Interestingly, the fee isn't charged further afield. Our friends over at Consumer NZ in New Zealand told us none of the major banks – Westpac, ANZ, ASB (owned by CommBank) and BNZ (owned by NAB) – charge the fee.

How much it costs the banks

Perhaps unsurprisingly, the response from the banks is that the fee is charged to cover the cost of processing transactions, such as the fees charged by the card schemes (like Visa, MasterCard and American Express) for international transactions.

Card schemes

None of the card schemes would tell us exactly what fee they charge the banks for foreign transactions. However, MasterCard did clarify that it charges the banks a "small percentage on overseas transactions" and Visa said it "applies International Service Assessment fees to its financial institutions for international transactions". The ANZ fee booklet also gives some indication, saying that American Express charges 1.5% of the value of the sale when the financial institution accepting the card is overseas. ANZ then charges an extra 1.5% on top of that.

While there seems to be a legitimate fee passed on to the banks for international transactions from the card schemes, it doesn't necessarily seem to be the full 3%. None of the banks specified what the other additional costs were.

What the banks say

An ANZ spokesperson told us that "the 3% charge covers the cost of processing an overseas transaction (through international schemes such as Visa or MasterCard) and conversion of the foreign currency". This would suggest that if you're making the payment in Australian dollars and no currency conversion is taking place, the only cost to the bank is actually the card schemes' fees, which doesn't appear to amount to 3%.

A NAB spokesperson said "whenever consumers conduct transactions with organisations that are either domiciled overseas or choose to process their Visa, MasterCard or Amex transactions outside of Australia, there are a number of processing costs incurred. These include those that the scheme providers charge and are all covered under the international transaction fee".

We also asked the Commonwealth Bank and Westpac about the fees but neither responded. 

Regulatory blind spot

Unlike credit card surcharges which are passed on to consumers by the retailers, the international transaction fee is charged by the banks independently of the retailer. This makes it a hazy area in terms of regulation.

Financial service regulator ASIC told us that it's not unlawful for banks to charge the fee provided it's been disclosed in the terms and conditions. "Both the Corporations Act and the Credit Code require disclosure to be made by providers of debit and credit products (respectively) of relevant fees and charges. These fees and charges will often be provided in a Schedule of Fees, attached to the product's terms and conditions," an ASIC spokesperson told CHOICE.

Given each of the big four banks do disclose the fee, should the onus therefore be on online retailers to disclose where their payment processing will take place if they advertise prices in Australian dollars?

Lack of disclosure

While retailers aren't the ones charging the fee, they don't always clearly disclose where their bank is located. Of the sites we looked at with offshore banks, any such reference was usually buried either in the terms and conditions or FAQs. We found the clause hard to find when intentionally looking for it, but some consumers are not even aware the fee exists in order to look for any warning about where the bank is located. Ideally this information would be made clear at least at the point of purchase.

The retailer's role

If the site has an Australian page and charges in Australian dollars, it would be reasonable to think you're dealing with a local payment system. CHOICE has received a number of complaints from consumers about a range of sites where they were charged the international transaction fee despite thinking they were making payments within Australia.

For example, multinational company Google Play has a portal tailored to Australian customers but a global payment processor that isn't based in Australia, meaning those buying from the site will be hit with the fee. After searching the site we did find a disclaimer which said: "Any orders placed could be subject to cross border or exchange fees by your card issuer, and Google Play cannot reimburse for any fees assessed by your card-issuing bank".

Even some businesses whose sites have Australian domains, like Weight Watchers and the Sydney Aquarium (part of Merlin Entertainments Group) have offshore banks. Groupon Australia has a foreign bank but it's in the final stages of arranging a local payment gateway.

To add to the confusion, the payment processing may take place in different countries depending on which payment method you use. For example, online glasses retailer Vision Direct (the Australian arm of an international group) told us that while their Visa and MasterCard payments were processed in Australia, other credit cards such as Amex and Diners as well as PayPal payments were processed internationally.

Trying to find out where your payment will be processed and if you'll subsequently be charged an international transaction fee is hard work, as we discovered when testing various payment methods on the Google Play store. 

We paid with a Visa and an American Express credit card and were charged the international transaction fees on both occasions. However, when we paid using the same American Express credit card through PayPal, the bank did not charge the extra fees.

Presumably, processing payments offshore saves the retailer money. Vision Direct's CFO Jason Johnson explained that for credit cards such as American Express and Diners, their payment provider processes them through their European gateway because the payment fees are lower.

"This allows us to pass on these savings to our Australian customers through cheaper product prices," he said.

However, Johnson also said that any customer charged a fee could contact Vision Direct for a refund on the fee. Groupon and the Sydney Aquarium also have a similar policy.

ACCC weighs in

As for whether online retailers which appear to be based in Australia are breaching Australian Consumer Law by having offshore payment systems, an ACCC spokesperson told us that "the conduct could be misleading or deceptive and there would be an obligation for appropriate disclosure on the part of the business".

It's an issue that the ACCC has looked at following complaints from consumers. "There are various types of services in which this issue has been raised. The matters have been resolved through administrative resolution rather than litigation or undertakings," the spokesperson said.

How to avoid international transaction fees

Short of asking every retailer before you purchase their product or service if their merchant bank is offshore, the best way to avoid international transaction fees is with a card that doesn't charge the fee.

Verdict?

There's a bunch of reasons people choose to use particular credit cards and consumers won't necessarily always want to shop online using fee-free credit cards. The problem is that it's incredibly hard to figure out whether or not you'll be charged an international transaction fee until you've made the payment. Online retailers need to do a better job of alerting consumers when their payment system is in another country – preferably at the point of purchase.

Where have you been hit with international transaction fees when shopping online?