Over the last couple of years, there have significant increases in card processing fees, and they disproportionately affect companies that sell cross-border.
Most recently, we’re seeing upcoming fees announced by the major card brands as a result of Brexit. As a result, we’d like to offer some insights on how the interchange fees and foreign exchange fees associated with cross-border payments work, and how you can avoid these fees and minimize their impact on your business.
What Are Cross-Border Interchange Fees?
Whenever someone purchases from you using a card, you pay a card processing fee. While the fees vary by card type, the majority of the fee is the interchange fee. And cross-border sales can incur up to a 1% additional cost on top of the regular interchange fees.
To truly understand the impact of this fee, you need to understand what the card networks consider to be “cross-border.” A transaction is classified as cross-border when the customer uses a card issued in a different country or region from where the payment is processed.
Here are a few examples:
- Let’s say a US online business with a US acquiring bank sells a $100 item to a shopper in France who pays with a Visa card issued in France. The business will pay up to 1% in incremental fees for that order from France versus if the shopper was in the US and using a Visa card issued by a US bank.
- If that same French shopper uses the same Visa card at an Italian ecommerce site with a local acquiring bank, that Italian merchant will not pay a cross-border interchange fee. For the purposes of card payments, Visa considers Italy and France to be in the same region.
- Meanwhile, if that French shopper goes to college in the US and purchases from an online US business with the Visa card that was issued in France, the transaction is considered cross-border and would also be subject to those fees.
What Do Cross-Border Interchange Fees Cost a Business?
Consider a US online business that sells $200 million worth of goods. If 25% of sales come from shoppers outside the US, that would mean that $50 million of their revenue could be subject to cross-border interchange fees.
If those non-US transactions are processed in the US, then the business would pay up to 1% in incremental fees on those transactions, or $500,000 in avoidable cross-border interchange fees.
What Can You Do to Minimize Cross-Border Interchange Fees?
To reduce cross-border interchange fees, businesses need to process card transactions as if they are local to the region where the shopper’s card was issued. This means businesses need to connect to local banks in every region where they have a legal entity. Then, they can route every card transaction to the bank that matches where the card was issued. The more global a business is and the more locations it operates in, the more connections they need.
On average, international businesses use five different payment gateways to route cross-border transactions to local banks. This can be resource-intensive for businesses. The costs of developing and maintaining those connections along with other important payment services, like the ability to offer popular payment types like eWallets and fraud prevention can quickly offset the savings from processing payments locally. The alternative is to integrate with a payment processing provider with a global bank network.
Chargebee and BlueSnap have partnered to help merchants scale their subscription businesses on a global level. Through this partnership, merchants can optimize their cross-border transactions to maximize revenue and decrease costs.
With local acquiring in 47 countries and Intelligent Payment Routing, BlueSnap can help you increase authorization rates while reducing costs. And with Chargebee’s seamless subscription management and BlueSnap’s All-in-One Payment Platform, you can unlock new revenue opportunities in global markets.
Don’t Forget Foreign Transaction Fees
Even if you avoid cross-border interchange fees, your business or your customers still might have to pay a foreign exchange fee.
Going back to the example of the French shopper who buys from a US online business, there are two scenarios:
- The shopper pays the foreign exchange fees: If a foreign customer buys from a site in US dollars and pays with a card issued by a French bank, then the shopper will pay a foreign exchange fee. Over time, these charges are likely to lead to a decrease in sales for your business.
- The business pays the foreign exchange fees: If the shopper buys from the site and pays in euros, then the bank will charge a foreign exchange fee to the business in US dollars. The foreign exchange fees vary based on the currencies used in the transaction.
Let’s assume that for US dollars and euros, the foreign exchange fee is 1%. That means that at $200 million business with 25% in international sales would incur another $500,000 dollars in fees. However, if the payments are processed in the currency and the country or region where the shoppers are, then there is no such fee.
The Bottom Line on Cross-Border Payment Fees
Businesses need to keep in mind that some cross-border fees are completely avoidable. You just need to adequately set up your payment processing to mitigate the costs and optimize revenue. Luckily, BlueSnap can help businesses take payments globally while helping reduce costs and complexity with the All-in-One Payment Platform.
Interested to know more? Check out this webinar as experts from Chargebee and BlueSnap share the top 10 insights to maximize international subscription and recurring billing.