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

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Foreign transaction fees: How to avoid and why do you need to care?
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Whether you’re paying for social ads, making vendor payments, or booking flights, your global business expenses can add up rapidly. But have you looked at the impact of foreign transaction fees on your bottom line? 

Overseas transaction fees are charged by financial institutions for card payments in foreign currencies or when sending money to an international bank account.  If left unchecked, foreign transaction fees can eat away at your business’s bottom line.

You can minimise these costs when you use business credit or debit cards with no international fees and a multi-currency business bank account. Keep reading to learn more about foreign transaction fees and how the Airwallex Borderless Card can help you avoid them.

What are foreign transaction fees?

Foreign transaction fees are charges your business incurs when you use your corporate card to make a foreign currency payment. International bank payments also have hefty transaction fees. That’s because international transfers often involve multiple banks in different countries, each of which may charge its own fee for handling the transaction

For this article, we’ll be focusing on international fees for card payments, which can be as high as 13% if you use dynamic currency conversion. These fees are a percentage of the transaction amount, and we’ll share how these are calculated below. These fees come from two financial institutions: (1) the card issuer and (2) the card network.  

The card issuer is the financial institution that provides the card to businesses. They are responsible for setting terms like interest rates, rewards programs, and credit limits. DBS, Citi, and OCBC are some examples of card issuers in Singapore. 

On the other hand, card networks like Visa or Mastercard operate the infrastructure that enables card transactions. They set the rules and standards for card payments, facilitate communication between card issuers and merchants, and ensure the security of the payment system. 

Both institutions charge a fee for their role in facilitating international business payments. If you travel frequently or have recurring card payments, these fees quickly add up and can reduce profitability. It’s essential to be aware of how much these charges are and explore ways to minimise them.

How much are foreign transaction fees and how does it work?

When you or your employees use a corporate card to pay in foreign currencies, the transaction goes through a process to convert and settle the amount. Foreign transaction fees come into play during the conversion step.

Let’s say you’re travelling to Hong Kong and need to pay HKD 1,200 for a business hotel. When you pay for your stay at the front desk, the hotel’s bank (merchant) sends a request to your card issuer (i.e. your bank or financial institution) to check if you have enough credit or funds. 

Once the transaction is approved, your card issuer and network converts the HKD to GBP (or your home currency). However, the conversion process isn’t quite straightforward. The conversion rates are either based on interbank rates, or a rate decided by card networks like Visa or MasterCard.

This is where foreign transaction fees come in. Typically, Visa or MasterCard apply a 1% markup on the conversion fees, while card issuers (i.e. your bank) add a 2.75% administration fee for facilitating the transaction. Both fees will be taken from your card account.

To illustrate the example:

Scenario Paying for your hotel booking in Hong Kong at the front desk
Foreign currency pairs GBP to HKD
Foreign exchange rate Determined by Visa or Mastercard
Markup imposed by card network (i.e Visa or Mastercard) 1%
Administrative fee imposed by card issuer 2.25%
Total foreign transaction fees 3.25% on top of the exchange rate determined by Visa or Mastercard

However, let’s say you booked your hotel room online and used dynamic currency conversion (DCC). This optional service gives you the option to see and pay in your home currency (GBP) rather than the foreign currency (HKD). The price is converted at the point of sale and lets you see what you’re paying for in GBP, without needing to do any maths.

When you use DCC, the currency conversion and exchange rate is decided by the merchant. However, there is an administrative fee for any transaction that uses dynamic currency conversion. This fee is usually a percentage of the converted amount in GBP.

On the surface, DCC seems to provide lower foreign exchange charges and greater clarity, as you can see the exchange rate upfront and can account for business expenses in GBP. 

However, DCC may have higher overall costs because exchange rates may be less favourable than those your bank would use. Merchants may also add a markup to the exchange rate, which can range anywhere from 2% - 12%. Ultimately, you end up paying more for the convenience of seeing prices in GBP.

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 SGD during business travel. POS systems will sometimes ask if you’d like to convert the local currency to SGD. 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 VISA Borderless 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 a free 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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