What Is A Cross Border Fee?

A cross border fee is the fee charged to a merchant when a customer uses a credit card as payment for purchases or services from an issuing bank not located in the same country as the merchant’s processing account. Let’s see if we can make that a little easier to understand.

Say you run a deli in New York City and a tourist from Japan stops in to try your famous hot pastrami sandwich. If he pays for that sandwich using a credit card issued by a Japanese bank, you’ll be charged a cross border fee because the issuing bank for the tourist’s credit card is located in a different country from your merchant account. This fee is not the same as a currency conversion fee. It’s a separate fee that may be added to a currency exchange fee or may be charged even if no currency exchange takes place with an international sales transaction.

History of the Cross Border Fee

The internet has changed the way we all shop. We’re no longer limited to what our local stores have to offer for sale. Today we have access to thousands of stores around the world simply by logging onto the internet and browsing their websites.

Before 2005, there were no cross border fees. However, credit card processing companies charged a currency conversion fee to cover the extra costs incurred during an international transaction. But e-commerce merchants were sidestepping the currency conversion fee by using one of several solutions. Some companies used an acquiring bank that supported multi-currency processing. Others directed their foreign customers to local distributors who carried their merchandise for sale.

For example, if a shopper in the US found the perfect Irish knit sweater on a UK website, she might have been directed to go through a local distributor in the US to make her purchase. Then the purchase could be paid for using a credit card issued by a US bank, thus avoiding any conversion fee.

Since 2005, MasterCard and Visa have instituted the cross border fee whenever a merchant accepts an international credit card for payment. This fee is charged by the issuing bank and passed on to the merchant as an assessment for the use of the international credit card processing network whether or not there is a need for currency conversion to complete the transaction.

When Are Cross Border Fees Charged and How Much Are They?

When you process an international charge, the bank that issues the credit card used in the transaction checks for two things:

1. In what country was the credit card issued?
2. In what country is your merchant account located?

The issuing bank is looking to see if you are processing a transaction for a customer located in any other country than the country where you have your merchant account. At the time of writing, the fee schedule is as follows:

• If you bill an international customer in your currency, you will be accessed 0.40% (or 40 basis points).
• If you bill an international customer in their local currency, you will be accessed 0.80% (or 80 basis points).

So let’s go back to that Japanese tourist who enjoyed a pastrami sandwich in New York City. When that deli owner gets his monthly credit card processing statement he is going to see a line item labeled cross border fee or foreign transaction fee for 0.40% of his customer’s total check, because he billed an international customer in US dollars.

Are There Ways To Avoid The Cross Border Fee?

The answer to that question is “yes.” The solutions merchants employed to get around the currency exchange fees would work. Use an acquiring bank that supports multi-currency processing, or direct your customers to purchase your merchandise through your local distributors.

There’s another option as well. With the rapid growth of e-commerce, many larger retailers are registering a branch of their company in countries where they do a large volume of business. And what is gained by this legal maneuver? Well, say you operate a company in the US that does a lot of business in the UK. Once you register as a UK business, you can apply for a merchant account in the UK and accept locally issued credit cards for payment with no cross border fees to worry about.

Is this means of avoiding cross border fees really worth it? If you do a large volume of business outside of your own borders, cross border fees can add up. But balance that cost against the expense and pitfalls of setting up a foreign business entity before you make any business decisions.

Just as with any of the transaction fees that appear on your monthly credit card processing bill, it’s important to understand how and when cross border fees are charged. This understanding will help you control your costs and improve your bottom line.