Banks accused of gouging $1bn a yearly with foreign exchange fees

A lurk worth almost $1 billion a year to the nation’s banks and financial institutions is next on the government’s hit list.

Initiated by Josh Frydenberg yesterday, the new inquiry will examine the hidden foreign exchange ‘‘mark ups’’ banks charge when customers transfer funds to foreign bank accounts.

A lurk worth almost $1 billion a year to the nation’s banks and ­financial institutions is under threat, as the competition regulator launches an investigation into whether they are gouging consumers via hidden and potentially unjustified foreign exchange conversion fees on credit and debit card purchases.

Initiated by Josh Frydenberg yesterday, the new inquiry, due to report by May, will also examine the hidden foreign exchange ‘‘mark ups’’ banks charge when customers transfer funds to foreign bank accounts, thought to be worth up to another $1bn a year to the industry.

“Given how widely foreign currency conversion services are used by consumers and businesses, reform in this area could make a real difference and put more money in the pockets of Australians,” the Treasurer said.

“A customer of an Australian bank who travels overseas and spends $5000 on their credit card can expect to incur $140 in foreign exchange transaction fees.”

Over the 12 months to July, about $32bn was spent on credit and debit cards issued in Australia in foreign currencies, according to data provided to The Australian by top industry sources. That suggests banks made $960 million over the period, based on the typical 3 per cent charge levied on all purchases in foreign currencies.

Banks make a profit on foreign card purchases even without the fee, owing to “interchange fees” of between 1.5 and 2 per cent of the value of their customers’ foreign purchases from the foreign banks that process the transactions.

Grant Halverson, chief executive of consulting firm McLean Roche, which specialises in payments, slammed the finance sector for overcharging. “What started as a modest 1 per cent surcharge in 2001 by the four banks was extended to 3 per cent and outright gouging of Australian consumers,” he said.

“It’s a perfect example of how fees are used by financial services companies to recoup ‘lost’ revenue, in this case from the ­reduction in interchange as a ­result of RBA reforms.”

Six of 67 banks have at least one account with no international fee, according to RateCity, which compares financial products. The big four banks had 76 per cent of the credit card market last year.

“The 10.5 million Australians who travel abroad every year and the individuals and businesses who send money internationally every day deserve a better deal,” Mr Frydenberg said.

An investigation by The Australian a year ago found the big four banks charged the highest foreign exchange mark-ups of any group of large banks in the world, equivalent to about 5 per cent of the value of the transaction.

These were equivalent to up to 30 times the fees charged by US, British and German banks, according to data provided by Transferwise, an international non-bank payment provider that competes with banks

The foreign exchange mark-ups charged by the big four, which affect travel card purchases or remittances to overseas bank accounts, have risen about fivefold since 2008 to between 4 and 5 per cent, according to analysis by The Australian.