Cross-border fees: Why they are charged and how to reduce them

Key takeaways:

• Cross-border fees are charges that businesses incur for transactions across countries, which usually involve different currencies, bank networks, and regulatory environments.

• Financial institutions charge cross-border fees to compensate for the risk of currency conversion fluctuations and cover operational costs of processing international transactions.

• You can reduce cross-border fees when you make and receive payments like a local business in the regions where you operate. One way to do this is to set up an account with local bank details to make and receive payments via local payment rails.

The global eCommerce industry is expected to grow by 8.02% annually, reaching a projected market volume of US$5.89 trillion by 2029. It’s clear that more people are shopping online, cross-border. While the surge in cross-border transactions can bring greater revenue, businesses are likely to feel the pinch of mounting cross-border fees. These small charges can quickly snowball, particularly for those that process high volumes of cross-border transactions or pay international suppliers regularly. High cross-border fees can impact your bottom line, so understanding these fees and reducing them can help you stay ahead in the global market.

Below, we'll focus on international fees for card payments. We'll break down what cross-border fees are, why they are charged, and how much they usually cost. Then, we'll share a few simple ways you can reduce them.

What are cross-border fees? 

Cross-border fees are charges that businesses incur when processing transactions between different countries and regions. These fees typically arise when a customer pays with a card issued by a foreign bank, or when a transaction requires currency conversion. There are three types of cross-border fees that businesses typically encounter.

Foreign transaction fee

A foreign transaction fee is a fee that financial institutions charge businesses when they process a transaction through a foreign bank or when the transaction involves a foreign currency. This fee is a percentage, usually 1–3%, of the total transaction amount, and typically includes an issuer fee and a currency conversion fee. The customer’s issuing bank charges the issuer fee when a card is used for an international transaction, even if no currency conversion takes place. If there's a currency conversion, then a currency conversion fee applies.

Currency conversion fee

Financial institutions usually charge currency conversion fees for transactions that require conversion from one currency to another. This fee is usually a fixed amount or a percentage of the transaction amount. Currency conversion fees help cover the costs and risks associated with fluctuating exchange rates, as well as the operational cost of converting currencies.

When you receive or send money in a currency different from your business account's default currency, your bank may charge a currency conversion fee. Some banks automatically convert funds to your default currency before settling them in your business account, even if you prefer to hold the original currency (from the customer’s payment). This forced conversion leads to unnecessary currency conversion fees.

Exchange rate margin 

On top of the currency conversion fee, there may also an exchange rate margin. This margin is not a fee, but a margin that’s added onto the interbank rate. The interbank rate, on the other hand, is the rate that banks and financial institutions use when trading currencies with each other, and is usually not accessible to the public.

For example, financial institutions may trade USD to EUR with each other at the interbank rate of 0.9, meaning that US$100 buys €90. But when you convert funds with your financial provider, they may add on an additional exchange rate margin. They may offer you a lower rate of 0.8. So for US$100, you only buy €80, and your financial provider pockets the difference of €10. Because this rate is hidden in the exchange rate, it may not always be obvious.

Wire transfer fee

When you send money internationally via a wire transfer, such as SWIFT, banks and financial institutions charge a wire transfer fee. The fees can vary depending on the institution and the transfer amount. Sometimes, they're a flat fee that typically ranges from US$10–$50 per transfer. Other times, they're a percentage of the total transaction amount. Wire transfer fees cover the financial institution's cost of moving the money, including the use of international banking networks and compliance with legal requirements.

Getting to know more about these fees – what they are, why they exist, and how they're applied – ensures you have better cost control and can take steps to protect your bottom line.

Other fees

Depending on your bank or financial institution, there may be other fees involved. These can include:

• Receiving fees: Your bank may charge a receiving fee to receive a payment in a foreign currency.

• Outgoing fees: Your bank may charge a fee for sending money internationally.

• Correspondent bank fees: If your financial institution uses intermediaries to send a cross-border payment, this fee may cover their costs.

Other fees can include non-delivery fees for returned payments, compliance fees to cover the costs of compliance with international regulations, such as anti-laundering laws, and general service fees. When assessing a payment provider for cross-border payments, it’s worth checking for these fees.

Example: How currency conversion fees can add up

Here, we look at how a financial institution adds the exchange rate margin as a hidden cost in a simple transaction, resulting in a less favourable rate and higher fees:

Let’s say the interbank rate for US dollars to euros is 0.9, where US$100 buys €90.

• Exchange rate margin: A financial institution might offer a less favourable rate of 0.80, where US$100 now only buys €80. The institution pockets the exchange rate margin, i.e., the difference between the interbank rate and the financial institution’s rate. In this transaction, the exchange rate margin is €90 (interbank rate) - €80 (institution rate) = €10.

• Currency conversion fee: The financial institution may then apply a currency conversion fee of 2% of the transaction amount, equalling €1.60 (2% of €80 = 0.02 * €80 = €1.60)

• Total fee: €10 (exchange rate margin) + €1.60 (currency conversion fee) = €11.60.

• Final exchange amount: €78.40 (Subtracting the currency conversion fee from the converted amount: €80 - €1.60 = €78.40)

Some modern fintechs, like Airwallex, offer the interbank rate with a small margin of 0.5–1%, saving you on high fees and hidden exchange rate margins. In comparison, the same transaction with a 0.5% fee would buy you €89.55 (the interbank rate minus 0.5% of €90 = €89.55).

When and why are cross-border fees charged?

Cross-border fees are charged when a customer pays with a card issued by a foreign bank. For example, if a customer in Europe purchases from your US online store and pays with a credit card issued in Europe, you'll incur cross-border fees for this international transaction.

Banks and card networks, such as Visa and Mastercard, charge cross-border fees to cover the expenses of managing cross-border payments, which usually involve multiple currencies and international banking networks. These fees compensate financial institutions for handling the risks of currency conversion and foreign exchange, processing costs, and maintaining a compliant, efficient, and secure payment infrastructure. For example, when a customer pays in euros to a US-based store, those euros need to be converted into US dollars. This process is more than a simple conversion. It also involves managing FX risk and facilitating transactions across various banking networks.

How much are cross-border fees?

Cross-border fees are usually a percentage of the total transaction amount, and currency exchange fees are usually added to it. For example, in card transactions, you might see fees anywhere from 0.6% to 1.4% of the purchase, depending on the card network and the type of transaction. Let's say your business is based in the US, and a customer from Sweden pays for a US$100 sweater from your store in US dollars with their Sweden-issued Mastercard. If Mastercard charges a 0.6% fee for this cross-border transaction, you'll have to pay an extra US$0.60 on that transaction. Visa's fees are similar but a bit steeper, so the fee could be 0.8% (US$0.80) under the same conditions in this example.

Currency conversion rates are another factor that can vary. If the transaction requires a currency conversion, the exchange rate used can make a difference to the final amount. For example, if the Swedish krona is converted to US dollars at a less favourable rate, the total cost of the transaction for your business will increase.

But here's the good news: You can slash these costs and protect your margins by using payment platforms that offer transparent interbank rates. Since the interbank rate is the rate that financial institutions and banks usually trade at, it’s often used as a reference point to determine fair exchange rates. Platforms like ours give you access to interbank rates with a small, transparent markup of 0.5–1% above the interbank rate, so you get to keep FX fees low while operating globally. In other words, there are no foreign transaction fees, exchange rate margins, receiving or outgoing fees, or any other hidden fees.

Do you have to pay cross-border fees?

If your business operates internationally, you’ll likely have to pay cross-border fees, as these fees cover the costs of processing payments across different currencies and regulatory environments. High cross-border fees can affect your operational costs, profit margins, and overall cash flow. For example, higher cross-border fees may force you to adjust your pricing strategies and pass costs onto your customers, making your products or services less competitive in the global market. To stay competitive, you’ll want to keep these costs low.

How to reduce cross-border fees

It’s possible to significantly reduce cross-border fees and even avoid them altogether. Here’s how:

Use local currency accounts to receive multi-currency payments

When you use a local currency account to accept payments in the corresponding currency, you can avoid FX fees altogether. Local currency accounts allow you to settle payments in the same currency as your customers’, without having to convert funds. You can then pay out suppliers from the same balances, with no additional currency conversion needed. Traditionally, setting up local bank accounts in multiple countries requires extensive paperwork and a local business presence. But with some modern fintechs, you can open local currency accounts remotely to receive and hold multiple currencies without forced conversions and fees.

Offer local payment methods to your customers

Teaming up with a payment service provider that offers local payment methods is another way to cut costs. When you accept payments via local payment methods, you can avoid the foreign transaction fees that are usually charged for international transactions. Not only do you save more, you also improve the customer experience when your customers get to pay with familiar and hassle-free methods. Plus, local payment methods often come with lower processing fees compared to international card transactions, making them a cost-effective choice.

Choose a payment service provider with interbank FX rates

Interbank rates are typically not available to the public and are reserved for financial institutions to trade currencies with one another. So if you’re making cross-border payments, you could be paying ‌a marked-up rate. To minimise FX fees, look for a modern payment service provider that can offer interbank rates with minimal markup. Some providers pass on interbank rates with a small, fixed margin, helping businesses save on currency conversions.

Partner directly with payment networks

You may not be able to partner directly with every credit card scheme, local payment method, and banking rail. But it counts to look for a payment provider that does. Every intermediary involved in a transaction adds an extra fee, but when you choose a provider with direct connections to card scheme networks, you can bypass intermediaries and save a pretty penny on your international money transfers. As you route your transactions straight through these networks, you cut out any third-party involvement, making transfers faster and more cost-effective.

Save more on each transaction with Airwallex

With Airwallex, you're not just cutting costs – you're setting your business up for long-term growth, with a partner that combines global payments, transfers, FX, and more in one platform. Our Global Accounts let you make and receive payments like a local business, wherever you operate. You can create local currency accounts with local bank details, without the hassle of setting up traditional bank accounts in each location. Together with our multi-currency Wallet, you can accept and hold funds in the same currency as your customers’, then use these same funds to pay suppliers. This way, you avoid forced conversions and the FX fees that come with them.

When you process your transactions via our network of local payment rails and direct connections with major card schemes, you avoid foreign transaction fees and intermediary fees altogether. Pay out via local payment rails in 120+ countries, instead of using SWIFT. Approximately 95% of transfers on Airwallex arrive within the same day. Accepting payments via the 160+ local payment methods we offer also helps you save on foreign transaction fees and processing fees.

Plus, Airwallex offers businesses access to interbank rates, with a small and transparent margin on top. With our market-leading exchange rates, you can save up to 80% on FX fees on currency conversions, further protecting your margins.

Whether it's accepting cross-border payments, paying international suppliers, or managing business expenses, you can do it all in one place. With our all-in-one platform, you’ll no longer have to juggle between providers to meet your financial operation needs, further reducing costs and improving efficiency.