If you’ve used a credit card internationally the past few years, odds are good you’ve paid your credit card issuer a foreign transaction fee. What you may not know is that you may have also paid a foreign transaction fee to several other entities along the way. Additionally, you probably have no idea how much you paid in fees or who actually got the money. This was the subject of a recent lawsuit. Though the lawsuit was settled, and exact details have yet to emerge, the lawsuit will likely require more transparent disclosure of fees on credit card statements. Unfortunately the lawsuit does nothing to curb the number of middlemen who take a cut of the fee.

Until now consumer have been almost entirely unaware that they were even paying a fee. Because foreign currency exchange rates can fluctuate significantly throughout the course of the year, inexperienced travelers are often unable to tell if they received a good exchange rate on their purchases when their credit card statement comes in. Consumers have been seemingly willing or at least innocently naive enough not to complain. As a result more and more players are looking to get a piece of the foreign transaction fee pie. The fee is extremely attractive to card issuers because they incur very little actual expense to complete the transaction. Some issuing banks will also add a fee and incur no expense whatsoever.

Debates about the actual expense incurred by credit card issuers continues, but most analysts agree that it is between 1-2%. Regardless, a consumer can be charged as much as 9% once all the middlemen have had their action. The ballooning fees have the different parties pointing fingers at who is responsible and who should be cut out of the equation.

One of the newer players vying for part of the fee pie are credit card merchant services who enable Dynamic Currency Conversion (DCC) and charge a fee for the service. DCC allows the currency conversion to be made at the point of sale. Different merchant service providers charge different amounts for the actual conversion, but in most cases a cut of the transaction is split between the merchant and the services provider. Through DCC, the merchant is given an opportunity to profit from the currency transaction.

Here is an example of a typical credit card foreign currency transaction:

Purchase multiplied by wholesale exchange rate + DCC fee (3%) + Visa/MasterCard Fee (1%) + Issuing Bank Fee (2%) = 6% paid in total fees.

Before DCC, Visa and MasterCard only charged fees if currency was actually converted, but have since implemented fees for any purchase made internationally. This move helps recoup fees lost by Visa/MasterCard to DCC service providers and also makes DCC less attractive to consumers. Further it pressures DCC merchant services providers out of the market entirely. Disturbingly, in the example above, the issuing bank provides no service for the currency exchange but still adds a 2% fee. Many consumer advocates condemn DCC, ignoring the fact that the issuing bank and Visa/MasterCard compound the fee after dynamic currency conversion has been preformed despite not helping facilitate the exchange. DCC providers tout full disclosure of exchange rate and fee at the point of sale, but they can’t tell you about compounding fees at that time.

Here are a few ideal scenarios for the future of credit card foreign currency exchanges:

1) Equation with DCC:
Purchase multiplied by wholesale exchange rate + DCC fee = 3% or less fee for total transaction. In this option, the consumer knows the exact exchange rate, fee and U.S. dollar amount at point of sale. It cuts credit card issuers out of the fee equation.

2) Equation without DCC or Issuing Bank fee:
Purchase multiplied by wholesale exchange rate + Visa/MasterCard Transaction Fee (1%) = 1% fee for total transaction. This was how foreign transactions were performed in the old days before DCC service providers and issuing banks compounded the fees. This fee also reflects actual cost incurred.

3) Equation without DCC but with Issuing Bank:
Purchase multiplied by wholesale exchange rate + Visa/MasterCard Transaction Fee (1%) - Issuing Bank Fee Refund (1%) = NO FEE for the transaction. Issuing banks do have some incentive to refund fees to encourage international clients (often people with good credit) to use their cards.

Sound far fetched? Try a Capital One card.

But without consumer awareness and subsequent consumer outrage, foreign currency transaction fees are more likely to just keep compounding. And that’s the real world we live in.