Could somebody please explain why some banks charge a fee for card transactions made in a foreign currency? For example, for a debit card transaction, as far as I know, the exchange from the foreign currency to the local currency is done by the card operator using an exchange rate of its own, so the bank only has to debit the account in the local currency. So, as far as I can see, there is no extra cost for the bank when transactions are made in local or in foreign currencies.
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If you don't see a cost to currency conversion, then will you be an unwitting pawn in my plan to arbitrage you into bankruptcy and make myself rich? No, you won't convert currency for me for free because you intuitively know there must be costs involved, including the initial investment of creating the capacity to make conversions, you just seem to be waving them away as so marginal to the bank's operation that they shouldn't be charged. That's a question of pricing, not a question of cost. It's not costless when you need infrastructure and employee time to complete the task.– NL7Commented Jul 28, 2014 at 21:27
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A lot of nice, long and detailed explanations why they charge fees for a computer calculation performed at near light speed but basically... because they can and nobody can't or won't, rather, stop them, under the rubric, "It's a free market."– Ray StevensCommented Mar 30, 2016 at 18:13
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4 Answers
Because they can, of course.
They do share part of their commission with the international clearing house (be it Visa or Mastercard or any other of the international credit card companies), so this fee is partly to recoup the shared commission.
And partly because they can.
answered Jul 27, 2014 at 1:15
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I don't really know, but my feeling is that there is no extra cost for the bank. The card operator acts as a clearing house and the bank never has to do anything about the foreign currency (apart from acknowledging it). I say this because up until 2 years ago or so, in the UK, most banks didn't have a fee for foreign transactions on debit cards. And now most of them have introduced one and the merchant fee has remained the same. I might be totally wrong, but I think the only reason is "because they can". Commented Jul 27, 2014 at 21:29
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1It depends on the country and organizations. When I worked in the industry, the country I worked at had its own internal clearing house, which would only go externally for international transactions - and charge issuers for that. So foreign cards in that country would cost more to the issuers than at home, and foreign transactions for domestic issuers would cost more as well. Maybe something similar happened in the UK recently? Commented Jul 27, 2014 at 21:32
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2Anyway "because they can" always holds. Unless there's enough competition to drive prices down - they will go up. Because people don't have a choice, after all - we all travel. Commented Jul 27, 2014 at 21:34
Banks and card networks aren't the only players in card transactions.
When you swipe the card, the transaction follows a chain to your card issuer to see if you have the credit or funds available to cover it.
NOTE: This is a general transaction flow, and some acquirers / countries may differ in how their transactions are processed. The general idea is the same.
Card Swipe @ Merchant POS -> Payment Gateway -> Processor -> Card Network -> Issuing Bank
These processes below usually happen in parallel, when the issuer responds about fund availability.
-> (Auth Response) Card Network -> Processor -> Gateway -> POS (Transaction Approved)
-> (Fund Queue) Card Network -> Acquirer (Can be voided before settlement)
Then, when it's time to settle...
(Settlement Notice) Merchant Batch Close Transactions -> Acquirer -> Card Network.
(Funds) Acquirer -> Merchant Account. (Varies by country)
(Settlement Data) Card Network -> Processor.
-> Issuing Bank.
(Posted Transactions) Issuing Bank -> Card holder
You'll notice that the processor takes on a large role in facilitating the transaction from start to finish, and the processor is usually where the exchange fees and markups are incurred. These are charged to the card issuer and passed on by the issuer to the cardholder.
The card networks (most commonly, Visa and MasterCard) also charge fees for transactions that take place outside of the issuing country of the card, regardless of whether the transaction takes place in a different currency or not. Visa calls theirs the International Service Assessment (ISA), and MasterCard calls theirs the cross-border fee. These are charged to the card issuer and passed on by the issuer to the cardholder.
While debit cards do not carry the FX rate change risk, they still process on the global card networks, and the same general process is used for fee assessments.
Yes, they charge what the market is willing to pay, and banks know we all shop around, but there are also costs in the FX process.
First, the bank has to run an account in each currency you use, and different currencies have different hedging requirements, so the bank's cost of hedging a foreign currency exposure is likely to be built into the transaction, and it depends on the currency. Some currencies cost less to hedge than others. Further, If the bank doesn't run an account in some currency, they have to pay for someone else to run the account, and hedge it. They pass that cost on to you.
Secondly, the bank has to fund each different currency account they run. OK, so your transaction is probably between your account, denominated in one currency, with your bank, and the account denominated in the foreign currency, with your bank. These accounts have to be funded from somewhere, and to do that your bank needs an account with the central bank for each currency they run accounts for. That is the only way they can be guaranteed real time gross settlement with counterparty banks in cross border transactions. Otherwise they take a number of risks to get your payment made for you, including settlement finality. All that has a cost as well.
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But, isn't the card operator handling the foreign exchange? As far as I understand the process, the bank only debits the account in the local currency and then it sends the amount to the card operator. So, the bank never has to handle any foreign currency. Commented Jul 28, 2014 at 13:19
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@IonIonascu - Even if the bank doesn't do it directly, other people are carrying ready currency reserves that are subject to fluctuation and currency risk. This is a cost that people are not doing for free; somebody is paying for it, and in this case the bank can either do it directly and charge you a fee, or get a third party vendor to do it and pay them with some or all of the fee they charge you. It's possible that in some cases a bank passes on more than the amount of the fee, either as a courtesy to customers (who pay more elsewhere) or because other underpaid fees balance it out.– NL7Commented Jul 28, 2014 at 21:02
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@Ion well yes the card operator is handling the FX, and they charge a commission to your bank to do that for them! It's usually built into the spread used by the card operator. They charge a larger spread to the retail banks, build a position across lots of retail banks, and then cover with an FX wholesale bank and earn the spread differentials. The fact there's a commission means you have to pay more to do the FX transaction. That is just the price element. Then there's delivery (ie the transfer) has its own set of charges between banks and operators.– rupwebCommented Jul 29, 2014 at 14:05
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@Ion so the thing is - I think - the cost from the card operator is passed on to your bank.– rupwebCommented Jul 29, 2014 at 14:07
Currency conversion is a valuable service, so people pay for it and others get paid to perform it. You paid your bank to change the currency, which is very common. Part of it is the simple service cost, part of it is recouping their cost for building the capacity to do so, and part of it is the risk of fluctuation in price for currencies to which the bank is exposed. If something fails, you will expect them to fix it and maybe absorb some cost as a result of that failure.
All of these things they did more easily and at lower risk than you could otherwise do yourself. So you paid for the convenience and certainty of the transaction. Even if they didn't charge you a specific fee, they would get it somewhere else, like in annual fees, other transaction fees, lower customer service expenditures, etc.
In situations where the bank itself is not undertaking many of the functions and risks involved in the conversion, they are paying other companies or vendors to do so. So the money they get from you goes to pay those people and cover those risks - whether those people and risks are resident inside the corporation or outside it.
