What is a Currency Conversion Fee?

A currency conversion fee is a charge by banks and credit card companies on transactions that are carried out in a foreign country. These fees are charged in addition to foreign ATM fees. The fees can also stack, with currency conversion fees charged both by the card company, like Visa or MasterCard, and the bank that issued the card. The fees are controversial because many consumers are unaware of them before they are charged, and the fees are often merged with the transaction on the statement so that the amount of the fee is difficult to discern. Banks and credit card companies take advantage of currency conversion fees to maintain profits in the face of increasing regulation of other types of fees.

Banks and card providers usually structure a currency conversion fee as a percentage of a transaction. Visa and MasterCard charge a 1 percent fee, and banks add a fee to that number. The total is usually about 3 percent. The fee must be explained in the terms of the card contract, so alert customers will know what percentage they will be charged on foreign purchases. They may not be able to determine, however, which purchases qualify for the fee.

Originally, a currency conversion fee applied only to a transaction in a currency other than US Dollars. Merchants began to run transactions in dollars to appease customers and to make a profit themselves by using exchange rates that were unfavorable to the customer. The banks responded by charging the fee for every transaction that occurred in a foreign country. When customers make purchases online, the applicability of the fee depends on the country in which the transaction is processed.

Some consumers have complained about the lack of transparency of bank policies concerning the fees. On bank statements, the fee is often bundled with the transaction instead of the currency conversion fee having its own line. This can lead some customers to overlook the charge. Others are unaware of the existence of the fees until they are charged.

It is possible to avoid the fees. Some banks do not have their own currency conversion fee; they charge only the 1 percent fee that they incur from Visa or MasterCard. Other banks, like Capital One, bear the burden of the card provider fee so that they can provide their customers with the ability to carry out foreign transactions with no currency conversion fee.