November 25, 2022
by David Goodale
How much do International (cross border) credit card processing fees cost?
(Slightly edited from video transcript for greater readability)
Hello, David here at Merchant-Accounts.ca. Today I'm going to tackle a quick but important question. What are international or cross-border credit card processing fees? Stay tuned. We're going to dig in, in a second.
Cross Border Transactions
When payment transactions cross a border, as a merchant, you will pay a larger fee. To be specific in my explanation, there are two things that Visa and MasterCard look at every time in a payment transaction. The first is where is the merchant's domicile. This is the country and region your business is incorporated or registered. Merchant-Accounts.ca is a registered business in Canada therefore I'm a Canadian merchant. The second thing they look at is where the issuing bank of the cardholder is based. It's the domicile of the cardholder's issuing bank that's important.
An example cross border transaction
Let's say that I'm a Canadian merchant, and I sell something to a customer in Rhode Island and they're with Wells Fargo Bank. Visa takes note that the Merchant is Canadian and the card is issued by Wells Fargo Bank in Rhode Island United States. This transaction crossed the Canadian-United States border. It's time to assess some cross-border fees and some international transaction fees.
How much are those cross-border fees?
I suppose the next thing we should look at is how much those cross-border fees are. This can be a little confusing, so stick with me for a second. When a transaction is processed, if you bill that foreign cardholder in the cardholder's, local currency, the cross-border fee is more, it's 1% per transaction from Visa and MasterCard. I'm recording this in 2021. I know that's a little confusing. So let me say it again. I'm Canadian, I bill John in Rhode Island. Now I bill him directly in US dollars because at Merchant-Accounts.ca we do multicurrency processing and it's always best to bill your cardholder in their local currency. I bill John in US dollars because he's an American customer and we charged his card in US dollars. His local currency, visa, and MasterCard will assess a cross-border fee of 1% for that transaction.
Had I billed John in any currency other than US dollars, the cross-border fee would be reduced by half. It would've been 0.5%. This often seems counterintuitive, and people get confused by it. Visa and MasterCard assess a higher international or cross-border transaction fee if you bill a cardholder in their local currency. As a last note on this, just as a little e-commerce tip, if you did a lot of sales, let's say that, I'm still the Canadian merchant in my example here, let's say I did a ton of US Dollar sales to the US customers, for example, $10 million per year. 1% of $10 million a year is a hundred thousand dollars. It's a lot of money and it is worth it for me to do whatever it takes to avoid this cross-border fee from happening.
As a last note on this, just as a little e-commerce tip, if you did a lot of sales, let's say that, I'm still the Canadian merchant in my example here, let's say I did a ton of US Dollar sales to the US customers, for example $10 million per year. 1% of $10 million a year is a hundred thousand dollars. It's a lot of money and it is worth it for me to do whatever it takes to avoid this cross-border fee from happening.
What I would do is incorporate a branch or an office in the United States, that would let me get a US domestic merchant account. That would prevent cross-border fees from occurring, which it's worth it if you do enough sales.
Additional Administrative Headache
It's not worth it to incorporate in another domicile like the United States if you don't handle enough sales, because there are cost and administrative headaches associated with that. I have another tax return, and I have to deal with the IRS. I want to deal with those issues as much as I want a root canal. Unless there's a real reason to want to do it, then don't consider it. However, as soon as you cross a threshold and I can't tell you how much money is worth it to deal with all those extra administrative headaches. At some point, you are paying out enough money in cross-border fees that eliminating this would be like a significant chunk of revenue to your business. That's when you pull the trigger, you prevent your transaction from crossing a border by getting a domestic merchant account in that foreign country.
Cross border processing issues are exactly the type of problem that we help business owners with at Merchant-Accounts.ca. If you have any questions, reach out to us because we don't believe there are any silly questions. I hope this was helpful. Thanks for watching and have a good day there.
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