How to avoid international transaction fees on business spend

Key takeaways:

• International transaction fees associated with cross-currency transactions and conversions that are typically 1% – 3% of the value of the transaction.

• There are three key types of foreign transaction fees: currency conversion, dynamic currency conversion, and payment network fees (cards).

• Businesses can avoid international transaction fees with multi-currency accounts and cards

These days, almost every Australian business is, in one way or another, a global business. Whether you’re selling in another country or buying supplies from abroad, your finances are touching different corners of the world. International transaction fees seem inevitable, but they can be reduced and even avoided. 

Once you know how to minimise foreign currency exchange costs and hidden fees, you can better plan your business finances to avoid them.

What is an international transaction fee?

An international or 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 transfer amount, and it should be stated in the financial institution’s terms and conditions.

Money moves so seamlessly across borders now that it’s easy to forget the complicated picture going on behind the scenes. Countries and regions around the world have their own rules and regulations around financial transactions, and banks need to communicate with each other to move payments from one account to another.

The financial institutions managing these processes incur operational expenses that are then passed on to you as various foreign transaction fees.

What types of international transaction fees are there?

There are a few types of foreign transaction fees your business may encounter, including currency conversion fees, dynamic currency conversion fees, and credit card and payment network fees.

Currency conversion fees

You may incur currency conversion charges when making international transfers, where you need to change your currency into the currency of the recipient. This is typically around 1–4% of the total amount.

Direct bank-to-bank international wire transfers can incur hefty transaction fees. While the SWIFT payment network is a relatively efficient method of sending money overseas, it comes with charges from any intermediaries that the money may pass through before it reaches its destination.

Dynamic currency conversion fees

Some businesses offer fees that change the exchange rate. Dynamic currency conversion fees let you pay an international supplier in AUD instead of the currency they use.

While you think you’re avoiding foreign transactions, you may still be charged a fee – in this case, a fee for a third party undertaking the conversion. When using this method, keep an eye on the exchange rate on offer, as it’s usually significantly less than the real interbank FX rate.

Credit card and payment network fees

Credit card and payment network fees cover the conversion cost from all parties involved – namely, from your bank, the recipient’s bank, and the payment network that was used in this transaction.

Institutions typically charge 1–3%, but banks are also known to charge high flat-rate fees for these payments, between A$6-$30 per transaction. If you make a lot of international payments, this adds up fast. Especially when you consider additional payment transaction costs like interchange fees.

How to avoid international transaction fees

There are a few ways businesses can avoid international transaction fees. This includes by using a multi-currency account (also called a Global Account), by using a multi-currency car, and travelling with cash and avoiding ATMs.

Use a multi-currency account

A Global Account – also called a Multi-Currency or Foreign Account – allows you to hold multiple currencies in the one account. Certain accounts, including Airwallex’s also give you the option to set up local bank accounts in multiple countries to bank like a local. 

These accounts allow you to collect payments from your international customers in their preferred currency, and either convert them within your account or spend them later in the same currency.

Use a multi-currency card 

There are also cards designed for international business transactions that minimise FX fees for fast, efficient spending.

Multi-currency cards allow you to access accounts that draw on multiple currencies, which help you spend without incurring FX fees. For example, Airwallex’s Corporate Cards are multi-currency international business debit cards, so you can use them to pay for international expenses without incurring FX fees, as long as you have the correct currency balance in your account.

If you don’t have the correct currency available in your account, you’ll benefit from Airwallex’s market-leading FX rates.

Travel with cash and avoid ATMs

If you do a lot of business travel, plan ahead and convert your cash before you get to the airport to save.

ATMs charge expensive fees you’ll want to avoid once you land in another country. Otherwise, you’ll owe conversion fees, as well as fees from your bank and the ATM provider (assuming it’s not tied to your bank). And your bank at home will likely offer a better conversion rate, anyway.

However, most business isn’t done in cash, and it’s a security risk to carry too many bills at once. So, a multi-currency business card or global business account is still likely your best bet.

How are foreign transaction fees calculated?

Most foreign transaction fees are percentage-based charges, so the actual fee amount varies based on the transaction size. Though, some banks use flat-rate fees.

A total foreign transaction fee averages 1–3% of your transaction. So, if you pay an international employee A$3,000, you’d owe between A$30-$90 in foreign transaction fees.

The actual rate you pay depends on the type of foreign transaction fee charged and the rate your chosen institution charges.

How do foreign transaction fees impact businesses?

Businesses can be impacted by currency conversion costs and fluctuating FX rates in all cross-border transactions, including collecting money from customers, paying employees, and buying supplies.

Being aware of the factors driving currency volatility can help businesses avoid sudden hits to their profit margin. Foreign exchange (FX) rates are fluctuating constantly, thanks to changes like:

• Inflation rates: Lower rates of inflation are correlated with a country having greater purchasing power compared to its trading partners, which affects FX rates.

• Interest rates: Higher interest rates tend to attract foreign capital seeking higher returns, leading to currency appreciation.

• Economic indicators: GDP growth, employment rates and manufacturing output reflect a strong economy.

• Political instability: This can negatively impact the value of a country’s currency, as it can put off potential foreign investors due to increased uncertainty and decreased confidence.

• Trade balances: Countries that export more than they import generally experience an appreciation of their currency.

Example: A company’s home currency falls in value, so the cost of wages and supplies in other countries rises. Holding funds in foreign currencies can help counterbalance this effect.

On the other hand, if a company’s home currency strengthens, these costs will have less of a financial toll. However, the price of the business’s products may become less competitive in foreign markets, leading to a potential loss of market share.

Exchange rate fluctuations also impact financial reporting. The perceived financial health of the company may be impacted if the company’s home currency drops in value. By monitoring changes in FX rates, companies that hold money in multiple currencies can also make effective decisions about when to move money between accounts.

Explore easy, foreign transaction fee-free business accounts

Knowing how to avoid international transaction fees isn’t just about cost savings. Steps like leveraging multi-currency accounts can certainly help save money, especially if you make a high volume of international payments.

However, you also enjoy the added benefit of faster transactions to improve cash flow management with accurate data for financial planning. Quick transactions also make sure you never miss a payment for improved service and reduced late fees.

Frequently asked questions

Why are international transaction fees higher than domestic transaction fees?

A domestic transaction is more simple as it involves one currency (AUD) and two Australian banks that operate under the same rules. An international transaction involves multiple banks, multiple currencies, different regulations, and global payment networks to facilitate the transfer. 

Can I avoid international transaction fees as an eCommerce business owner?

Yes, you can avoid foreign currency fees when you run an eCommerce store. It’s important to choose an international payment gateway provider and Global Account that supports multiple currencies – like Airwallex – to be able to operate globally without extra costs. 

Are banks or fintech platforms better for reducing international transaction fees?

In most cases, non-banks and fintech platforms are significantly better and cheaper than traditional banks. While traditional banks have reduced their international transaction fees in recent years to compete, fintech and non-bank platforms were introduced specifically to cater to underserved global businesses looking to scale uninhibited by international fees.

Sources:

1. https://www.beuc.eu/sites/default/files/publications/beuc-x-2017-131_currency_conversion_scam_factsheet.pdf