Foreign transaction fees: How to avoid and why do you need to care?

Summary:

• 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 US$10,000, you'll pay a foreign transaction fee of up to 3% or up to US$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 do foreign transaction fees impact business owners?

Foreign transaction fees can chip away at the wallets of travellers and shoppers. For businesses, these fees can mean the difference between profitability and being in the red.

We call it the conversion trap.

Here's an example:

You’re a UK company (the merchant), your customer is based in the US and your supplier is based in Vietnam but accepts USD.

1. Your US customer checks out in USD.

2. Your UK company then uses an acquirer/card network (e.g. Visa/Mastercard/Stripe/Worldpay) to auto-convert USD funds to GBP.

3. The acquirer pays out to your UK company in GBP. This is the FIRST CONVERSION

4. Your UK company then needs to pay suppliers in Vietnam in USD.

5. To do this, you must convert GBP to USD to pay the supplier. This is the SECOND CONVERSION

These two conversions can cost you up to 3-4%. Double currency conversions are not efficient. They impact your bottom line and drain internal resources. But here’s the thing, the conversion trap and double currency conversion are completely avoidable.

Read the guide on businesses can avoid the conversion trap.

How to avoid foreign transaction fees

The convenience of card payments comes at a price, especially when you’re dealing with foreign currencies. The good news is that you can reduce or completely eliminate these unwanted fees. Here’s how:

• Avoid paying in your home currency during business travel. POS systems will sometimes ask if you’d like to convert the local currency to your home currency. This is DCC, and you should always decline it to avoid unnecessary charges.

• Use wire transfers for large payments. Wire transfers can be more cost-effective for large cross-border transfers. Unlike corporate cards, which charge a percentage of your payment, wire transfers charge a fixed fee. This makes it easy to estimate how much the transfer costs. 

• Use a card with low or no foreign conversion fees. Some corporate cards like the Airwallex VISA Borderless Card have no or low foreign conversion fees. That’s because it’s a multi-currency debit card that takes funds from your Airwallex business account, which you can use to hold 20+ currencies. There are no foreign conversion fees when you use the funds in your Business Account. If you don’t have the necessary balance, funds will be converted at a small fee.

• Use a card with no foreign transaction fees. Most card issuers charge an admin fee for foreign currency transactions. When you use the Airwallex Borderless Card, you pay no admin fees. 

• Use a multi-currency corporate card. As the name suggests, these cards allow businesses to hold and spend in multiple currencies, which minimises the costs associated with currency conversion. We’ll dive deeper into their benefits in the next section.  

Benefits of multi-currency cards for businesses

If your team makes global payments or travels frequently, you can reduce card fees with multi-currency corporate cards. These are debit cards that let you spend in various currencies. Here’s how your business can benefit from using these:

• Avoid unnecessary currency conversion. Multi-currency cards come with a multi-currency account or wallet. When you use the card to pay for a currency that's already in your account, there's no need to convert the currency. This way, you can make purchases or withdraw cash abroad without the extra cost of exchanging money. 

• Increased transparency over business expenses. A multi-currency card can enable streamlined accounting by consolidating transactions from different currencies into one account. This centralised view makes it easier to track spending and leads to more accurate and efficient financial reporting.

• Global acceptance. These cards work with payment networks like VISA or Mastercard, allowing you and your team to make payments anywhere in the world.

Airwallex Borderless Card vs traditional corporate cards: which is better for overseas payments?

There’s a lot to evaluate when you’re choosing a corporate card for overseas payments. Besides comparing foreign transaction and currency exchange fees, you need to see how they can support your business through rebates, privileges, and time-saving features.

The Airwallex virtual Visa card stands out as a compelling choice for international payments, especially if you make frequent foreign currency transactions. Here’s why:

• Hold and pay in 20+ currencies without unnecessary conversion fees. Pay without unnecessary conversion using funds held in your Airwallex account. When you don’t have the currency balance needed, Airwallex will automatically convert funds for you using interbank rates. See how smart lock company Igloohome saved 5% per transaction with Borderless Cards.

• Spend wherever VISA is accepted. Issue multi-currency Borderless Cards to employees and spend in most currencies and countries, wherever VISA is accepted.

• Custom spending limits. The Borderless Card enhances security by allowing you to set custom spending limits. You can limit the daily or monthly spending on each card or restrict transactions to specific merchants only.

• Fast expense submissions, approvals, and reimbursements. Employees around the world can use the Airwallex mobile or desktop app to upload receipts and submit expenses. Our new reimbursement solution makes it easier to view, approve, and disburse funds directly in employees’ bank accounts. See how Neopets eliminated manual expense approvals with the Borderless Card.

• No annual or replacement fees. Lost or stolen cards can be instantly blocked, and you can issue a new one for free.

• Issue virtual cards instantly. Borderless Cards are available as physical and virtual cards, which you can issue in seconds. Virtual cards are ready to use immediately. 

Start cutting back on foreign transaction fees today

In today’s global economy, overseas travel and vendors are a necessary part of doing business. When you use a traditional corporate card to settle these payments, you increase your operating costs because of their hidden fees.

Credit cards without foreign transaction fees can help you cut costs, but banks in Singapore don’t usually offer these. Fintech firms like Airwallex, however, have a multi-currency debit card that lets you pay in multiple currencies with no foreign transaction fees. While there is a charge for converting currencies you don’t hold, they’re usually a fraction of what card issuers charge for overseas payments.

Ready to minimise your global payment fees with the Borderless Card?  All you need is a verified Airwallex Business Account. Here’s how:

• Step 1: Create an Airwallex Business Account

• Step 2: Submit documents and verify your business

• Step 3: Instantly generate Borderless Cards for your team

Frequently asked questions

1. Is the foreign transaction fee the same as the currency conversion fee?

Foreign transaction fees and currency conversion fees are similar but not the same. A foreign transaction fee is charged by your bank or card issuer when you make a purchase in a foreign currency or through a non-domestic bank. It's usually a percentage of the transaction amount, and is sometimes called an administrative fee.

On the other hand, a currency conversion fee, often included in the foreign transaction fee, is the charge of converting from the foreign currency to your home currency. 

2. Why do credit card companies charge a foreign transaction fee?

Foreign transaction fees help card issuers and networks cover the costs associated with processing overseas payments. This includes the costs of currency conversion and the risks involved in international transactions, such as fluctuating exchange rates and potential fraud. The fee also serves as a source of revenue for the card issuer and network. 

3. Are there any hidden or additional fees associated with foreign transactions that business owners should be aware of?

When making overseas card payments, business owners should be aware of hidden fees beyond the foreign transaction fee. These can include currency conversion fees, which are sometimes separate from the foreign transaction fee, and dynamic currency conversion fees if you choose to pay in your home currency at a foreign merchant. 

There might be ATM withdrawal fees if you use your corporate debit card to get cash overseas. It's important to review your card's terms and conditions and consult with your card issuer to understand all potential fees.

4. What are some alternative payment methods to avoid foreign transaction fees for international business transactions?

To minimise foreign transaction fees, consider payment methods such as transfers through multi-currency accounts, business credit or debit cards with no foreign transaction fees, and fintech payment specialists like Airwallex. 

Airwallex’s multi-currency Business Account allows you to hold, pay, and receive funds in multiple currencies. The Borderless Card lets you make card payments from the currencies you hold, which eliminates conversion fees altogether. 

Additionally, Airwallex provides competitive exchange rates and transparent pricing, so you know exactly what you're paying without any hidden fees.

***Note: This publication does not constitute legal, tax, or professional advice from Airwallex nor substitute seeking such advice, and makes no express or implied representations/warranties/guarantees regarding content accuracy, completeness, or currency.

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