Just a month or two ago Capital One was the only major U.S. issuer who offered credit cards with no foreign transaction fees. Its rivals charged, and most of them still do, on average 3 percent of the transaction amount every time you made a purchase with your card outside of the U.S. That is, provided your card was accepted in the first place, but that is a different issue.
Suddenly several large U.S. issuers have launched cards with no foreign transaction fees, even as a new Federal Reserve rule is about to be enacted in July that will cut a large chunk off the revenues they collect from debit card transactions. What are we to make of that? After all, issuers were supposed to start jacking up fees elsewhere to make up for lost debit revenues. Well, they are and the no-foreign-transaction-fee thing seems to be more of a marketing ploy than anything else.
Who Is Doing It?
Cardhub.com has compiled a list of the no-foreign-transaction-fee credit cards currently being offered in the U.S. Capital One dominates it, issuing all but three of the listed cards. Let’s take a brief look at the new entrants.
I should first note that American Express‘ entry is a charge card, not a credit one. The difference is that users of charge cards are required to pay off the entire balance at the end of each monthly cycle. This is why there are no interest rates applicable to these cards. You may ask how AmEx is making money from cards with no interest rates. Well, beside the hefty $450 annual fee, AmEx is making money from the processing fees it charges merchants accepting its cards. Visa and MasterCard issuers don’t have this option, as the processor of a transaction involving their cards may be any other Visa or MasterCard member. So this is a special case.
Then we have two entries from Chase and one from Citi. These are very similar offerings. All come with no promotional interest rates on either purchases or balance transfers and all charge an annual fee, two of them after the first year.
A Marketing Ploy
The new crop of cards with no foreign transaction fees are all targeting high-spending consumers with very high credit scores. I am pretty certain that Chase and Citi have looked at the average amount of foreign transaction fees generated by the prospective holders of the new cards and have compared it to the average per-account fees generated from the promotional interest rates.
The issuers have probably calculated that the extra fees they will generate in the absence of promotional interest rates will make up for the lost revenues from foreign transaction fees for a few years ahead. But then, they can change the terms of these cards at any time they want, which just happened to my Chase Rewards card, making it much less attractive in the process.
When it’s all added up, the new Citi and Chase offers are not nearly as competitive as the lack of foreign transaction fees may make them seem at a first glance. Quite apart from my hypothetical calculation above, none of these three cards has a particularly good rewards program. True, two of them offer a great initial bonus if you spent a certain amount within a specified time-frame. But many other new cards offer similarly attractive bonuses. And, while the no-foreign-fee cards’ rewards max out at three points for a spent dollar, many other new cards do so at a ratio of 5 / 1.
So what I will keep doing is using my best rewards card when shopping at home and take my Capital One when traveling abroad.
Image credit: Thmz.com.