Foreign credit card transaction fees — what they are and how they work.

Engaging in international ecommerce brings with it numerous opportunities for broadening your customer base and expanding your brand. However, complexities also enter into the picture as soon as you elect to accept overseas transactions. One of the most important and most frequently misunderstood of these is foreign transaction fees.

Gaining a full understanding of these costs for conducting business on a global scale can help both you and your customers to succeed in this multifaceted enterprise.

What are foreign exchange fees?

From the customer’s perspective, a foreign transaction (FX) fee is something that appears on their credit card bill as a result of making a purchase that passes through a foreign bank. It can also be a purchase that is in a currency other than the U.S. dollar (USD).

In other words, people pay for the privilege of buying internationally, with fees that are charged by the credit card issuer. Ranging anywhere from one to three percent of the purchase cost, these fees consist of two parts.

1. A currency conversion fee. This is charged by the credit card network (Visa or Mastercard, for example) and occurs with all transactions. Generally, it is about one percent.
2. An issuing bank fee. This is charged by the financial institution that provides the customer’s credit card (Barclays or Citibank, for example) and is generally about two percent of the purchase cost. Note, however, that some banks do not charge a fee at all. Customers wishing to reduce foreign transaction fees often opt to find one of these less expensive providers.

Although FX fees consist of these two parts, the customer only sees one total cost on their credit card bill. This can be one of the confusing aspects of FX fees for customers.

Therefore, as a merchant, you should do all you can to help your buyers understand any charges from your store that they see on their credit card statements.

FX fees in the larger payments ecosystem.

If you are just beginning to process payments in multiple currencies but have an established domestic business, you are probably already familiar with the other card fees you will be expected to pay. Just in case you aren’t, here is a run-down of the additional fees you can expect to incur.

• Interchange fee. This is set by the card issuer and can be in the following forms: a flat per-transaction fee, a flat fee plus a markup, or a tiered fee based on what type of transaction is being processed. For example, you would be charged more for card-not-present transactions than you would for in-person purchases.
• Network fee. This is decided by each separate card network and is also non-negotiable.
• Processing fee. This is charged by your payment technology partner/merchant account provider. In this area, there is room for negotiation, so it makes sense to shop around to find the provider that not only is economical but also provides the bundle of services that best suit your particular business’s needs.
• Address verification fee. This should be part of the security suite that your payment services provider offers and is helpful in reducing fraud and ensuring that payments are coming from genuine sources.

Frequently asked questions about FX fees.

1. Is there a difference between FX and cross-border fees?

These terms are interchangeable and refer to non-negotiable charges that are levied by card networks like Visa and Mastercard. They come into play when the bank that issued the customer’s credit card is located in a different country than where the business is headquartered.

2. How can you tell if cross-border/FX fees apply?

The most important determinant is the location where the business is registered. If it is in a country that is different from the one where the sale occurred, a fee will apply. Another consideration is the location of the institution that issued the customer’s card.

3. Do FX fees include the cost of currency conversion?

No. This is a separate charge.

4. Is there any way to avoid FX fees?

Although many of the components that go into these surcharges are fixed, there are some things you can do to lessen the sting of FX fees. One way is to partner with an acquiring bank that works with businesses like yours that support multiple currencies and do business internationally. Often, costs in this competitive space are lower.

Next, you may decide to work in tandem with distributors local to the overseas areas where you are doing business. Although they will most certainly take a cut of your profits, your customers can gain that hometown touch and also will not get slammed with the additional credit card charges that come with global ecommerce.

A final option is to set up a subsidiary of your business in the particular overseas country where you do most or all of your international business. However, this should only be considered a viable option if you have good reason to believe you will be conducting a high volume of sales and that you will be expanding in the future.

Deciding to spread your wings and begin to serve global customers allows you to take your business to whole new levels. In addition to diversifying your customer base, going global with a robust set of desirable products and/or services and the foundation of a strong business infrastructure can be extremely profitable.

As you contemplate making this move, however, it is important to recognize that along with the excitement of growth also come inevitable costs. Although you can take steps to keep some of their components to a minimum, foreign exchange fees are unavoidable in the non-domestic arena.

As long as you figure them into your equation and find the payment service provider that is best suited to meet your company’s needs in the most cost-effective way possible, you will find that both you and your customers will come to consider them a modest cost of doing business in today’s global ecommerce marketplace.