This is a guest post written by David Goodale, CEO at Merchant-Accounts.ca. We at Foxy have worked with David on numerous projects over the years, and we’re happy to have him share his expertise on our blog.
A large number of e-commerce based businesses sell to customers located outside of their country. In fact, one of the largest advantages of selling online is the quick access to a potentially global customer base.
Furthermore, the ease with which people can pay for things from anywhere using a credit card makes selling to those foreign customers easy to accomplish. That is where the grey area begins though, because both merchants and cardholders often do not understand the extra fees that can be incurred when cross-border transactions take place.
What is a cross border fee?
When a credit card payment takes place Visa and MasterCard look at two things:
1: Where the merchant is domiciled
In order to accept credit cards you will need a merchant account or payment processing service. When you sign up with a payment processor such as Paypal or Merchant-Accounts.ca, the application form will ask you where your business is registered. This is a very important question when it comes to cross border payments. The reason it’s important is because the country your business is registered in will cause all sales within that territory to be deemed “domestic” and all other sales to be deemed “international” or “intraregional”.
Although it is beyond the intended scope of this article, if you have a Canadian based business you must work with a Canadian licensed acquirer (merchant account provider). If you have a US based business you must work with a US licensed acquirer (merchant account provider). It’s often the case that a merchant might want to work with a US based acquirer so that all US based sales are counted as domestic. For example, this is very popular for Canadian businesses that do a lot of sales within the USA. However, a Canadian based business must work with a Canadian based processor. Thus, the location of your business will always have a direct impact on what transactions will qualify as domestic, and which transactions will qualify as international. That is why attempting to get a domestic merchant account in a different territory than where your business is based can often be a frustrating experience. You can’t escape or bypass it. If you want to process domestic transactions within a specific territory, for example the USA, the only way to accomplish this is to open a business presence in that country (in this example the USA) and work with a US licensed merchant account provider to get a domestic US based merchant account.
2: The location of the card issuing bank
The other criteria that is examined whenever a transaction is processed is the location of the card issuing bank. In the above point #1 we clarified what determined where a business is “based” or “domiciled” from a credit card processing perspective. With that having been established Visa and MasterCard then check to see if the card issuing bank is located in the same territory that the merchant account is located in.
The result: If a cardholder and merchant are not located in the same territory a transaction will be deemed as “cross border”. When that occurs, both the cardholder and the merchant are impacted from a cost perspective.
The History of Cross Border Transaction Fees to the Merchant
Before we get into the current cross border rate structure (as of September 2014), we should briefly look back at the history of e-commerce merchant account pricing. If we go back a handful of years, flat (non-fluctuating) pricing was the most common pricing method in the e-commerce payments industry. For example, in 2005 an e-commerce merchant might have had a flat discount rate of 3.5%. That rate never, under any circumstances whatsoever, would have fluctuated. This was the old “flat” or “fixed” pricing model popular in the burgeoning years of e-commerce.
Flat pricing was fantastic in that it was honest, simple to understand, and easy to reconcile. However, as e-commerce and online payments have matured the cost structure for online payments has become more complex. Interchange, which is Visa and MasterCard’s cost structure to the credit card processor. has changed to include more breakdowns for rewards cards, corporate cards – and foreign issued cards.
We are going to focus on those fees that apply when foreign issued cards are processed. However, in order to do that we must have at least a cursory understanding of interchange, and how it is set by region. Visa and MasterCard set interchange within a region. The cost structure of interchange is the same to all processors within a region in order to create a fair and even playing field. Examples of different regions are: Canada, USA, UK/Europe, Asia/Pacific, and Australia. The actual interchange cost can vary tremendously by region. For example, Australia has among some of the lowest interchange fees in the world, whereas in the USA, interchange is on average more expensive than in Australia. US based interchange is also fairly complicated because (in comparison with other regions) the US has many different card types and criteria that can impact the interchange cost associated with a particular transaction.
The reason for pointing this out is that it would be an incredible undertaking to outline every cross border fee scenario. Instead, we will look at some of the most common ones, with the goal being to create a high level understanding and point of reference in terms of how much cross border fees are.
Cross Border Fees for US Domiciled Merchants
In the USA there are two separate cross border fees to contend with, although they add up to about the same amount a Canadian merchant would pay.
Selling to a foreign cardholder:
- International Acquirer Fee(IAF): 0.45%
- International Service Assessment (ISA) : 0.40%
- Total fee for international payments for US domiciled merchants: 0.85%
Cross Border Fees for Canadian Domiciled Merchants
The cross border fee in Canada can be a bit less expensive if compared to the cross border fee paid by US-based business, but it depends on the currency that the transaction is processed in.
As mentioned earlier in our discussion, it is possible to sell to a customer anywhere in the world using a Visa or a MasterCard. However, when looking at cross border fees for Canadian merchants we must be more specific and look at the currency the payment is processed in when selling to an international customer.
For example, a Canadian business might sell health products online. They have customers in Canada, but also in the UK. When selling to a customer located in the UK they need to decide if they are going to charge that customer in GBP (the cardholders local currency) or in Canadian dollars (and let the card issuing bank figure out the exchange rate issue).
Without getting too off topic, many online businesses choose to sell to foreign customers in the customers local currency. It is almost always desirable from a sales and marketing perspective. Billing in the local currency will increase your customers confidence, reduce confusion in terms of exchange rates, and in general makes it easier to market your products in a foreign country.
On the flip side of the coin, a merchant does not need to offer local currency support. A Canadian merchant can easily charge a British credit card in Canadian dollars. If so the card issuer has to figure out the exchange rate and the merchant doesn’t need to worry about anything. (Although there is indeed a cost issue to the cardholder when doing it this way. See “Cross Border Fees to the Cardholder” further below).
If you are wondering what “sets” the currency that a payment is in, it’s the merchant account. If you want your business to be able to accept payments in foreign currencies you must find a credit card processor like Merchant-Accounts.ca (which FoxyCart supports and recommends for Canadian credit card processing) that can provide multi-currency credit card processing.
With the basic understanding that we have just achieved in terms of how multi-currency credit card processing works we can finally get to the important part: the transaction currency will play a role in the rate.
As a side note to the examples to the left, I am often asked why it’s more expensive when billing in a cardholders local currency. I have never been able to find out an authoritative answer to that question. If anyone reading has information in terms of *why* that is the case (the reasoning behind which the card brands have structured the cross border fees that way), we would be happy to update this article to include that information.
Canadian merchant selling to cardholder in the cardholders local (native) currency.
If selling to a cardholder in the cardholders local currency the cross border fee is 0.80%. For example, if a Canadian domiciled merchant sold a product to a UK cardholder in GBP, or if selling to a US cardholder in USD, the cross border fee would be 0.80% because the cardholder is paying in their own local currency.
Canadian merchant selling to cardholder in non-local currency.
If selling to a cardholder in any currency that is not the cardholders local currency the cross border fee is 0.40%. For example, if a Candian domicled merchant solid a product to a UK cardholder in USD or in CAD, the cross border fee would be 0.40% because the cardholder is paying in a foreign currency.
Cross Border Transaction Fees to the Cardholder
As a cardholder, there are two costs to be aware of when processing cross border transactions.
- If you purchase a transaction in a foreign currency, your card issuing bank will take the foreign currency and convert it into your domestic currency. For example, if you are a British cardholder and bought something in the USA for $100 USD, the card issuer will take the $100 USD and convert it into GBP, showing you the exchange rate on your statement. It’s important to note that that exchange rate you pay may be relatively higher than the mid-market rate on the day of the transaction. Card issuers typically charge between 3% to 5% of the value of the transaction in currency conversion fees
- If you purchase from a foreign merchant in your local currency, some (thankfully not all) card issuers charge an extra fee. The fee will show up as a separate, second line item that totals up to 3% of the purchase total. For example, if you are a US based cardholder, and purchase from a foreign merchant in USD (in other words you purchased from a foreign merchant in your native currency of USD), the card issuer may charge an extra 3% as a second line item on your credit card statement as a foreign transaction service fee.As a side note to this, it is a major point of contention held by many merchants and cardholders that this is a very unfair fee. The argument held by most merchants and their customers is that the merchant went to the effort of billing the cardholder in the cardholders local currency, and did everything they could to simplify the transaction and make it easy for the cardholder. However, the card issuer has interjected beyond the merchants control and added their own separate 3% surcharge on the transaction, just because the purchase originated outside of the cardholders country. It is worth noting that not all card issuers charge this fee. This is something that is beyond the control of both the merchant and the credit card processor, and is solely controlled by the card issuing bank.What is also unfortunate is that although the card issuer is solely responsible for the fee, and is solely enjoying the extra revenue it generates, the statement often makes it appear that this is an extra fee being charged by the merchant. Needless to say, this causes complaints for the merchant. Fortunately, this fee is not charged by some card issuers, and while complaints do happen, they are intermittent at worst. It is not a point to be overly concerned about, as once you know (and having read this, you do know) that the card issuer is the cause of the problem, and you can redirect a customer’s complaint to the card issuing bank.As a last note on this point, if any readers from the card issuing side of the business happen across this article and would like to add information regarding the reason for this fee (which at face value does not appear entirely fair to merchants or cardholders), I would be very interested in learning more about the reason for it. It could be an entirely reasonable fee, but I have yet to be able to find out why some card issuers charge it, some do not, and why the card issuing banks that do tend to design the statement to make it look like the fee is because of something the merchant did, when in fact that is not the case.
Multi-currency For FoxyCart Users
Multi-currency is currently only available for Enterprise users, but will soon be available for Advanced users as well.
In an ideal world, a business would have an office in every country, have every transaction qualify at the lowest domestic rate, and would have no considerations to worry about when selling internationally. That is obviously not the case for most businesses. However, on a much more optimistic note, it has never been easier to sell internationally and attract new market share than it is with a simple, well built e-commerce website. Although there are some considerations to keep in mind, they are certainly not major problems. Any business that wants to target international customers can do so affordably, and effectively.