As International Travel Increases, Foreign Transaction Fees Lag Behind


As international travel from the US hits an all-time high, more credit card issuers than ever are ditching overseas transaction fees.

Last year, Americans made a record 73 million international departures by air and other modes of transportation, says Richard Champley, a senior analyst with the National Office of Travel and Tourism, part of the US Department of Commerce.

“It looks like 2016 could be another record year,” says Champley, referring to early data this year, which shows a 10.1% increase in international outbound departures compared to 2015.

As travel has skyrocketed, we’ve also started to see foreign transaction fees disappear from credit cards. Issuers apply these fees, typically 1% to 3% of the amount charged, to purchases made outside the US In the past three years, each of the 12 largest credit card issuing banks has introduced a new credit card with no foreign transaction fees or eliminated such fees on an existing card.

If these trends continue, foreign credit card transaction fees may soon become a thing of the past.

International travel takes flight

International travel doesn’t increase like clockwork every year; It has its ups and downs, which make the sustained gains of the past few years a big deal. And the increase is not just in business travel; in fact, business travel has eased in recent years.

Instead, surveys by the National Travel and Tourism Office show that vacationers have been one of the main contributors to the steady increase in the number of trips. In addition, Champley notes, the data indicates that the increase in travel is due to an increase in the number of travelers, rather than to people who make more trips per year.

This travel data includes people who travel abroad by air and other modes of transportation and those who travel to Mexico and Canada by ground transportation. The Bank of Mexico and Statistics Canada provide figures on the latter; If your data from last year is reviewed, the numbers for 2015 (represented by the blue dashed line) could change. The dotted blue line in the chart above represents the growth that we could see if current trends continue through the end of this year.

This increase in international travel has indirectly contributed to major changes in the credit card industry in recent years, as the demand for foreign transaction fee-free cards has increased.

Competition beats foreign transaction fees

Not so long ago find a credit card with no foreign transaction fee sometimes it meant going with a card that was not your best option. In 2010, a Pew Trust study found that 91% of credit cards issued by the nation’s 12 largest banks had overseas transaction fees, and the average fee was 3%.

Today, the landscape has changed. Using the same methodology outlined by Pew, NerdWallet found that only 57% of credit cards issued by the 12 largest banks today have overseas transaction fees, although the average fee remains the same. Among travel credit cards, these fees have almost completely disappeared.

Ditching foreign transaction fees could be lucrative for issuers, many of whom get most of their income from their credit cards with interest, not fees. In fact, a composite income statement from First Annapolis Consulting with data from major credit card issuing banks showed that interest earnings generated twice as much money as all service fee earnings (including foreign transaction fees). and exchange fees.

Some issuers may also be trying to attract high-income cardholders, who tend to travel more frequently and generate more income than the average cardholder. In fact, American households in the top 20% of income reported spending money on airfare at twice the rate for all households in data collected in 2014 by the Bureau of Labor Statistics. When cardholders spend more, issuers get more income.

A few years ago, Chase got rid of the 3% fees on its United℠ Explorer Card. Today, none of the issuer’s travel cards carry a foreign transaction fee.

Recently, USAA announced that it would eliminate foreign transaction fees on all of its cards this year. He made the change for active duty military cardholders serving overseas and members who enjoy traveling internationally, USAA Vice President Matt Bruhn said in a statement to the San Antonio Express-News. Navy Federal Credit Union, which also serves military families but is not in the top 12 issuers made the same move at the beginning of this year.

Some issuers set the stage for changing these fees early on. Capital One, for example, has always had a policy of no foreign transaction fees, says a Capital One spokesperson. And Discover stopped charging fees in 2011, following a post-recession drop in international travel.

Precedent of an arms race

This isn’t the first time issuers have been caught in an arms race for profits, and it won’t be the last. Consider what happened in 2013, when Capital One began offering a 1.5% fixed-rate, no-fee cash back card. Since then, Barclaycard, Chase and Wells Fargo have followed suit. Citi even launched a fixed rate cash back card with a rate above 1.5%.

What happened to fixed rate cash back is happening to overseas transaction fees right now and is benefiting international travelers. In fact, a recent analysis of NerdWallet showed that even if you travel abroad only once a year, a travel card with no overseas transaction fees would now be a better deal than most cash back cards due to the richer rewards and lack of fees abroad.

The average foreign traveler charges his or her credit card abroad about $ 816 on each international trip and makes 2.6 trips abroad per year, according to data from the 2014 survey from the travel and tourism office, the most recent available. . If you could avoid paying the median foreign transaction fee on each foreign purchase, the savings would add up to about $ 64 per year.

In an economy where the dollar is strong, that money could go a long way.

Why foreign transaction fees will soon be a thing of the past

Travel may not continue to increase steadily. It goes in cycles, says Champley. Overall, the increase in international travel is related to a strong US dollar, revenue growth, higher gross domestic product, more airlines traveling to more destinations, and marketing programs targeting US travelers, it notes. It is likely to decline at some point, for example in a future credit crunch or in the event of an economic downturn.

But the surge in international travel for now, it seems, could be enough to make some issuers want to ditch foreign transaction fees on credit cards for good. There may be no overseas transaction fees that will soon be the new normal.

This article originally appeared on Forbes.

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