December 10, 2023

Business Visa

The Business Visa Is Mightier Than Sword

Credit cards’ unjustified 2.5% FX fee screams for competition

After two years with minimal travel, Canadians are itching to get away.

Huge backlogs at Passport Canada as well as a dramatic increase in passengers at the country’s largest airports are evidence of this.

When travellers finally make it to that European capital or golden Caribbean beach, many will use their credit cards for lodging, dining, and other expenses. Whether used through a phone app or presented physically, credit cards are a convenient and safe way of paying, especially abroad.

Banks gear many credit cards — a significant source of revenue — toward travellers, offering a slew of benefits — from air miles to free baggage perks. Security features including identity theft protection have also been improved over time.

But one thing hasn’t changed — the hefty and unjustified 2.5 per cent foreign exchange (FX) fee on international transactions charged to Canadian credit card holders.

It is puzzling that in a marketplace where financial consumers appear to have plenty of choice — Canada’s Big Five banks, plus card giant American Express, offer a selection of more than 100 credit cards — only two cards (Scotiabank’s Gold AMEX and Scotiabank’s Passport Visa) have a “no FX fees” feature.

So, what is the 2.5 per cent FX fee, how does it work and how much is it going to cost you?

Say you decide to treat your family to “Harry Potter and the Cursed Child,” the blockbuster show playing at Palace Theatre in London, England, this summer. Your kids are super excited, and you haven’t done anything in so long, you splurge on the really good seats.

Dress Circle seats for a Saturday matinée in July are £210 a piece, so £840 for a family of four. The question is how this will convert to a charge in Canadian dollars on your next credit card statement.

On all Canadian credit cards issued by the big banks (save the two Scotiabank cards mentioned above) a network fee of between 0.5 per cent and 1.5 per cent is applied to any transaction in a foreign currency. This fee goes to the network clearing companies such as Visa or Mastercard, and you can’t really do anything about it.

On top of that, there is a 2.5 per cent FX fee — an arbitrary surcharge that card issuers impose on all international transactions. Visa’s currency exchange calculator, for transactions made on May 4, 2022, converts one British pound to $1.659 (CAD). This rate includes a markup of 3.5 per cent over the European Central Bank Rate, Visa says. So, the £840 paid for four Harry Potter tickets will show up as $1,393.76 on your credit card statement, of which $14 are network fees, and an additional $34 are FX fees.

I reached out to all major Canadian cards issuers and asked what justifies the 2.5 per cent FX fee and why they aren’t offering cards without such fees.

Of the major banks, RBC and TD didn’t respond to my email; Marie-Catherine Noël, a spokesperson for BMO, promised an answer but never provided one. Only CIBC and American Express (AMEX) Canada responded with statements.

Tom Wallis, a spokesperson for CIBC, said “international transactions are more expensive to process than domestic transactions,” hence, “the foreign transaction conversion fees … are used to offset the costs incurred in offering a comprehensive worldwide payment network.”

Becky Brescacin, a communications manager for AMEX Canada, said, “AMEX Canada offers a wide range of products, including some of the most competitive credit cards in the Canadian market.” She also said that “Many Canadian credit cards charge a foreign transaction fee and AMEX Canada is generally in line with the market on this feature.”

Brescacin essentially acknowledged that there is little competition among Canadian card issuers when it comes to FX fees.

An even stronger evidence of this lack of competition is found south of the border where AMEX offers at least 11 credit cards with no FX fees and brags about how great a benefit it is. Yet, in Canada, AMEX isn’t offering a single card without such a fee.

The Canadian reality is that all major players charge the FX fee, everybody’s making money off it, and no one wants to change the status quo.

Fortunately, there are a few alternatives to the big banks’ grip on the industry. For example, Brim Financial, a Toronto-based fintech, offers a few zero FX cards; Home Trust also carries one; Wealthsimple offers a prepaid Visa card free of FX fees; and don’t forget Scotiabank.

Travel is just one example of where you’ll feel FX fees. But anyone who shops on international websites will also feel the pain. These fees can add up.

Brim doesn’t charge FX fees, its website states, since it “doesn’t incur a surcharge.”

Well, if that’s true for a small fintech like Brim, how come the big banks are incurring FX costs?

Two federal agencies could help improve the situation. The Competition Bureau must send a clear message to credit card issuers that they are being watched and encourage them to offer zero FX fee products. Also the Financial Consumer Agency of Canada, needs to educate Canadians about the hidden fees and the alternatives.

But ultimately, it is up to consumers to do their homework to avoid an unjustified FX fee.

Amir Barnea is an associate professor of finance at HEC Montréal and a freelance contributing columnist for the Star. Follow him on Twitter: @abarnea1