Are you a merchant that wants to expand internationally? If the answer is yes, then there are several issues you should think about. Primarily, these issues concern international acquiring services and cross-border transaction fees.

International payment processing might cost at least twice as much as local payment processing. The basic reason for that is involvement of several currencies and several banking systems in the process. If both buyer and seller operate within one geography, use the same currency, and have accounts in the same bank, then commission the bank charges for electronic payments is minimum, because, technically, the funds remain where they were. If buyer and seller are operating from two different countries, using different currencies, then the situation is somewhat different. Let us explain why.

Factors that influence the size of a cross-border transaction fee

Fees, that financial institutions charge for any transactions, include two components. First, base costs, consisting of interchange and assessments. And, second, markups, that banks surcharge on top of interchange. In the case of international payments, four different banks instead of one or two impose the surcharges. A cross-border payment involves the buyer’s bank, the seller’s bank, and two correspondent banks (one on each side). Each of these institutions charges a specific percentage of transaction amount (or per-transaction fee) for the service of moving the funds from the buyer to the seller. Cross-border fee includes all these components, which makes it substantially larger.

Another factor behind the size of cross-border transaction fees is multi-currency payment processing. Usually, an international payment involves two currencies: “local” and “foreign.” If a transaction is authorized in foreign (buyer’s) currency and settled in local (seller’s) currency, then it costs less, because there is no need to support two currencies on the seller’s end, and, consequently, the process is easier to implement. If both authorization and settlement currencies are foreign, then transaction processing costs more, because the seller’s acquirer has to support foreign currency, and currency conversion takes place. Card associations charge two kinds of cross-border fees for these two cases – domestic and foreign.

As we can see, international payment processing is a complex procedure, even if it is described in relatively simple terms. And that is why cross-border transaction fees might sometimes seem large.

If you want to learn more about cross-border transaction fee structure, you are welcome to read our article on the subject on Paylosophy.