IN LONDON on holiday last week, American Tim Clay stopped by upscale department store Harrods Ltd. to buy gifts for friends back home. When it came time to pay for the Harrods goods, the sales clerk offered him the choice of paying in U.S. dollars rather than pounds. So, the dentist from Delaware signed a credit-card receipt for $31.38 (27.65 euros) for presents whose price tags added up to GBP 18.90 (26.79 euros). That means Harrods charged Mr. Clay with a sterling-dollar exchange rate of $1.66, as much as 2% more than what he probably would have paid had he let Visa International Inc. and his bank handle the transaction. "I thought Harrods was reputable enough to charge a fair [exchange] rate, so I didn't ask," Mr. Clay says. The rate "is probably not great, but the final value seemed reasonable to me." The high-profile department store is among a growing number of nonfinancial companies entering the currency-conversion business, charging foreign shoppers with fees that boost purchase prices 3% to 5%. These charges, which aren't disclosed to consumers, amount to big business for merchants. The companies are eyeing nearly $4 billion in revenue that banks and credit-card companies like Visa and MasterCard International Inc. generate annually from cardholders who shop outside home countries. Avis Rent A Car, a unit of Cendant Corp., and budget airline Ryanair Holdings PLC do it. Ford Motor Co.'s Hertz Corp., another car-rental company, plans to begin doing the same thing this summer in the U.K. Currency conversion can be a nice add-on revenue stream that can smooth a company's margins by selling an expensive service to the client without telling the client how much it costs. A retailer such as Harrods, which generates 25% of its nearly $1 billion in annual sales from tourists, stands to earn $2.5 million from currency conversion, assuming a 1% fee. Harrods, Avis, and Ryanair wouldn't comment on the size of their fees. When credit-card companies handle a conversion, they levy a 1% transaction fee that banks issuing their cards pass on to customers. Those banks sometimes add their own fees of as much as 3%. But because issuers must disclose fees, there is more competition, and sometimes they waive the charge to attract customers. In contrast, merchants charge 0.5% to 2.5% for the conversion, their banks tack on an extra 0.5% to 1.5% to do the transaction and the foreign-exchange dealers the banks use often get an additional 1%. None of these fees are disclosed to customers. The difference compared with using a credit card can be as much as four percentage points. In Mr. Clay's case, he was lucky Harrods and its financial partners charge less than average for the currency conversion. He would have paid about $0.65 less if he had paid in pounds, using his U.S. credit card. But he didn't know because there is no law telling Harrods it must disclose the conversion fees that could be compared with those charged by the credit-card firm and Mr. Clay's bank. Budget airline Ryanair tells customers about its currency-conversion practices -- but only in the 46th and final paragraph of the terms-and-conditions section of its Web site. Here, customers carrying credit cards issued outside the European Union are told they will face a "foreign-user charge." They have no way to avoid the embedded fees, which, based on a recent transaction, are around 5% of the purchase price. Avis uses the last paragraph of its terms-and-conditions statement to say it sets the exchange rates for transactions involving foreign currencies. The loading of fees to be shared with its bank and foreign-exchange provider also nears 5%, based on recent online bookings. Avis defends its practice but acknowledges it sometimes reimburses irate customers. "We returned them the money as a gesture of good will," says Richard Coates, financial comptroller of Avis Europe. He said Avis doesn't make a lot of money from the currency conversion. "It's just a cost-recovery fee we charge to cover our hedging costs." Credit-card companies are under pressure to disclose more than retailers and car-rental outfits -- partly as a result of a state-court ruling in California. Though Visa and MasterCard charge just 1% on overseas transactions, they warn clients about this fee in the small print of cardholder agreements. They don't require banks that issue their cards to do it for them in monthly card statements and applications. In the case, brought by a California resident in a class-action suit, a judge found that Visa and MasterCard International failed to properly spell out these charges and, in a preliminary ruling, ordered them to refund fees collected on foreign purchases from 1996 to 2002 to U.S. consumers. The credit-card companies face an estimated bill of $800 million. An official ruling is expected by the end of summer. Visa and MasterCard say they will appeal if the ruling goes against them. But it could prove difficult to crack down on nonfinancial companies. "These merchants could argue it's not a fee -- it's just an exchange rate they use. So, it's easier to manipulate and harder to regulate," says Ken McEldowney, executive director of Consumer Action, a San Francisco consumer group. In March, the organization filed a class-action suit against American Express Co., also charging the company failed to properly disclose foreign-exchange conversion fees. It really pays for retailers to get into the currency business. Even those that bill a mere GBP 100,000 a year in foreign currencies can cover the minor technology investment required to get into the game, says David Wills, an executive in the Barclays Group's U.K. credit-card division. For now, it's still a tiny business, representing only 2% of the $40 billion a year in purchases by traveling cardholders, according to a credit-card trade journal called the Nilson Report. Business is picking up so fast that David Roberson, the report's publisher, predicts a major transfer of currency-conversion mark-ups from credit-card firms and card-issuing banks to merchants. He estimates that as much as half the $2.7 billion a year in foreign-exchange fees will change hands within the next five years.

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