Whether you’re traveling abroad, buying something online, or working with foreign suppliers, you’ll have to make a payment at some point.
Then, as you’re reviewing your transactions, you see the payment and it’s ended up being more than expected.
This kind of sticker shock is extremely common. From credit and debit cards to payment portals and wire transfers, foreign transactions come with additional fees that could potentially blindside you if you aren’t prepared.
But if you understand what foreign transaction fees are, how they work, and follow our actionable tips to keep them to a minimum, you’ll have all the benefits of buying abroad without the shock.
What is a foreign transaction fee?
Foreign transaction fees occur when making a purchase in a different currency or if the purchase is routed through a foreign bank.
Domestic payments use established networks that connect banks like the ACH network. These networks make it easy for banks to transfer funds and fulfill transactions at minimal cost.
Foreign transactions don’t have the same luxury. Money often needs to get routed through multiple banks (called intermediary banks) in separate countries before it’s landed at its destination.
Then there’s the added complexity of currency conversions—another task that banks and credit cards will charge a fee for. In some cases, there’s a fee baked into the exchange rate (e.g. a bank giving you an exchange rate of 1.08 instead of the market value of 1.10).
This extra legwork to land payments in another country results in foreign transaction fees. Whether you’re sending a payment to a supplier abroad or you’re using a credit card during international business travel, you’re likely to have fees on each transaction.
How foreign transaction fees work
The typical foreign transaction fee is structured as a percentage of the transaction amount after the currency has been converted.
Generally speaking, foreign transaction fees work like this:
- You agree to a payment and charge it to either a debit card, credit card, or other payment method
- The provider processes the transaction in the local currency
- The amount is converted to your local currency based on the exchange rate at the time
- Once in the local currency, a percentage fee is levied on the transaction amount
- The payment and the fee are added to your billing statement—sometimes these will be broken up into two line items so you’ll see the fee separately
Watch out for banks and credit cards potentially charging a markup on the exchange rate. If you’re starting to make foreign payments for the first time, compare the listed exchange rate on your statement to the market exchange rate on a website like XE.com or X-Rates.
How much do foreign transaction fees cost?
Foreign transaction fees are most frequently charged as a percentage of the transaction amount. Experian reports that foreign transaction fees generally range from 1% to 3%.
Then there’s the potential markup on the conversion rate. This is when the payment provider converts the currency at a rate below market value, essentially pocketing the difference.
For example, say you’re sending an employee to Germany to meet with a potential new supplier. While abroad, they spend 500 euros on accommodations, food, and transportation.
At the time, the exchange rate was set so 1 US dollar (USD) was equal to 0.90 euros. However, the credit card converted 1 US dollar to 0.85 Euros on top of charging a 2% foreign transaction fee.
The initial amount of 500 euros becomes 588.24 USD (500/0.85). After applying the 2% foreign transaction fee, the expense total lands at 600 USD.
At the market exchange rate of 0.90, the expense amount would have been 555.55 USD. This means you’ve paid 44.45 USD in foreign transaction fees (32.69 from the currency conversion and 11.76 from the 2% fee).
As you start making international payments, you can estimate costs by using the listed exchange rate and the foreign transaction fee charged by your bank or credit card.
However, if your costs are coming in above your estimates you should look at the exchange rate the bank or credit card is offering you.
How to avoid foreign transaction fees
Foreign transaction fees may seem inevitable, but that’s not the case. Businesses use these strategies to minimize foreign transaction fees or avoid them altogether.
Choose the right bank or credit card
Not all credit cards charge foreign transaction fees. Many of the top providers offer credit cards with no foreign transaction fees, though you may have to give up other perks like points, cash back, or low interest rates.
Banks that waive the foreign transaction fee are less common, however, there are some options.
It’s also possible to offset foreign transaction fees with other perks. For example, a credit card that offers 3% cash back with a 3% foreign transaction fee will save you more money on foreign transactions than one with no cash back and no foreign transaction fee.
Before making international payments from your existing bank or credit card, shop around to see what are some alternative options. It may be worth having a credit card with the right reward structure specifically for all your international payments.
Compare against third-party payment providers
Look into payment providers and money transfer services that specialize in international payments. They’ll offer some of the best rates and transparent pricing.
The best way to combat foreign transaction fees is to get familiar with the options that are available to you and when they’re the best fit. Processing times, exchange rates, fees, transfer limits, and availability should all be considered before sending an international payment.
Open foreign currency accounts
It may be worth opening a foreign currency bank account if you’re frequently sending and receiving money in a specific currency. For example, if you have suppliers and buyers who use euros, it might make sense to have a dedicated bank account for that activity.
There are still pros and cons to opening a foreign currency bank account. Account fees can be costly when they start adding up, minimum balances mean some of your cash is always held up in that currency, and you may lose money over time from a currency’s value starting to fall.
Ultimately, it’ll take some back-of-the-napkin math to understand whether the switch will save you money. It also depends on what the business’s risk tolerance is for potential dips in currency value.
Negotiate with your providers
The terms of your bank or credit card are not set in stone. It’s worth reaching out to see what wiggle room there is in the contract terms to potentially waive foreign transaction fees.
Before reaching out, look for a competitor’s option with an overall package you’d consider. Your negotiations are more likely to be successful if you have an alternative you’d switch to.
It should also be noted that you’ll get the best results if you’re in the provider’s good graces. A clean history of paying bills on time, carrying a consistent bank balance, and maintaining a strong credit score can all improve your chances.
Stay in the loop on new offerings
Paypal, Stripe, and Shopify currently make up nearly 80% of the payment processing market share. However, this is all subject to change with the FinTech boom leading to the creation of digital banks and payment platforms.
The point of the matter is don’t assume your existing method is the best method. Either new options will pop up or existing options will get more competitive with their offerings and drive down costs.
Check in with both your vendors and buyers on what payment platforms they’re using and their experience with it. This small step could result in you making a switch to a better product and saving money.
Currency conversion fees vs. foreign transaction fees
Currency conversion fees and foreign transaction fees are very similar. Both are a percentage fee that’s charged on a foreign transaction, but they differ in who they’re charged by and to.
Foreign transaction fees are owned by the payment issuer. The payer is charged a percentage fee on the transaction by the bank, credit card, or digital payment platform they use to send money.
Currency conversion fees are owned by the payment receiver. The payment processor used to collect funds charges a percentage fee to the receiver to have the funds converted into their local currency.
Both fees are likely charged on an international transaction meaning there are costs to both the sender and receiver.
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Save time and money on foreign transactions
Streamline your international payments and save money with BILL, an AP platform for global payments. Supporting payments to more than 130 countries, you’re covered with payment methods that work for you.
Competitive exchange rates and $0 wire transfers give you peace of mind knowing you’re not being nickel and dimed on a payment. And you don’t just save money, you save time with a one-click payment option.
Reach out for a demo to see how BILL can revamp your international payments process.
FAQ
Why do banks charge foreign transaction fees?
Banks charge foreign transaction fees due to the costs of processing international transactions and minimizing any potential losses due to fluctuating currency exchange rates. These fees are charged on any transactions that involve a currency exchange or are routed through international banks.
Do debit cards have foreign transaction fees?
Debit cards have transaction fees on payments and sometimes on ATM withdrawals. However, it’s possible to find debit cards that are fee-free on both types of transactions. In particular, look for debit cards that are part of a global ATM network to keep foreign transaction fees in check.
How do I know if my credit card has a foreign transaction fee?
The best place to check for foreign transaction fees is in the terms and conditions for your credit card.
Otherwise, look through past statements for any international transactions. Generally speaking, foreign transaction fees will be included as a separate line item so it’s clear how much you were charged on past payments.
Are there credit cards without foreign transaction fees?
Yes, some credit card companies offer cards that do not charge fees on transactions abroad. Chase, Mastercard, Bank of America, Citi, and more have fee-free options.
What is a normal foreign transaction fee?
Foreign transaction fees typically fall within 1% to 3% of the converted transaction amount. On a transaction of $100, the fee would then be somewhere between $1 to $3.
Can I use a debit card abroad without fees?
Unless your bank offers an option without foreign transaction fees, you’ll be charged for any payments or ATM withdrawals you make while abroad. However, some banks are a part of a global ATM network which will allow you to withdraw cash and avoid the fees.
