foreign transaction fees constitute a significant portion of a bank's profit model.

Banks are in business to make money - as are all commercial for-profit enterprises

consusmer is usually out to save money

so best to compare rates, etc. and if possible give such business to Capital One cards as they seem to be able to make money without the extra charges - assuming they use the same basic inter-bank exchange rate.

Compare and decide - let competition dictate the rates.