Tracing the foreign transaction fee

I read with some interest Patricia Russell’s letters concerning credit card foreign transaction fees (May ’10, pg. 14 & July ’10, pg. 11).

Visa imposes a foreign transaction fee (FTF) whenever a charge is run outside of the United States. We are talking about a fee that Visa charges the customer’s bank and which then (almost certainly) is marked up and passed along. The merchant has no role in this fee; i.e., Merchant -> Visa (adds fee) -> Card Issuer/Bank (marks up fee) -> Customer (stuck with fee).

The flow for a domestic credit card charge is as follows:

1. The customer gives the merchant/vendor the credit card and the merchant “runs” the charge.

2. The merchant’s card processor, almost always his bank, credits the merchant’s account for the charge amount less a processing fee. In the US, the fee is typically in the 2.5%-4% range (with American Express charging the higher amount, which is why a lot of merchants won’t take AmEx). So if I am a merchant and run a charge of $100, I may get $97 credited to my account.

3. The merchant’s card processor electronically passes the charge to Visa, Inc.

4. Visa electronically passes the charge to the cardholder’s card issuer, typically, a bank or credit union.

5. The charge appears on the cardholder’s statement at face value, the exact amount that was charged in step 1.

In steps 2, 3 and 4, the three entities somehow divide the pie (the processing fee) so they each get a piece.

Now, in a credit card charge run internationally, the foreign transaction fee is assessed at step 4. Then (99% probability) the foreign transaction fee (FTF) is marked up and passed to the cardholder, step 5. It is that marked-up FTF that kicked off this whole discussion.

Note: I have not discussed currency conversion. Visa handles the conversion between steps 3 and 4. In other words, they might receive a charge (step 3) in euros and pass it along (step 4) as dollars. If I recall correctly, the conversion is claimed to be at “wholesale rates,” but I am sure that Visa takes a little slice (they deserve something) that is not really visible; it’s just a slight increase in the dollar amount passed in step 4.

The merchant, too, has the option to do the conversion at a rate of his choosing. This is probably something to beware of, since the rate could be highly unfavorable. The charge slip amount should always be stated in the local currency and you should retain a copy so that you can cross-check your credit card bill.

(Since the currency conversion has been done before the transaction reaches the credit card issuer, if the issuer is absorbing the foreign transaction fee, there is no opportunity for them to “get well” by hiding it in the currency conversion.)

I would point out that merchants running charges in a foreign country do not benefit from the FTF charged to the customer in the Visa transaction above. Even though any of the merchants’ American banks would be delighted to provide card-processing services, the benefit to merchants for running the charges in a foreign country may be a better rate in that country due to huge volume; tax advantages that allow them to better manage profits between national subsidiaries and the home office; cost advantages from not having to repatriate the money, or convenience from having all credit card processing at one location.

It really doesn’t matter to a customer why a merchant makes this choice. What matters is that when the merchant makes it, the customer is almost certain to get whacked with a fee.

So, because there is an economic advantage to merchants in running these charges overseas, some choose to go ahead and burden their customers with the consequent foreign transaction fee. I maintain that because the merchants are the cause of the extra fee, they should pay it. If no one ever pushes back, this egregious behavior will continue.

GEORGE ANDERSON

Minneapolis, MN