What is a cross-border fee? How to avoid one

What is a cross-border fee?

Cross-border fees are flat-rate charges applied to transactions where the payer and payee are in different countries. Typically higher than domestic transaction fees, they cover conversion costs as well as any additional processing charges associated with the transaction. The rate varies by processor, which typically uses these fees to account for global differences in payment methods.

For merchants looking to sell internationally, understanding these fees may be important for profitability. By incorporating additional costs into the business’s pricing strategy, companies can maintain competitive pricing without sacrificing profit margins.

Cross-border fee vs. foreign transaction fee

A “foreign transaction fee” is an umbrella term that covers cross-border fees, exchange fees, and other similar processing costs associated with international transactions.

Customers making international purchases may see a foreign transaction fee on their invoice or purchase statement rather than an individual charge for a cross-border fee.

Cross-border fee vs. currency exchange fee

Cross-border fees are operating expenses that businesses pay for, separate from currency exchange fees. Currency exchange fees are additional costs that facilitate the exchange of the customer’s currency for the seller’s currency.

Most payment processors charge rates as a percentage of the total purchase price. Customers typically pay for exchange fees at the time of purchase, and those fees can vary based on the current exchange rate.

The cost of cross-border transactions

While all transactions — domestic and international — incur card processing fees, cross-border transaction fees are additional charges that specifically apply to international transactions. The amount businesses pay will depend on the payment service provider they’re working with.

However, most costs fall within three main categories:

• Low fees (.60%): Some processors charge an average of .60% of the transaction’s value. These fees are common for businesses conducting sales between EU member nations.²
• Base fees  (1%): Base fees of 1% of the transaction’s value are available through some processors.
• Enhanced fees (1.40%): Depending on the business’s location and payment processor, cross-border fees can cost them 1.40% or more.

Keep in mind that the more complex the transaction is, the higher the fees will typically be.

Factors affecting cross-border transactions

Cross-border fees can vary from processor to processor, but a few common factors impact the rate companies pay. This includes factors such as the following.

Currency conversion

Currency conversion fees are charges for converting transactions from one currency to another. Here’s how the conversion works:

• Consumer currency: The business’s website converts its prices into the consumer’s preferred currency. Consumers can then use their home country’s currency to make a purchase on the business’s website.
• Seller currency: The payment processor converts the consumer’s currency to the seller’s currency based on the current exchange rate.

Fluctuations in the exchange rate for each currency can cause cross-border fees to go up or down.

Location

Different countries have different standards and requirements for international transactions and shipping strategies. These requirements can levy different cross-border fee rates depending on each country’s regulations. Businesses may pay different fees for each country in which they do business.

Compliance costs

Compliance costs are fees associated with adhering to international banking and financial regulations, which can vary among countries. Business owners are typically responsible for covering these costs.

Companies should also consider the added costs of implementing security measures and fraud prevention strategies when accepting online payments. The cross-border fees may also increase or decrease depending on the business’s and the consumer’s location.

A cross-border fee example

Let’s look at a quick example of what a cross-border fee looks like in real life.

A buyer in Germany uses their German credit card to buy a pair of shoes from an online shoe store based in the United States. The payment processor charges a 1% cross-border fee, and the purchase price of the shoes the consumer orders comes to $200.

The consumer makes their payment, and the business has to cover the cross-border fee as well as processing fees to complete the transaction. The payment processor charges a standard fee of 2.9% of the transaction total. So, the business has to pay the following:

• Processing fee: $5.80
• Cross-border fee: $2.00
• Total fees: $7.80

The business pays the cross-border and processing fees out of the total amount the customer paid. In this example, the business effectively receives $192.20 of the $200 transaction.

This is why choosing the right pricing strategy is important. By factoring the cross-border fees into what businesses charge customers, they can pass the cost onto the consumer and preserve their profit margin.

3 ways to help reduce cross-border fees

Though cross-border fees are common in international transactions that rely on online payment processing, there are ways businesses can reduce the cost and impact of those fees.