Many present-day companies operate internationally and deal with electronic multi-currency payments. They know, that cross-border transaction processing fees, charged by international financial institutions, are much higher than local transaction fees.
People often wonder why international payment processing costs so much. Well, there are several reasons for that, but two major factors involved are multi-currency operations and correspondent banking system.
Processing fee, usually consists of two key components: base costs (including interchange and assessments) and markups. However, in case of a cross-border transaction fee, these components include additional items, and are charged by several banking systems instead of one.
Cross-border transaction processing, multi-currency payments, and correspondent banking
Multi-currency payments can be divided into two categories. Some are authorized in foreign currency, but settled in local currency. Others are both authorized and settled in foreign currency. So, for this second category of payments higher fee is charged. MasterCard network, for example, is charging domestic cross-border fee for the first category of transactions and foreign fee for the second category. Foreign cross-border fee is a bit higher than domestic fee.
The second conceptual reason behind high cross-border transaction fees is correspondent banking. An international payment is handled by two banking systems, and each of them is, usually, represented by two banks. From the buyer’s side buyer’s bank and buyer’s correspondent bank are involved. From the foreign seller’s side seller’s correspondent bank and seller’s bank are involved. Each of these four banks charges its own markups. International payment institutions do not want to transfer money for free. In order to become certified international money transmitters, they have to pay a lot to respective national and international financial bodies. Moreover, international money transfers are the primary revenue source for many of them. Consequently, they often do charge a lot for their services. Additionally, harmonization of operations between two national banking systems is not easy or cheap, so cross-border fees are one of the ways to cover the related costs.
So, as long as different countries are using different currencies and banking systems, and have geographical and financial borders between them, cross-border transaction fees are likely to remain high.
Read more about cross-border transaction fees in our respective article on Paylosophy.