What Is A Cross Border Fee For Credit Card Processing?
If you decided to read this post, you’ve probably already have been introduced to the cross border fee on your credit card processing statement, and you want to know a little bit more about it. You may also be in full-on research mode when it comes to accepting credit cards in general. In either case, you’re in the right place.
So what is a cross border fee?
A cross border fee is a specific type of credit card processing fee that appears whenever you, a merchant in one country, accept payment from a customer whose card originates from another country. This fee is set by the card networks rather than your credit card processor, so it’s important to note right off the bat that you likely can’t negotiate a lower cost for this base figure. But you should still know what the going rate is so that you can spot any inconsistencies or inflated charges on your statement.
First, we are going to explore two scenarios that will help you understand what could trigger a cross border fee on your statement. Then we will get into the nitty-gritty of the cross border fee itself — what it is exactly, why it’s passed to you, and how much it may impact your business. By the end of the post, we hope you will come away with a balanced perspective when it comes to making decisions about engaging in business across the globe.
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When Might A Cross-Border Fee Apply?
Cross Border Fee Scenario #1
In this first scenario, imagine you are an owner of a textiles company in the western part of United States and have an ecommerce storefront. You decide to begin selling your fine fabric offerings in Canada, so you develop a campaign that successfully targets your prospects to the north; your online sales take off in the Toronto area.
In this case, you intentionally decided to reach out and market to prospects who live outside of your country, so you are likely well aware of the fact that you will need to consider the conversion rate. What you may not know is that your credit card processing company is also taking on additional fees when it comes to converting from Canadian currency to USD — and those fees are passed to you.
In this scenario, you can expect a cross border fee to be applied to the sale. This cost represents a tiny percentage of your total sale but still may become an important factor when it comes to deciding if you ever want to expand or set up a part of your business over the Canadian border to save fees.
Cross-Border Fee Scenario #2
With ecommerce, you should be aware that you’re opening your business up to international sales and accept that you’ll end up paying a bit more in fees as a consequence. But there are some cases where you may not be aware of the international nature of a sale, especially for card-present transactions! In these cases, a random “cross border fee” appearing on your statement can be a cause for alarm.
If you have a brick-and-mortar shop, for instance, you could potentially accept payment from someone traveling to the US (as a tourist or even on business) who walks into your shop and pays you with a card from an overseas bank. The final conversion will be in US dollars from that overseas bank, and therefore, the cross-border fee applies.
Read on to find out exactly why the cross border fee is assessed in the first place, and if there is anything you can do about it.
Why The Cross Border Fee Is Passed To You
Selling across borders means more work for the financial institutions involved, which is why cross-border fees are passed on to the merchants. However, depending on the circumstance and the banks involved, both the consumer and the merchant could face extra fees on their credit card statements. The two biggest players in the credit card industry — Mastercard and Visa — both assess cross border fees to credit card processing companies. The credit card processing company then typically passes these charges on to the merchant in the sale.
To do business in today’s global market, it just costs a little bit more. But we still haven’t explored the why in depth.
It all boils down to the costs faced by credit card companies and acquiring banks when it comes time to convert the cash. Any time a transaction involves two currencies, there are a few more administrative steps required to convert money from one country’s currency to another’s. Depending on the countries involved, there are also some risks for the issuing banks, particularly when it comes to the stability of another country’s currency.
Because of the fees and risks associated with conversion, and the dramatic increase in exchanges across the globe, Mastercard and Visa have both assessed these types of international fees since 2005. Like a hot potato, the fee is tossed between the issuing bank and processor, then passed along to the merchant as an “assessment fee” — a reasonably fair trade for the privilege of using the international credit card processing network.
It’s important to know that even though both companies charge the fee, they call it by different names. Visa refers to its fee as the International Service Assessment, whereas Mastercard is more direct and simply calls it the Cross Border Fee.
How Much Are Cross Border Fees?
Just how pricey are these cross border fees?
Part of that depends on where in the world you, the merchant, are based. Mastercard, for instance, issues a 0.6% fee for “any transaction in which the merchant’s country of domicile differs from the country where the card was issued, and the transaction was settled in USD.”
Mastercard charges a bit more for non-US merchants: “Any transaction in which the merchant’s country of domicile differs from the country where the card was issued, and the transaction was not settled in USD,” will cost you a flat 1.0% in addition to interchange fees.
Keep in mind that you could also be responsible for other types of assessment fees, including the Global Acquirer Program Support Fee, which applies to transactions accepted by US merchants involving credit cards that are issued outside of the U.S.
Note that these each of these fees is 1% or less of your total sale from the credit card companies. And while that likely won’t break the bank, each fee still takes a little something away from your bottom line.
How Third Party Processors Deal With International Processing
We generally recommend merchant account providers that offer interchange-plus pricing for transparency’s sake. You know how much the processor will charge in addition to interchange fees and assessments, and it’s all clearly laid out in the statement. However, third-party processors typically offer flat-rate pricing instead of interchange-plus. (Think PayPal or Stripe, both of which charge 2.9% + $0.30 for all US-based online transactions.)
Third-party processors don’t break down all of their fees for you, and that’s largely because they play a numbers games — with their flat-fee pricing, they make a profit on some transactions but lose money on others (usually American Express transactions, which tend to have higher interchange rates). This sort of pricing model means that the processors usually set their own pricing for cross-border transactions and other special fees, rather than simply passing on the card networks’ interchange fees, for the sake of keeping pricing predictable.
Some third-party processors don’t support international transactions at all. Square falls into this category. Others, such as PayPal and Stripe, do accept international transactions, but assess their own fees.
PayPal, for example, adds a 1.5% fee to all transactions from cards that originate out of your home country. For US merchants, that means you pay 4.4% + $0.30 per transaction for international/cross-border sales. Stripe, a company that has staked its reputation on making global commerce easy, charges a 1% cross-border fee, which means US-based merchants will pay 3.9% + $0.30 per transaction.
In both cases, these fees don’t include any currency conversion costs, if the issuing bank doesn’t convert the currency before passing it onto the processor.
At first glance, pricing for international transactions with a third-party processor sounds rather steep, but usually, these kinds of businesses are more cost-effective for small businesses because they have few, if any, other fees or overhead costs. So while you might pay more on paper to accept cross-border payments with a third-party processor, you’ll often save money in other areas.
Is There A Way To Avoid The Cross Border Fee Charge?
The answer to that questions is generally a hard no — not if you want to continue making sales from your international patrons. The cross border fee charge is a non-negotiable assessment fee that is collected and maintained by the card networks. Your credit card processor doesn’t make any profits off of the base fees set by the credit card companies. That said, you will want to make sure your processor isn’t charging you extra fees for the transaction — these may be negotiable.
And there are a few exceptions that some business owners might want to explore. While it isn’t possible to get the cross border fee removed when you deal in international business, you may decide that you do enough business in one area of the world to necessitate registering your company in that country and opening a bank account there. There may be a plethora of reasons why that decision would work for your business, and one of those could be to avoid extra processing fees. It all depends on where you see your business growing and if expanding your business in a specific region is worth it for you.
Keeping The Cross Border Fee in Perspective
As a savvy business owner, doing the due diligence when it comes to running your business is how you become — and stay — successful. Seeking to research and understand why you are being charged a fee (and if there is anything you can do about it) is something you should never stop doing. However, in this case, the cross border fee and other charges for doing business with people located across the globe are unavoidable parts of doing business.
For most business owners, accepting orders across borders — despite some extra costs — represents more potential for revenue growth. Balancing all the costs of doing business with your customers (no matter where they are) with your profit potential will help you make the best decisions while you keep your goals intact.
If you are interested in learning more about international fees and how they may affect your business, check out our related article, What is Visa’s International Service Assessment Fee? If you are worried about the woes of overpaying for credit card processing and feel you need some more guidance on making the best choice, our cost analysis workbook may be able to help.