Foreign transaction fees and how to avoid them

Key takeaways:

• Foreign transaction fees are charged by your card issuer when payments are processed through foreign banks or involve currency conversion. They typically range from 1%-3% of the transaction amount.

• Typical rates include a currency conversion fee (around 1%) and an issuer fee from your card provider (about 2%).

• The best ways to cut rates include using no-foreign-transaction-fee cards, paying in local currency, and exploring fintech solutions for better exchange rates.

Foreign transaction fees can significantly impact your business's bottom line. Every time you or your employees make payments abroad – with a credit card or through a bank transfer – unexpected fees can quickly add up.

Without the right partner, even routine expenses in another country can lead to unnecessary costs that eat into your profits. Understanding how these fees work is essential for making informed decisions about cross-border payments.

For modern digital businesses, grasping the intricacies of foreign transaction fees and foreign exchange (FX) fees is crucial. Traditional banks often charge up to 3% per international transaction, but innovative solutions are transforming how global businesses manage cross-border payments.

Fortunately, you can reduce or eliminate these fees, enabling you to handle global transactions more efficiently.

What is a foreign transaction fee?

A foreign transaction fee is a charge that financial institutions add when you make payments in foreign currencies or through overseas banks. This charge is usually between 1% and 3% of the amount.

Understanding the structure of these fees, and understanding interchange fees, can provide deeper insights into the costs associated with international transactions.

These fees can appear in everyday activities, such as paying for social ads, booking flights from an international carrier, ordering products from a foreign retailer, or paying overseas suppliers for goods and services.

Understanding these fees is essential for businesses across industries to manage international payment costs effectively. For example, companies involved in eCommerce payment processing often encounter these fees when selling products to customers abroad.

Today, money flows across borders constantly, but the processes behind these transactions are complex:

• Each country has distinct financial regulations

• Banks must coordinate cross-border transfers

• Card networks maintain global security protocols

• Currency conversion happens in real-time

Foreign transaction fees can vary depending on the payment method. For this article, we'll be focusing on international fees for card payments. These fees comprise of:

• Network fee: ~1% (charged by the card network e.g. Visa, Mastercard, etc.)

• Issuer fee: ~2% (charged by the issuer, usually your bank)

• Total: up to 3% of transaction value

These fees can significantly impact profitability for companies making frequent international transactions. If left unchecked, foreign transaction fees can eat away at your business’ bottom line. While traditional banks typically charge these full amounts, modern fintech solutions often provide quicker and more cost-effective alternatives.

How do foreign transaction fees work?

Foreign transaction fees vary depending on your bank or payment method. These fees combine a currency conversion fee (often around 1%) and an additional charge from your card issuer or bank (usually around 2%).

To understand how these fees affect your business, think about this example: When you buy something from another country for $10,000, you'll pay a foreign transaction fee of up to 3% or up to $300. This fee is made up of a network fee and an issuer fee.

For companies managing multiple overseas vendors, employees, and customers, these fees compound quickly:

• Monthly supplier payments: $50,000 × 3% = $1,500

• International customer refunds: $20,000 × 3% = $600

• Employee travel expenses: $10,000 × 3% = $300

Beyond these visible charges, businesses may encounter other hidden costs, such as FX markups on currency conversions. Additionally, it’s important to consider how long international bank transfers take and potential delayed bank transfers, as timing can also affect your overall costs and cash flow.

How to avoid foreign transaction fees

Foreign transaction fees may seem inevitable, but there are ways to minimise or even eliminate them. With an Airwallex Business Account, your business can hold, receive, and pay in different currencies, avoiding unnecessary transaction fees.

Additionally, if your business relies on wire transfers for cross-border payments, understanding their structure can help reduce unexpected fees.

Foreign transaction fee-free cards

Some corporate cards, like the Airwallex Borderless Card, have no or low foreign conversion fees. That’s because our multi-currency debit card takes funds from your Airwallex Business Account, which you can use to hold many different currencies. There are no foreign conversion fees when you use the funds in your Business Account. Airwallex’s market-leading FX rates will automatically apply if the correct currency isn't available, ensuring you save on conversion costs.

Dynamic currency conversion (DCC)

Dynamic currency conversion (DCC) is often presented at the point of sale, allowing you to convert the transaction into your home currency on the spot. However, with DCC, your card network doesn't handle conversions using their exchange rates. Instead, the foreign bank or payment provider sets the rate and manages the conversion, often adding markups and fees.

These providers typically add a markup and may impose additional fees. This makes DCC more expensive than simply paying in the local currency and letting your card issuer handle the conversion. While DCC may seem convenient, it often comes with higher costs than using your card’s native FX rate. In most cases, declining DCC and allowing your card to manage the conversion is more cost-effective. To further avoid international transaction fees, consider sticking with local currency payments when possible.

Convert cash

For employees travelling abroad, converting cash at the destination can be a way to avoid foreign transaction fees. While this method may help sidestep card-based foreign transaction charges, it’s important to note that currency conversion at exchange kiosks or local banks often comes with less favourable rates.

Additionally, converting cash can be less convenient than using cards and may lead to higher overall costs than simply paying foreign transaction fees. While it’s generally more economical than opting for dynamic currency conversion (DCC).

Simplify global transactions with a multi-currency account

Managing international payments efficiently is crucial for growing businesses. With an Airwallex Business Account, you can hold, transfer, and receive funds in over 60+ currencies, reducing costly foreign exchange conversions and streamlining cross-border transactions.

Using this in combination with an international business debit card like Airwallex Borderless Cards allows you to make international payments with little or no foreign transaction fees. Together, these solutions help you manage cross-border money movement efficiently and cost-effectively boosting your business's global operations.

Frequently asked questions about foreign transaction fees

Why am I charged a foreign transaction fee?

You may be charged a foreign transaction fee if a transaction is processed through a foreign bank or involves a currency conversion. These fees pay for the costs banks and credit card networks pay when processing international transactions. They include currency conversion fees based on the exchange rate and the risks involved. If your business uses a telegraphic transfer for international payments, these fees can also apply.

How much is a foreign transaction fee?

Foreign transaction fees typically range from 1%-3% of the transaction amount. This includes a currency conversion or network fee (around 1%) and an issuer fee from your card provider (around 2%).

How do I know if my card has a foreign transaction fee?

Your card’s terms and conditions should outline any foreign transaction fees. If you don't have your paperwork handy, contact your card issuer directly to confirm whether your card charges these fees.