HOW BANKS BITE BUSINESS TRAVELERS
By Joe Brancatelli
August 11, 2010 -- Thanks to new Federal Reserve regulations and the CARD Act of 2009, credit, debit and ATM card users are now protected from a battery of abusive practices and outrageous fees. Well, everyone but business travelers, that is.
One area that both the regulations and the law ignored were fees imposed on transactions that banks and financial institutions consider "foreign" and transactions that require overseas currency exchanges.
Travel overseas and want to use your credit card? There's still a fee for that, and the price that financial institutions charge is skyrocketing. Want to use your debit card instead? There's a fee for that and prices are rising there too.
Want to use your ATM card overseas to withdraw cash from your own checking or savings account? Besides the fee the ATM owner may charge, your bank will charge you for the privilege of conducting business in a foreign currency. Want to avoid the fee by going to an overseas branch of your own bank? Sorry. Even if your financial institution operates overseas, it is likely to charge you to access your own money.
Think none of this affects you because you don't travel overseas? Think again. Financial institutions have redefined what a "foreign currency transaction" is. Even if you are being charged in U.S. dollars for a purchase you made in the United States, you may be hit with a currency fee if the merchant uses an overseas bank to process the transaction.
The new rules about fee disclosure now do require banks and financial institutions to highlight the topline cost of the overseas charges in bold-print disclaimers. But the details and the tricks of foreign exchange remain buried in the fine print. And there's big money in the small print.
The foreign-currency game was rampant when we discussed the issue three years ago. Things have gotten much more complicated (read: expensive) since then. In fact, more than 90 percent of bank cards and nearly 60 percent of credit union cards are now larded with currency fees, according to a report released last month by the Pew Trusts. The median fees? Three percent for bank cards and two percent for credit unions, Pew says.
That translates into a huge windfall for the country's financial institutions and big bucks out of your pocket. MasterCard reported a 10.9 percent growth in transactions and an eye-popping 39 percent rise in cross-border fees. Visa recently reported that international-transaction revenue rose 22 percent in a single quarter.
And it is, almost literally, money for nothing. In an oft-cited lawsuit, Visa reported that its cost related to currency transactions was just $6.9 million on revenue of $630 million. Even when you consider the banks' all-purpose caveat--"You have to factor in the cost of fraud. It is much higher on international transactions," one credit-card executive told me last week--the profit margins are astounding. And neither the Fed nor the new credit-card laws offer business travelers any relief.
If you carry an American Express card, for example, you're probably paying a 2.7 percent vigorish whenever you use the card overseas. That translates to $27 ladled upon a hotel bill that converts to U.S. $1,000. The big banks—Chase, Citi, Bank of America, Wells Fargo, HSBC—charge even more, usually 3 percent whenever you whip out their MasterCard or Visa overseas.
Need local currency (and who doesn't) as you travel? Dipping your banking or debit card into a local ATM will usually carry the same 3 percent charge, plus any fee imposed by the owner of the ATM. And some banks, notably Citi, no longer differentiate between an overseas ATM run by someone else and Citi's own network. Walk into a Citi branch in Shanghai or London and use your Citicard to get cash from your Citi account and you'll pay 3 percent for the currency exchange fee too.
"It's almost pure profit for us," a bank executive talking off the record admitted. "There are some incremental accounting fees, but other than that, (foreign-exchange) fees drop right to our bottom line."
You'd think making a pretty penny on business travelers when they are out of the country would be enough for the banks. Nope. In the last year or so, many have changed how they define a foreign-currency transaction. If your merchant—an international airline, for instance, or even a seller on eBay or Amazon.com Marketplace—uses a foreign bank to process your charge, you'll pay the currency exchange fee. You don't even know it's happening because the merchant is billing you in dollars and the charge appears on your card statement in dollars. But since the charge was routed through an overseas bank, your financial institution will take its 3 percent of flesh too.
(By the way, this flavor of foreign currency charge is partially fueled by an equally offensive practice called "dynamic currency conversion." That's when a retailer or restaurant owner overseas will helpfully suggest that he can handle the currency exchange on the spot and charge your card in U.S. dollars. Needless to say, the exchange rate you'll get is awful because the merchant receives a hefty piece of the currency transaction. Then your bank or financial institution will charge you its foreign currency fee atop the converted price anyway.)
Can you beat the system? Yes, but only if you pay careful attention to the game and choose your cards wisely.
There are a few cards—most notably, some elite charge products offered by Schwab in conjunction with their accounts—that do not impose foreign currency fees. Some international banks (including Citi and HSBC) offer a reduced rate or waive the currency fees for customers who join special programs that require high balances in checking, savings and other investment vehicles. A few specialty card issuers such as USAA limit fees on some cards to 1 percent.
Then there is Capital One, the bank and credit card issuer that has emerged as a formidable niche player with business travelers. Capital One credit cards currently do not impose a currency exchange or cross border fee. Banking cards tied to its checking, savings and money-market accounts are free from overseas fees, too.
Capital One's competitors deride its no-foreign-fees policy because they claim the bank's customers tend to be lower-income types who aren't likely to travel overseas. My reaction as a business traveler? So what. Demographics notwithstanding, it is clear that plenty of higher-income business travelers like me carry Capital One credit and ATM cards specifically to use overseas.
And for all their bluster, Capital One's competitors have realized that one way to win the business of business travelers is to create products that are free from foreign exchange folderol.
Consider the new credit card that Chase has unveiled in conjunction with Priority Club Rewards, the frequent guest program of the InterContinental family of hotels. Besides the usual affinity card perks (elite status, bonus points for hotel charges, free stays), the Chase Priority Club Select Visa does not charge foreign exchange fees.
Chase, the nation's largest card issuer, will also soon unveil its first credit card for the Hyatt Gold Passport frequent guest program. The much-anticipated card was announced earlier this year, but neither Chase nor Hyatt will discuss its features before the product is officially introduced in the next few months. But one hot (and plausible) rumor is that the Hyatt-tied card will also be free from foreign exchange fees.
"I wouldn't say [foreign exchange fees] are a new battleground in the travel business," one credit card executive told me last week. "But I will say that Capital One has gotten people's attention. "The theory that business travelers are price insensitive is silly. They know when they are getting dinged 2 or 3 percent for no reason."
The Fine Print…
One more complication to using your credit, debit or ATM cards overseas: Much of the world is moving to cards that use an embedded chip rather than the magnetic stripe preferred by U.S. financial institutions. Some overseas point-of-sale devices (ticket machines, for example, or "swipe" terminals at retailers) no longer accept cards that don't have the new chip technology. So make sure you have local currency.
ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.
THE FINE PRINT This column is Copyright © 2010 American City Business Journals. All rights reserved. Reprinted with permission. JoeSentMe.com is Copyright © 2010 by Joe Brancatelli. All rights reserved.