At some level this may seem obvious, but it was still interesting to me. It turns out that credit card companies waive foreign transaction fees on select products for the same reason they offer mileage bonuses even when those bonus offers come at a loss.
It’s all about influencing consumer behavior beyond the individual transaction that benefit from the bonus or the elimination of a fee.
American Express isn’t making money when it gives out 3 points per dollar on airfare with its Premier Rewards Gold product. Citi never made money offering 5% back on drugstore purchases.
The idea with those is to engage their cardholder so that they become accustomed to using the card, and keep pulling it out. Because that’s how behavior apparently actually works, we don’t all maximize cards for each transaction. We get used to using a card and we keep using it.
I spent about 90 minutes last week with a card executive who runs a major co-brand portfolio. He explained that cards which have foreign transaction fees get put away on trips abroad. And consumers keep the card in their wallets when they return.
Customers get into the habit of using a different card and they just keep using it. So the foreign transaction fees cost too much future business, making it a no-brainer to eliminate (at least for a consumer set that travels abroad and has card choices and significant spend).
This executive explains that he doesn’t mind consumers having more than just his card – he expects it – the fight is to make sure that his product is top of wallet.