One of the more annoying of the world’s bank charges is the fee that banks
charge you when you make a purchase on your credit card overseas. In fact, there
are often three fees:
- The 1% fee which Visa and Mastercard charge the issuing bank, and which
is usually passed on to the cardholder;
- An extra fee of up to 2% charged by the issuing bank for no obvious reason;
- The hidden fees which may or may not be found lurking inside the exchange
Bankrate.com has a good
overview of how the first two fees differ from issuer to issuer: Bank of
America and Citibank charge a total of 3% after conversion to US dollars, for
instance, while Wachovia and WaMu charge 1%, and Capital One actually eats the
charge from Visa and Mastercard and charges 0%. As for the stand-alone cards,
American Express charges 2% while Discover charges 0%.
Not a single bank would tell Bankrate why they might charge more than 1%, maybe
because they were embarrassed to admit it was just a scheme for making money
without any effort.
But I’d be very interested to see not how the fees compare in theory, but how
they compare in practice. If you bought four identically-priced items overseas
at exactly the same time, using a Visa card, a Mastercard, an Amex card and
a Discover card, how would your charges differ? Discover, with its 0% fee, might
look like the best option – but if it whacks you on the exchange rate,
you might be better off elsewhere.
There are two reasons I’m a little bit suspicious of Discover’s 0% fee, and
they both come down to the fact that the Discover card is basically a US card,
not a global one. As a result, relatively few overseas locations accept it in
the first place, which means that currency conversion is less easy and common
for Discover than it is for other cards. More importantly, there’s no netting
out: while lots of Americans use their Discover cards abroad, there aren’t any
Europeans, say, using their Discover cards in the US. So every time a Discover
cardholder makes a purchase, Discover really does need to convert dollars into
that foreign currency.
Visa, Mastercard, and Amex, on the other hand, have revenues in lots of different
currencies on a daily basis. If American cardholders spend $1 million in Europe
on the same day that European cardholders spend $1 million in America, everything
can pretty much cancel itself out, and no actual FX trade needs to be done.
Still, this is all very theoretical. Does anybody know how and whether FX conversion
rates differ in practice?