Why Do Credit Card Companies Waive Foreign Transaction Fees?

At some level this may seem obvious, but it was still interesting to me. It turns out that credit card companies waive foreign transaction fees on select products for the same reason they offer mileage bonuses even when those bonus offers come at a loss.

It’s all about influencing consumer behavior beyond the individual transaction that benefit from the bonus or the elimination of a fee.

American Express isn’t making money when it gives out 3 points per dollar on airfare with its Premier Rewards Gold product. Citi never made money offering 5% back on drugstore purchases.

The idea with those is to engage their cardholder so that they become accustomed to using the card, and keep pulling it out. Because that’s how behavior apparently actually works, we don’t all maximize cards for each transaction. We get used to using a card and we keep using it.

I spent about 90 minutes last week with a card executive who runs a major co-brand portfolio. He explained that cards which have foreign transaction fees get put away on trips abroad. And consumers keep the card in their wallets when they return.

Customers get into the habit of using a different card and they just keep using it. So the foreign transaction fees cost too much future business, making it a no-brainer to eliminate (at least for a consumer set that travels abroad and has card choices and significant spend).

This executive explains that he doesn’t mind consumers having more than just his card – he expects it – the fight is to make sure that his product is top of wallet.


About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. But is waiving foreign transaction fees even a loss leader for credit card issuers? Does processing foreign transactions even cost them any more than domestic ones? I always assumed that it was merely a cash grab for the issuers.

  2. DWT is right, the additional vig they charge over the fee that Visa or MC charges is just gravy.

  3. There is absolutely no world in which foreign transaction fees cost anywhere near what the end-user fees are. Obviously your description of “why would a credit card company forgo the giant profit they would otherwise mint off of forex fees” is correct: but I do not believe for a second they are actually losing much money. Obviously it is a calculus, but they are forgoing one kind of profit (forex fees) for another kind of profit (however else they make money when a customer uses that particular card).

    This is not to say the forex cost for a giant multinational “largest banks in the entire world” are zero, but it’s close. Compared to 5% back, which is more real, or even miles (although I am sure Chase e.g. got a helluva deal during UAL’s bankruptcy). I think forex has to be far and away cheaper to waive than miles or percent back.

  4. DWT and beachfan are right. Eliminating foreign transaction fees is NOT a loss leader. The credit card companies still get a merchant fee, and they earn a small amount of money on the current conversion, maybe 1% total.

    I definitely won’t use a card that charges a foreign transaction fee when there are good alternatives. I’m looking at you, HH Amex Surpass and SPG Amex and Amex BRG.

    As a result, My Fidelity Amex (curiously issued by a subsidiary of Bank of America, I believe) and Chase Sapphire Preferred have the top positions in my wallet most of the time.

    Based on his rationale, those are poor business decisions to keep the fees on the other cards, unless there are a lot of uninformed consumers who use them not realizing the fees they are incurring.

  5. Are there any good airline or no-foreign-transaction Debit cards now that are worth the fee for “retired spend?” I gave up credit cards years ago. Hope I’m not the first ban.

  6. Part of a 3% foreign transaction fee goes to the payment network and part to the issuing bank, so a 0% fee is subsidized by the issuing bank at least out of the merchant fee, they do pay out on it, and of course they’re still buying reward points.

  7. When you say payment network, are you referring to the processor or Visa or MC international? I thought Visa and MC international vig is about 1% and built into the conversion rate. A 3% forex fee is on top of the 1% Visa forex charge.

    If it’s the payment processor, do they charge the bank more for processing charges arising outside the US?

  8. Foreign transaction fees are charged because they USED to be commonplace. When the first no foreign fee cards came out, other issuers simply didn’t the see the diminished revenue–since most people just kept using their cards with fees anyway. Now with so many no foreign transaction fees, many but not al consumers have gotten wiser to this bank ploy. Banks don’t give up a fee unless they think it is to their advantage. When enough card users stop using the card or the bank feels they are losing too much international business to other banks issuing cards without the foreign fee, the bank/card will stop charging the fee. It’s that simple.

  9. @Bill – “When enough card users stop using the card or the bank feels they are losing too much international business to other banks issuing cards without the foreign fee, the bank/card will stop charging the fee. It’s that simple.”

    Yep. For all the people who complain about FTFs, and for all the noise they make, there apparently aren’t enough of them to influence the finances of the card issuers who charge them.

  10. Waive?? What on earth are you talking about? This post is a prime example of Stockholm syndrome — the fees are completely made up, so there’s nothing to “waive”.

    This post is as preposterous as claiming that the government is waiving a tax on the air we breathe.

    And yes, I am one that does not carry a card with such a fee and encourage anyone else to do the same.

  11. Exactly. These FTF’s didn’t “Used to be commonplace” at all. They never existed at all in the 1980’s. Then some bank or issuer invented the fees as another way to profit from consumers and like lemmings everyone else started to copy them. There’s no extra cost or service provided for these fees, and the card issuers get discounts from the merchants just like for domestic charges plus the opportunity to make a profit on the foreign exchange conversion.

  12. Not everyone pays off their credit card bills in full each month. If they don’t, the credit card companies make a lot of revenue in interest. Hence they probably more than make the exchange fees back from just this alone.

  13. I thought this was all obvious. When I travel abroad, which I do frequently, I use my CSP and my Barclay’s Arrival almost exclusively. I also bring along my cards that trigger lounge access, but don’t use them, and anything else stays at home. Foreign exchange fees are a great way to see to it that your card stays in my sock drawer. This is just a big “we charge this because we can” ripoff fee. It does not offset a cost to them. Indeed, when I cancel a card and they ask for a reason, I often include, “A lot of my credit card use is overseas and your card is useless for that.”

  14. Carl,

    Note that the Fidelity Amex DOES have a foreign transaction fee, but it is only 1%, not 3%. This prevents me from using it in any meaningful fashion when traveling abroad when there are so many other more attractive options with no transaction fees.

  15. Especially hotel cards- seems so obvious that we would use them more hello they are for hotel spend! Spg amex how can you still be charging forex???!! Us bank club carlson- would use it more for sure. Stupid.

  16. I think many are confused about foreign transaction fees. Visa and MasterCard charge a < 1% fee for all transactions that cross borders. I'm not sure exactly when they started charging this fee, but the stated purpose was to pay for expansion and upkeep of their international payment network.

    This fee is the only fee involved in foreign transactions and charged to the card issuing bank. Anything on top of this approximately 1% is just fluff that your card issuer feels they can get away with charging. Pure profit.

    I've seen some pretty favorable exchange rates used when using my cards overseas so I'm not so sure payment networks add a percentage to the exchange rate. If they do, however, the purpose is different than that of the FTF.

  17. Amazed there are cards still charging FTFs. Amex is perhaps my favorite issuer but when I travel, all but my Plat stays at home. Shame on SPG and Surpass charging FTF as I use Arrival instead. But I guess many simply don’t know about the fees, don’t care or don’t have alternative cards and Amex etc al know that so the smart business decision is to charge them.

  18. Almost all of us probably know people who when talking about their vacations say, “I’m still paying off the credit card three months later, but it was worth it!” I suspect the card companies make more off the interest from people overspending on their vacations than they do on foreign transaction fees.

  19. When travelling internationally for business, I use my SPG card whnever possible since I am reimbursed, FTF and all. It is a little hassle for the Expense Report, but face it, you do not get a very good exchange rate – and this is where the CC companies make $$ – arbitrage on exchange rates. What you see published on the web is for transactions in excess of $1MM and CC companies consolidate the total transactions to get the lower rates.

    FWIW, AMEX Platinum has no FTF.

  20. When my husband traveled and worked overseas, he was issued a company credit card – American Express or Diner’s Club. It was “Here, get this card; the bill still comes to you and then fill out an expense report.” I think most big companies did this and, hence, a foreign profit center. I would bet that most of their customers still use it for company expenses, so I wouldn’t hold my breath that FTFs will ever be eliminated.

  21. It’s really interesting to hear people here talk about there not being any fees charged to a card issuer when processing a foreign transaction. That’s simply not true. Besides the supposed <1% fee from V or MC, there is something called bid-ask-spread in the F/X market. The spread isn't as large as say a small cap stock which doesn't have the same liquidity in the market place as the GBP/USD. However, there are some currencies where the spread between two currencies may not be favorable and thus a F/X fee is (was) warranted.

  22. Ben – you are correct that is a bid-ask spread in the currency market. However, I suspect that you are probably incorrect in how it affects the credit card companies. Presumably they include the spread in the conversion rate they use for you. However, since they have charges from country B by cardholders of country A and charges from country A by cardholders of country B, the credit card company only has to go to the currency markets for the net difference. In other words, they then come out ahead on the fees for the offset amount that have been charged to customers but that they did not have to pay. I don’t have any insider knowledge, but I can’t imagine them doing it any other way.

  23. This is a good analysis of why issuers offer bonuses that function as loss leaders. However, if your correspondent tried to make it seem as though waiving FX fees were somehow similarly generous, he was being quite disingenuous. The issuer still makes their full interchange profit on foreign transactions, and closes any exchange risk out at or near the instantaneous interbank rate. All they have done is stop adding a wholly unjustified spread to the conversion. In my opinion this is far more a recognition of market forces and the availability of cheaper FX conversion (including from the same banks!) than any scheme to encourage usage, although that is of course a nice benefit as well.

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