Understanding foreign transaction fees and how to minimise them

What are foreign transaction fees

A foreign transaction (FX) fee or international transaction fee is a surcharge applied by your card issuer or bank to any transaction that either takes place in a foreign country or passes through a foreign bank. It's an administrative cost for processing a payment that involves a foreign element¹.

These fees apply in several common scenarios:

• Traveling abroad: When you use your credit or debit card to make a purchase at a physical location in another country, like a restaurant in Paris or a shop in Tokyo.
• Online shopping: When you buy something online from a company that is based in another country. Even if the price is listed in your local currency, if the merchant processes the payment through a foreign bank, an FX fee can be triggered.
• Foreign subscriptions: Recurring payments for services like software or streaming platforms based in another country can also incur these fees.

Essentially, any transaction that involves a currency conversion or crosses international borders in the payment processing network is a candidate for a foreign transaction fee. It's charged by the bank that issued your card (e.g., Citibank, Chase, DBS) as a percentage of the total transaction amount².

How much are foreign transaction fees?

The cost of foreign transaction fees is not standardised and varies from one financial institution to another. However, a typical range for these fees is between 1% and 3% of the total purchase amount³.

This fee is often composed of two separate charges that are bundled together:

• The Payment network Fee: Major card networks like Visa and Mastercard typically charge a fee of around 1% for processing international transactions. They handle the complex process of currency conversion and settlement between banks in different countries.
• The issuing bank fee: On top of the network's charge, the bank that issued your card often adds its own fee, which can range from 0% to 2%. This is their charge for facilitating international payment.

Therefore, a card with a "3% foreign transaction fee" or "3% handling fee" is likely passing on a 1% network fee and adding a 2% fee of its own. The entire fee is calculated on the total transaction value after it has been converted to your home currency.

While a 3% fee might seem small on a single purchase, it can quickly add up over the course of a business trip or for a company with numerous international suppliers⁴ ⁵

Examples of foreign transaction fees

To understand the real-world impact of these fees, let's consider a couple of practical examples.

Example 1: A Business Dinner in New York

Imagine you're on a business trip to the United States and take a client out for dinner. The bill comes to USD $200. You pay with your corporate credit card, which has a 3% foreign transaction fee.

• Transaction Amount: USD $200
• Foreign Transaction Fee: 3%
• Calculation: USD $200 * 0.03 = USD $6

In this case, you would pay an extra USD $6 just for the privilege of using your card abroad. Your credit card statement would show a charge equivalent to USD $206, converted to your home currency.

Example 2: Purchasing Online Software from an Irish Company

Your company needs a new project management tool and decides to subscribe to a service from a company based in Ireland. The annual subscription fee is €500. You pay using your standard business credit card, which, again, has a 3% FX fee.

• Transaction Amount: €500
• Foreign Transaction Fee: 3%
• Calculation: €500 * 0.03 = €15

An additional €15 is added to your transaction. If your company makes dozens of similar international purchases for software, cloud services, and supplies throughout the year, these seemingly small fees can easily snowball into a significant and unnecessary business expense.

Other fees related to overseas transactions

The foreign transaction fee is just one piece of the puzzle. When dealing with international payments, several other charges can inflate your costs, often without you realizing it⁶ ⁷.

Foreign currency conversion (FCC) fee

A Foreign Currency Conversion (FCC) fee is a charge for the service of converting one currency to another. While sometimes used interchangeably with the foreign transaction fee, it's conceptually distinct. This fee is often embedded within the exchange rate you receive, making it less transparent. The bank or payment processor handling the conversion applies this charge.

Dynamic currency conversion (DCC) fee

Have you ever been abroad and had a merchant ask if you'd like to pay in your home currency instead of the local currency? This service is called Dynamic Currency Conversion (DCC). While it may seem convenient to see the final cost in a familiar currency, you should almost always decline this offer⁸.

When you accept DCC, you are allowing the merchant's payment processor to handle the currency conversion on the spot. They are free to set their own exchange rate, which is typically far less favourable than the rate your card network (like Visa or Mastercard) would provide. Furthermore, they often add a significant service fee for this "convenience." Opting for DCC can easily add an extra 5% to 10% to your bill. Always choose to pay in the local currency⁹.

Exchange rate markup

At any given moment, there's a "real" exchange rate known as the mid-market rate. This is the rate banks and large financial institutions use to trade currencies among themselves. It's the midpoint between the buy and sell prices of a currency on the open market.

However, this is rarely the rate you get as a consumer or business. Most financial service providers apply an exchange rate markup or "spread." They buy currency at the mid-market rate and sell it to you at a slightly higher rate, pocketing the difference as profit. This markup is a hidden fee that directly increases the cost of your transaction. The best financial products aim to provide rates as close to the mid-market rate as possible¹⁰.

Cross-border fees (CBF)

A Cross-Border Fee, sometimes called an International Service Assessment (ISA) fee, is a charge levied by card networks simply because a transaction crosses international borders. What's tricky about this fee is that it can sometimes apply even when the transaction is conducted in your home currency.

For instance, if you purchase a flight online from a foreign airline's website but pay in your local currency, you might still be charged a cross-border fee because the airline's acquiring bank is located in another country. This fee is typically around 1% and is often part of the total foreign transaction fee.

The importance of understanding foreign transaction fees for businesses

For individuals, FX fees are an annoying travel expense. For businesses, they are a serious operational cost that can erode profit margins. Companies operating in the global marketplace constantly deal with international transactions ¹¹ ¹² ¹³:

• Paying Foreign Suppliers and Freelancers: Businesses that source materials or services from other countries must make regular overseas payments.
• Employee Travel and Expenses: Employees traveling for conferences, sales meetings, or client visits will incur expenses in foreign currencies.
• International Clients: Receiving payments from international customers can involve fees from payment gateways.
• Global Software and Services: Subscriptions to SaaS products, cloud hosting, and digital advertising platforms are often billed from foreign entities.

When every single one of these transactions is hit with a 1-3% fee, the cumulative effect on a company's annual budget can be substantial. A business with USD $500,000 in international expenses could be losing up to USD $15,000 a year to these fees alone. Understanding and strategically managing these costs is not just good financial practice; it's a competitive necessity.

How to minimise foreign transaction fees

The good news is that with a bit of planning, you can significantly reduce or even eliminate these fees¹⁴ ¹⁵.

1. Choose cards with no foreign transaction fees

The simplest solution is to use a credit or debit card that explicitly advertises "zero foreign transaction fees." Many travel-focused consumer credit cards and modern corporate cards offer this feature as a key benefit.

2. Always pay in the local currency

As discussed, always decline the offer of Dynamic Currency Conversion (DCC). Politely insist on being charged in the local currency (e.g., Euros in Germany, Yen in Japan) and let your own bank and card network handle the conversion. You will almost always get a better rate.

3. Use a multi-currency account

For businesses, a multi-currency account is a powerful tool. This allows you to hold funds in various currencies (e.g., USD, EUR, GBP). You can receive payments from international clients directly in their currency and use those funds to pay overseas suppliers in the same currency, completely bypassing the need for currency conversion and its associated fees.

4. Consolidate ATM withdrawals

If you need cash abroad, try to withdraw larger amounts less frequently. Each ATM withdrawal can come with a fixed fee from both your bank and the local ATM operator. Minimising the number of withdrawals reduces the impact of these fixed charges. Just be sure to store the cash securely.

5. Leverage modern Fintech solutions

New financial technology companies are revolutionising international payments by offering solutions with greater transparency, lower fees, and better exchange rates than traditional banks.

Enjoy low-cost international transactions with Aspire Corporate Cards

From our experience, we've seen many Hong Kong businesses are burdened with layers of international transaction fees that weaken their cash flow. That’s why we introduced Aspire Corporate Cards—a powerful multi-currency debit card designed to eliminate these fees and streamline your international spending.

With Aspire Corporate Cards, you can spend directly in USD for global purchases and avoid unnecessary conversion charges. You’ll also earn unlimited 1% cashback on eligible digital and SaaS spending, helping you reduce costs on essential business tools—all with no annual or subscription fees.

To maximise your savings, Aspire also lets you create multi-currency accounts in HKD, EUR, GBP, and USD, so you can send and receive funds without FX or conversion fees. On top of that, the Aspire Business Account enables you to make international payments in more than 30 currencies at competitive FX rates.