We received some complaints from travelers that American Express skews foreign currency exchange rates before adding a 2% foreign transaction fee. Some even complained that the rate was a full 1% higher than the rate they were expecting. American Express prominently displays the 2% foreign transaction fee on monthly statements, but if it is true that they also skew the exchange rate, this effectively adds an undisclosed, unknown fee for customers.

Exchange rates can be incredibly tricky to determine, and until recent lawsuits, credit card issuers have added costs for purchases made in foreign countries without openly disclosing those fees to consumers. Now, many companies are much more forthright as they disclose fees, but customers have to be on their toes as the fine print can be confusing.

We decided to take a close look at how American Express determines the total fee added to a foreign currency purchase and whether or not the fee is skewed. If it is skewed to the customer’s disadvantage, we wanted to know by how much.

How an Exchange Rate is Determined
Exchange rates vary throughout the course of any given day. Much like the stock market, the actual value of currency purchases depend on the currency it is being compared to at any given moment. Whenever a currency is purchased, the buyer takes a risk that a particular currency might fall (even significantly) in a short period of time. Also, like stocks, brokers and other entities can charge fees to make the transaction. The exchange rate, technically speaking, is the rate at which one currency can be exchanged for another. A currency conversion fee is usually a percentage added to this base conversion rate then passed along to the buyer. To hide the fee, some banks build this fee into the exchange rate and don’t openly disclose the actual fee being charged.

The Fine Print — How American Express Determines an Exchange Rate
In the fine print on American Express statements, American Express states the following:

If you incur a Charge in foreign currency, it will be converted into US dollars on the date it is processed by us or our agents. Unless a particular rate is required by applicable law, we will choose a conversion rate that is acceptable to us on that date. Currently, the conversion rate we use for a Charge in foreign currency is no greater than (a) the highest official conversion rate published by a government agency, or (b) the highest interbank conversion rate identified by us from customary banking sources, on the conversion date or the prior business day, in each instance is increased by 2% [...]

This is interesting, because essentially what American Express is telling us here is that they do NOT base their exchange rate on the rate they actually paid for the currency in question. Instead they search for the highest rate that another source paid for a currency, then add an additional 2%.

The Truth Comes Out
For people looking for proof of skewing, there’s no need to search any further. But is this really so bad? The sources they base their exchange rate on sound official and doesn’t AmEx have the right to protect themselves from market fluctuations?

Since we have no way of knowing what American Express actually paid to purchase a currency, only American Express knows how much they profit by engaging in this practice. However, with this formula, the consumer will almost always be getting a worse rate than what American Express paid for the currency in question. One thing we can discover though is the actual fee American Express charges based on third party wholesale rates. By using the method described in this article, I took purchases made from August 1st - August 15th while in Canada. I made seven purchases on my AmEx card. In every case the markup was higher than 2%. The lowest total fee (above the wholesale rate) that I paid for a transaction was 2.3323%. The highest was 2.8260%. Still, this is very anecdotal. Although American Express does not differentiate between the posting date and the transaction date on their statements, perhaps the exchange rate got worse over that period of time.

Whether you feel American Express is justified in this practice or not, one thing is clear: American Express customers should expect to pay more than a 2% effective fee for using an American Express credit card internationally. If American Express wanted to fully disclose the actual fee being charged, they would itemize the fee line by line since it varies from purchase to purchase.

Have you used your American Express card internationally recently? We want to hear about your experience. Contact us, or post details below!