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.