Why Do Canadians Overpay When We Travel?
Canadians are very fond of travelling abroad. But we’re less fond of overpaying for that travel, particularly when we find out that we’re automatically paying more than fellow travel junkies in other countries.
Whether we know it or not, most of us pay a foreign transaction fee every time we charge items to our credit cards in a foreign currency. Typically this added expense amounts to 2.5% of the cost of the item purchased, and the only way to avoid it (aside from never buying anything outside Canada) is to obtain a credit card that doesn’t charge the fee. But pickings in Canada are unfortunately slim.
US vs Canadian No Foreign Transaction Fee Cards
Our spoiled neighbours to the south can choose from a plethora of no foreign transaction fee cards doled out by various big-name issuers, including Chase, Bank of America, Citi and American Express. Two American issuers, Discover and Capital One, offer no foreign transaction fees across their entire portfolio of credit cards. The UK also has a wide variety of card options with no foreign transaction fees, including cards from major issuers like the Royal Bank of Scotland. But the number of Canadian credit cards that either waive or make up for foreign transaction fees can be counted on two hands. They are:
- Home Trust Preferred Visa
- Scotiabank Passport Visa Infinite
- Rogers Mastercards (full suite of three cards)
- Brim Financial Mastercards (full suite of three cards)
- HSBC Premier World Elite Mastercard
So, why are there only nine credit card options in Canada that offer relief from foreign transaction fees, while, in true American fashion, U.S. residents are spoiled with an abundance of forex fee-free plastic?
Canada’s Love of Travel Means More Money for Issuers
“Part of why foreign transaction fees haven’t vanished from Canada is that they’re really lucrative there,” says Matt Schulz, chief American credit card industry analyst at CompareCards by Lending Tree.
“Canadians are much more likely than Americans to have passports and travel, meaning that Canadian banks are likely to collect these fees from a much wider swath of people than American banks are.”
He’s right. As of 2018, only 42% of Americans have a valid passport, while 66% of Canadians have one. More interestingly, though the U.S. ranks second in total spending on international tourism at $123.6 billion USD and Canada ranks sixth at $29.1 billion, Canadians spend far more on international tourism per capita: the average Canadian spends $802 on foreign travel annually; the average American only forks out $382. The amount Canadians spend on international travel represents billions more in foreign transaction fees for Canadian credit card issuers.
“We’re the second coldest country in the world,” says Ian Lee, professor at the Sprott School of Business at Carleton University and international lending expert.
“When people don’t like the cold they go south and the moment they go south they’re outside the Canadian dollar and into another currency, so they’re going to get hit. But the U.S. is the largest economy in the world and they speak the same language, so the allure of going to the States is still very high.”
Less Competition = More Fees
The allure of profits for Canadian credit card issuers is high as well. And the fact that Canada has only five major banks means less competition for customers and less incentive to change the fee structure.
“There are only five or so major credit card issuers in the Canadian market, therefore the competition does not require offering this [no foreign transaction fee] benefit,” says Tony DeSanctis, senior director at Cornerstone Advisors, a banking industry consulting firm.
“I know from both theory and practice that when you have more competitive markets with more companies competing, consumers have more choices and lower prices,” agrees Lee. “The Americans didn’t trust banks so they wanted lots of little banks. But some fail every year. Canada went the opposite route. We wanted a few very large banks that didn’t fail.”
The New Differentiator
Though there’s certainly less competition among Canadian credit card issuers, that doesn’t mean there’s no competition at all. Smaller financial service companies like Brim Financial, Rogers Bank and Home Trust are trying to make a dent in the Big 5 oligopoly by offering cards that either forgo foreign transaction fees or offer cash back on foreign currency purchases.
“As a newer portfolio, we have flexibility in the way we choose to design our credit card program. Our goal is to make the Preferred Visa the primary card in the wallet of our customers, and no ‘mark-up’ on foreign transactions serves as one key point of differentiation to attract Canadians to choose our credit card over other cards in the marketplace,” says Laura Lepore, Home Trust’s assistant vice-president of investor relations.
As the credit card rewards space across North America becomes more competitive, Schulz predicts that no foreign transaction fee cards may become more common.
“Banks are trying to differentiate, whether it’s by offering yearly spending bonuses or by giving higher rewards to people who already have large accounts with a bank or something else. It’s a very interesting time in the space.”
Lee agrees, noting that the same rewards pullback and differentiation seen in the States will start to emerge among Canadian banks too.
“Yes, [no foreign transaction fees] may become the next round of differentiation. Or I wouldn’t be surprised if the credit cards that offer an annual fee will start throwing in more benefits like this one to try to stop you from switching and going somewhere else,” he says.
Tell the Issuer What You Want
What’s the best way to ensure no foreign transaction fee offers become more common among Canadian credit cards? If you like to travel outside Canada, Laura Lepore advises you to gravitate toward the cards that offer this feature.
“Make those cards your primary credit cards. It’s no different than frequenting other businesses who are doing a good job at meeting your needs. Issuers and banks will take notice and adjust to serve their customers.”