Credit cards’ unjustified 2.5% exchange fee screams competition

After two years with minimal travel, the Canadians are eager to leave.

Huge backlogs to Passport Canada as well as a dramatic increase passengers in the largest airports in the country are proof of this.

When travelers finally arrive at that European capital or that golden Caribbean beach, many will be using their credit cards for accommodations, meals, and other expenses. Whether used through a phone app or physically presented, credit cards are a convenient and secure means of payment, especially abroad.

Banks offer many credit cards – a major source of income – to travelers, offering a host of benefits – from airline miles to free baggage benefits. Security features, including identity theft protection, have also been improved over time.

But one thing hasn’t changed: the high and unjustified 2.5% foreign exchange fee on international transactions charged to Canadian credit card holders.

It is disconcerting that in a market where financial consumers seem to be spoiled for choice — Canada’s five major banks, plus card giant American Express, offer a selection of more than 100 credit cards — only two cards (Scotiabank AMEX Gold and Scotiabank Visa Passport) have a “no exchange fee” feature.

So what is the 2.5% exchange fee, how does it work and how much will it cost you?

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

Dress circle places for one Saturday morning in July cost £210 per room, or £840 for a family of four. The question is how this will convert to a Canadian dollar charge on your next credit card statement.

On all Canadian credit cards issued by major banks (except the two Scotiabank cards mentioned above), a network fee of 0.5% to 1.5% is applied to any foreign currency transaction. These fees go to network clearing companies such as Visa or Mastercard, and there’s really nothing you can do about it.

On top of that, there’s a 2.5% currency exchange fee – an arbitrary surcharge that card issuers impose on all international transactions. Visas currency calculator, for transactions made on May 4, 2022, converts one pound sterling to $1.659 (CAD). This rate includes a 3.5% mark-up 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, including $14 in network fees and an additional $34 in exchange fees.

I contacted all the major Canadian card issuers and asked them what justified the 2.5% exchange fee and why they didn’t offer cards without this fee.

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

Tom Wallis, spokesman for CIBC, said that “international transactions are more expensive to process than domestic transactions”, therefore, “foreign transaction conversion fees…are used to offset the costs incurred to offer a comprehensive global payment network”.

Becky Brescacin, Director of Communications 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 foreign transaction fees and AMEX Canada is generally market-compliant on this feature.”

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

Even stronger evidence of this lack of competition can be found south of the border where AMEX offers at least 11 credit cards without exchange fees and boasts of its advantage. Yet in Canada, AMEX does not offer a single card without such a fee.

The Canadian reality is that all major players charge exchange fees, everyone makes money from 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 too wear one; Wealthsimple offers a prepaid Visa card with no exchange fees; and don’t forget Scotiabank.

Travel is just one example where you will experience currency exchange fees. But anyone buying from international websites will also feel the pain. These fees can add up.

Brim does not charge exchange fees, its website says, because it “does not incur a surcharge”.

Well, if that’s true for a small fintech like Brim, how come the big banks incur exchange fees?

Two federal agencies could help improve the situation. The Competition Bureau needs to send a clear message to credit card issuers that they are being watched and encourage them to offer products with no exchange fees. Additionally, the Financial Consumer Agency of Canada must educate Canadians about hidden fees and alternatives.

But at the end of the day, it’s up to consumers to do their homework to avoid unwarranted exchange fees.

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