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Friday, August 26, 2011

Will Canadian Credit Card Foreign Exchange Fees start to disappear like they have in the U.S.?

In Canada, the issuers of travel rewards credit cards have taken many steps in their attempts to attract and retain customers for their card products. Whether it be a sign up bonus, renewal bonus, enhanced insurance packages, first year free, you name it, it has been done except for one new marketing move that is taking place in the United States.

The latest trend in the U.S. to capture credit card clientele is the elimination of Foreign Exchange fees. Foreign Exchange fees are a service charge that credit card issuers add to transactions made in any currency outside of your home country. When you make a purchase abroad (in person or online shopping) the issuing bank will convert the purchase amount at the prevailing exchange rate at the time of purchase and charge you the Foreign Exchange fee for providing that service. Most of the Foreign Exchange fees on Canadian credit cards hover around the 2% mark, so for someone who travels a lot or does a lot of online shopping outside of Canada the 2% fee can add up really quickly.

Eliminating the Forex fee on a credit card won’t appeal to everyone in Canada but it definitely would catch the eye of frequent travelers, business travelers and those making a lot of purchases in foreign currencies. The one common factor between all these types of card users is that most of them spend a lot and almost all of that spending is put on their credit cards. I feel that a competitive advantage could be had here if a Canadian credit card issuer was to follow in the footsteps of their U.S. counterparts with such a marketing move. So I approached all the major credit card issuers in Canada with the question as to whether they are planning on following the trend in the U.S. and eliminate the Forex fee on some or all of their cards to gain a competitive advantage. The overwhelming answer from those who responded was no. At this point it seemed that for most of the card issuers it was not even on their radar except for one, American Express stated that they are following the trend closely and while they have no plans on implementing it in Canada anytime soon they are trying to understand what it could mean for them in the future.

I’ll take a shot at what it could mean for American Express or any other issuer for that matter. First, I believe the issuers see this as a loss of revenue stream rather then a potential profit center. If marketed correctly, the first card that offers this feature along with their regular rewards and benefits will be a market leader and could take a sizeable chunk of the market for credit card users using their cards abroad. Overall, the first card that takes this route should see an increased cardholder base and in turn the revenue from the increased spend on these cards could easily eclipse the lost revenue stream on foreign exchange fees. This marketing move is relatively new so the Canadian banks may also be holding back to see what happens in the U.S. market and whether the cards that have no foreign exchange fees remain that way or go back to charging the fee.

Since it is the latest marketing trend south of the border, many cards in the U.S. have been jumping on the no foreign exchange fee bandwagon so the market is starting to see a saturation of the offer and it may not lead to any competitive advantage over other credit cards. With this type of offer, the issuer has to be a market leader to realize the revenue gain because once everyone else is doing it, the issuer will have to offer it as well, but not to gain customers, rather it will need to be done to keep their current customers from defecting to another card.

I would love to hear your thoughts on this subject, feel free to comment below on the pros and cons of this type of marketing move, who you think will be the first in Canada to offer (if any issuer at all) and how long you think it would take other banks to respond or if leave any other comment you think ties into this subject.

16 comments:

  1. This would be a welcome innovation, but I wouldn't count on it. In fact, with the BMO acquisition of Citibank's portfolio and TD's of MBNA's, I foresee less, not more, competition in the Canadian travel and points cards space.

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  2. I firmly believe that it is a definite money losing business proposition for the credit card companies to not eliminate the foreign exchange fees. I'm a frequent traveler, and to save on the credit card's foreign exchange fees, I usually change currency at the local bank before I leave. This is a bit of a hassle but well worth the savings especially if you spend in larger amounts. In relation to the article, I believe that the first mover to eliminate the foreign exchange fees will gain significant market traction in the market segment that is the most profitable, high spenders. The switching cost from one credit card to other credit cards, especially if the other card's attributes are similar, will be enough to deter these new customers from switching in future. Why won't they switch? Simply because there is no reason to. I am surprised to hear that most credit card companies do not have this issue on their radar. I, for one, am keeping tabs on each credit card company's foreign exchange fees. It is a matter of when, not if, will foreign exchange fees be eliminated, as market competitive forces will eventually remove such pricing inefficiencies. The interesting thing would be to see which company first recognizes this opportunity and to capitalize on this.

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  3. A very timely post! I plan on doing extensive international travel over the next few years and am switching over to a US card (HSBC Premier World MC) that doesn't charge forex fees for this very reason. I'm surprised Capital One didn't include this as one of its features on its otherwise very good Aspire World MC. I believe their American outfit doesn't charge forex fees and it would have made the card even more competitive in the Canadian market. As it is, I will be reducing my spending on this card and may cancel it all together in the next year.

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  4. Amex already agreed to waive forex fees as a condition of getting the contract to be the travel credit card supplier for the Government of Canada.

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  5. Capital One's US card does not charge a foreign exchange fee. The large US banks tend to charge a 3% FX fee.

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  6. I am presently looking for a better travel rewards card. One with no foreign exchange fees would be a definite plus for me.

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  7. "I firmly believe that it is a definite money losing business proposition for the credit card companies to not eliminate the foreign exchange fees." This is true, and this is only the surface- the apparent immediate effect- and doesn't discuss yet its implications on a deeper level.

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  8. I didn't know about the 2.5% charged on foreign CC transactions until quite recently! It definitely adds up. I use two credit cards now, one C$ and one US$. The best Canadian US$ card, I believe, is by TD, as it offers the most insurance for the price. RBC US$ offers rewards, but is more expensive.

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  9. Amex already agreed to waive forex fees as a condition of getting the contract to be the travel credit card supplier for the Government of Canada.

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  10. This comment has been removed by a blog administrator.

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  11. Amazon just released a card with 2% cash back on all Amazon.ca purchases and 1% on everything else. Best of all, it has 0% foreign exchange fee! Afaik, this is the only credit card in Canada that has this. Check it out here: http://www.amazon.ca/gp/cobrandcard

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  12. forex on cc's is such a losing proposition. I tell all my friends, when out of Canada use an ATM and take enough each time to make it worthwhile. Just got a TD US card, so will try it soon. I understand that the 2.5% fee is split between the card and the bank. the only incentive to change is if we stop using cc's while abroad.

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  13. Chase has now released their Amazon.ca Visa card which promises to assess NO fees over and beyond the Visa International rate charged to them by Visa.

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  14. Yes the Chase Amazon Visa is the first card to offer no foreign exchange fees, it was posted in the comments above on May 3 and we covered it here:
    http://blog.rewardscanada.ca/2012/05/first-canadian-credit-with-no-foreign.html

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  15. Sears Mastercard will remove the 2.5% fee as of July 23.

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    Replies
    1. Makes sense since it is also a Chase card like the Amazon card. This just upped the value of the Sears Voyage Mastercard!

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