Transaction Fees

Many present-day companies operate internationally and deal with electronic multi-currency payments. They know, that cross-border transaction processing fees, that international financial institutions charge, 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 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 go to several banking systems instead of one.

Cross-border transaction processing, multi-currency payments, and correspondent banking

Multi-currency payments fall within two categories. Some transactions 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 banking institutions charge higher fees. 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 involves two banking systems, including two banks “on each side of the fiscal border”. From the buyer’s side, it involves buyer’s bank and buyer’s correspondent bank. From the foreign seller’s side, it involves seller’s correspondent bank and seller’s bank. 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.