As a merchant, it’s important to understand all of the different aspects of your business. If you are interested in, or are already processing foreign payments, you should really understand the details of what’s happening in those transactions. This will help you make informed decisions for your business model as your company grows.
Foreign payments can be tricky to understand because there are so many different steps involved in the process. There are usually multiple third-party entities involved, as well. Here, we’ll break down the foreign payments puzzle so you can better understand how they can impact your business.
What is a Cross Border Transaction?
A cross border transaction is exactly what it sounds like. It is a transaction between a consumer and a merchant who are in two different countries. In most cases, the transaction involves not only two different countries, but also two different forms of currency.
When a cross border transaction occurs, there are several steps that must be taken for the money transfer to occur from the consumer’s account to the merchant’s account. These steps include the actual transferring of the funds from one bank to another, the conversion between currency types and the assessment of various fees.
What is a Cross Border Fee?
A cross border fee is a fee that is charged to a merchant to accept payment from international credit cards. These fees are typically charged by the credit card company that was used such as Visa, MasterCard, etc. Merchants who sell their goods and services on a global scale will typically see higher processing fees than those who sell only domestically, mainly because of these fees.
To break it down a little more, here is a bit of history about the cross border fee. When ecommerce was still fairly new to the economy, many credit card companies just absorbed the higher transaction costs that banks were charging for international transactions. However, in 2005, credit card companies began passing this additional cost on to their clients (the merchants), instead of absorbing it.
Are Cross Border Fees the same as Foreign Transaction Fees?
Yes. These two terms are sometimes used interchangeably. However, more often than not, there will be additional fees associated with international transactions. When you see the words “foreign transaction fees” on your bank statement, this will likely include all fees associated with a foreign transaction, including the cross border fee.
Are Cross Border Fees the same as Currency Exchange Fees?
No. Exchange fees are much different than cross border fees. Exchange fees and rates are based on the value of the actual currency as compared to that of other countries, while cross border fees are associated with the transaction itself. We will discuss more about this a little later in this article.
How Much is the Cross Border Fee?
Cross border fees will vary depending on the countries involved in the transaction and the cardmember association being used. When we say “cardmember association”, we mean Visa, MasterCard, Discover, etc. Most cardmember associations charge similar percentage rates for international transactions, which range from 0.6% – 1.4%. However, there are a few criteria that affect these rates.
As a merchant, it’s important to understand those criteria. There are two aspects of the transaction that will affect the fees that are charged.
- What currency is the transaction in?
- Where the banks and merchant in question are registered?
Here is a simple example of the first criteria:
- If you sell a product or service to an international consumer and the transaction is conducted in your own currency, the rate will be lower.
- If you sell a product or service to an international consumer and the transaction is conducted in their currency, the rate will be higher.
The second criteria can be a little more complicated to understand because it’s based on where the banks are registered, not just where they are physically located. For example, if your business is registered in the U.S. and you sell something to someone in Europe, you may or may not pay a cross border fee. If they use a bank that is registered in the U.S., you won’t have a cross border fee assessed to the transaction.
What are Currency Exchange Fees?
Let’s clarify by first confirming that currency exchange rates are different from currency exchange fees. The term currency exchange rate simple refers to the difference between two different types of currency. Since they aren’t all the same, you may have 200 units of one currency that equates to only 50 units of another currency. The exchange rate is just a ratio between types of currency.
Currency exchange fees, on the other hand, are fees that are levied by the card processor to convert one currency to another during a transaction. The card processor can be a host of different entities such as ATMs, credit card processors, etc.
How Much Are Currency Exchange Fees?
These fees vary with each transaction. If you have one transaction between the U.S. and Sweden, and another one between the U.S. and Brazil, the fees will be completely different. However, there are some online resources to help you calculate and anticipate what those fees might be. We recommend using the following currency converters to see the various fees before making the decision to accept international payments.
If you already have an idea of the countries in which you’d like to sell goods or services, you should definitely check out these calculators and plan accordingly. Sometimes the exchange fees are low enough that they won’t really impact your revenue. Sometimes the opposite is true, so do your due diligence before making your decision.
Accepting foreign payments is an important decision for every merchant who participates in ecommerce. In a global economy that allows consumers to source goods from all over the world, it often pays to be flexible and innovative with your payment options.
Taking the time to learn more about international transactions and how they work is a good first step to becoming a part of that global economy. Your next step is to decide whether or not it’s a good choice for your business. If it is, it’s time to start implementing it and targeting global customers!
Kristofer Ortega is the sales manager of EUPaymentz. EUPaymentz specializes in payment processing services for companies located in European and other offshore jurisdictions.