Credit purchases abroad are getting more expensive

Goodbye, MBNA. Hello, Providian.

If you use a credit card in a foreign country, you may find yourself saying something like that.

Two years ago, this column examined the increasing propensity of credit card-issuing banks to tack on a 1% to 2% fee for foreign currency transactions. That fee was in addition to a 1% currency exchange fee that Visa and MasterCard charged.

Things have progressed from there, woe to the foreign traveler.

Consumer Action, a nonprofit consumer rights organization in San Francisco, issues an annual credit card survey of 140 banks and the fees and other costs associated with credit cards. From 2003 to 2004, the number of surveyed banks adding their own foreign currency conversion charges grew from 17 to 26.

The results of its 2005 survey won’t be available until the end of this month at www.consumer-action.org, so the organization declined to speculate. But if my experience is any indication, that number surely will have grown in 2005.

Two years ago, MBNA did not charge the added 1% to 2% fee. My primary card, a United Mileage Plus Visa (issued now through Chase) had just started charging it. So I applied for an MBNA card and have been using it for most of my foreign charges. I’ve probably saved a couple of hundred dollars, which is better than a stick in the eye.

Last month, MBNA announced in a mailing to its cardholders that it would begin charging a 3% “cross-border transaction” fee. So for my foreign travels, it is goodbye, MBNA, and hello, Providian, which does not charge the added fee.

That MBNA is disclosing these fees is a recent development. It was spurred, some industry analysts say, by a recent class-action lawsuit against Visa and MasterCard. (That decision on disclosure is being appealed.) Spokespersons for the credit card companies say there is no link between the suit and the changes.

But in an attempt to clarify its policy to consumers, Visa and MasterCard this year changed the way they disclose the charge for the 1% currency conversion fee.

Full disclosure of fees means that if banks like MBNA want to pass on to their customers the 1% fee from Visa or MasterCard and tack on a 2% charge of their own, they add them together and call it 3% without differentiating what goes into that total.

More important, they have changed the wording from “currency exchange” to “cross-border,” so you don’t even have to travel to be hit with the fee.

For example, if you were to purchase something in U.S. dollars online from Canada, it would cost you 3%. Or if you purchase something in the Czech Republic and the shop clerk offers to convert the amount into dollars (a bad idea, by the way), you’d still be hit with the 3% charge.

In response to consumer, merchant and bank complaints when Visa implemented the new fee structure in April, the company last week rescinded the cross-border transaction fee and replaced it with essentially the same policy that was in effect before. Now only foreign transactions that involve the exchange of currency will be subject to Visa’s 1%. As of the Travel section’s press time Tuesday, MasterCard says it is still planning to implement its cross-border transaction fee Oct. 1 (though it plans to charge 0.8% if there is no currency exchange).

It’s unclear whether Visa-issuing banks, many of which have followed Visa’s lead on cross-border transaction fees, will revert to applying fees only when currency exchange is involved.

“It’s up to the issuing banks,” said Rhonda Bentz, a Visa USA spokeswoman.

The 1% currency exchange fees provided Visa International with $424 million in revenue for the fiscal year that ended September 2004, nearly 30% of its revenue for the year, according to the Nilson Report, a credit card industry newsletter published in Carpinteria.

Such fees are attractive to credit card-issuing banks, which are increasingly looking to fees as a source of income, said David Robertson, publisher of the Nilson Report.

“Fees now generate about 19% of revenue in the card business,” he said.

For its part, MBNA said adding the fee was a response to fraudulent overseas transactions.

“The cost of foreign currency fraud was approximately five times that of domestic fraud,” said MBNA spokesman Jim Donahue.

Losses for domestic and foreign fraud steadily declined in recent years, both as a measure of real dollars and as a percent of the amount of credit card transactions, the Nilson Report said.

In 2004, credit card fraud loss for U.S. issuers of Visa, MasterCard, American Express, Discover and Diners Club was 4.7 cents per $100 charged, a 15-year low, according to the Nilson Report. The high was in 1992: 15.7 cents per $100. Fraud losses in 2004 came to $788 million, down from $882 million the previous year.

Do the math. If Visa alone took in $424 million in 2004 with its 1% fee, Visa-issuing banks could expect to reap an additional $848 million if they added their own 2% fees -- enough to cover the fraud losses not just for Visa cards but for the entire industry.

The foreign transaction fees are profit-driven, Robertson said.

“So what?” you may say. The banks deserve to make a profit wherever they can. Fair enough, as long as it is clear what consumers are being charged for.

Using a credit card when purchasing anything overseas is still a better deal than any other method. The exchange rates are fair and well-established; in case of fraud or other problems with the purchase, you’re protected; and the fees are still more reasonable than those you’ll find in currency exchange offices.

And with better disclosure of such fees, consumers can shop around for the card that best meets their needs.

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James Gilden can be reached at www.theinternettraveler.com. Comments on this Travel Insider column can be directed to him or to [email protected] or Travel Insider, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. We regret that we cannot respond individually.