Understanding foreign transaction fees for your business

More than 250,000 small businesses trade internationally. Some work for or with clients outside the UK, while others just buy in stock. Unfortunately, business dealings can frequently cost more than predicted due to various post-trade costs, including foreign transaction fees. Here, we examine what these fees are and how you can limit their impact on your outgoings.   

What are foreign transaction fees?

Foreign or international transaction fees are charges you incur when making overseas purchases or payments. They also apply if you’re sending money abroad in another currency. They may apply when you use any of the following:

• Credit cards or e-wallets

• Debit cards or e-wallets

• Prepaid cards

• Money transfers 

• Payment platforms

International transactions can result in charges when a business uses payment cards abroad or makes purchases in another currency from the UK.

What are the different types of foreign transaction fees?

There are two main foreign transaction fees, each potentially applying to a different payment method. These are: 

1. Non-sterling transaction fees

Charges may apply whenever you use a business credit card abroad to pay for goods and services – including if you’re making payments to a foreign provider online. The same applies to a debit card linked to a business bank account.

Card issuers charge non-sterling transaction fees when converting payments made in a local currency into sterling. In essence, these fees cover the risks associated with the exchange rate fluctuating between you transferring the money and the transaction being processed. 

A note of the charge appears on your bank or credit card statement.

The lowdown on non-sterling transaction fees

• There may be various fee levels depending on where you are in the world and the local currency

• Typically, you can expect to pay between 2.75% and 2.99% on debit and credit card purchases abroad

• Some credit and debit cards don’t attract this charge, making them ideal even if you only use them for this purpose

• Some, but not all, international money transfers add non-sterling transaction fees

• Where fees apply, these may be a flat rate, such as £10 on transfers up to £3,000, or a percentage, such as from 0.33% of the transfer sum

• Exchange rates and fees vary depending on the foreign currency 

• Payment platforms typically have different fees for businesses. For instance, PayPal adds between 1.29% and 1.99% to transactions

How can I avoid non-sterling transaction fees?

Should you pay in a local currency if you have the option? Some retailers and cash points allow you to pay in sterling rather than euros, dollars or whatever. Paying in local currency may sound like a good hack because you don’t have to pay your card provider’s non-sterling transaction fee. But it means you are subject to the local bank’s exchange rate, which might be less competitive than your bank or credit card provider’s and cost you more overall.

However, there are several ways to avoid paying non-sterling transaction fees without it potentially costing more overall, including:

• Using cards and money transfer operators that don’t charge a non-sterling fee

• Transferring a larger sum – some money transfer operators don’t charge a fee for bigger transactions, such as those over £3,000

• Using a fee-free foreign currency pre-paid card 

• Selecting pounds sterling instead of the local currency when buying online where possible 

• Taking foreign currency with you on a business trip

• Using a forex broker if you’re making large payments, as these tend to offer more attractive exchange rates, which can offset their fees

• Opening a foreign currency business account

2. Foreign cash withdrawal fees

Using a cashpoint while you’re abroad may be convenient, but it can be costly if you use the wrong card. Your card provider has to pay a charge for overseas cash withdrawals, especially those made with a credit card, and they pass the cost on to you.

The lowdown on foreign cash withdrawal fees:

• Card providers add a foreign exchange fee of 2.75% to 5% to your transaction for cash withdrawals – debit cards tend to be cheaper than credit cards

• You may also face a flat-rate cash fee of around 3%, with a minimum charge of, say, £3

• Taking money out of a UK cashpoint isn’t advisable as doing so triggers daily interest charges, and the same goes for overseas withdrawals

• Many privately-owned overseas ATM operators charge a flat rate for withdrawals – e.g. this can cost from €0.50 to €6 per withdrawal in Spain

How can I avoid foreign cash withdrawal fees?

Avoiding ATM charges involves a little research. Here are some ways to limit your exposure to unwanted fees:

• Use a fee-free credit, debit or prepaid card

• Research which ATMs offer free cash withdrawal before you travel

• Don’t pay in the local currency at ATMs

• Take cash with you

• Use your debit card to get cashback from shops

• Use a cashpoint that’s part of your bank’s international network

What’s the best way to accept international payments?

There’s no shortage of ways to receive payments from abroad, but some are better than others. The following are worth considering alongside bank transfers and card payments:

Payment gateways

Payment gateways are intermediaries sitting between you and a client or customer. Examples include PayPal, Amazon and Stripe. To use these, you need to open a merchant account. 

When a payment is due, your client transfers the payment to your account and the funds clear within a few days. 

Professional services offered by these gateways include:

• Branded pages, so you have a more recognisable presence

• Customer references – so they can more speedily enact future transactions 

• Secure and reliable payments – internationally-binding data security and anti-laundering regulations apply

Foreign currency business accounts

Many leading account providers offer foreign currency business accounts, some of which charge as little as 0.5% of the amount transferred – although this depends on the currency. These accounts are often the best for card use abroad.