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It is a well-known fact that global transactions come with a hidden cost—foreign transaction fee.
Usually, it is in the form of a discreet 3% charge imposed by certain banks/credit cards on purchases made in foreign currency. This includes essential international processing costs like currency conversion.
In this blog post, we tell you how to navigate this financial terrain by checking with your bank for a specific foreign transaction fee. Especially companies with frequent business vendor payments, need to consider fee-free options to save big on international purchases.
Read on
A foreign transaction fee is charged by some banks/credit cards for purchases in foreign currency or outside the home country.
It generally covers international processing costs including currency conversion and fee by intermediaries.
Make Note: Check with your bank for fees for jumping into making the transaction. In India, fintechs charge less for automated international payments. Consider these fee-free options to save on business purchases.
In the context of import and export payments in India, a foreign transaction fee on credit cards is a charge imposed by credit card issuers for transactions conducted in foreign currencies or with foreign merchants. This fee, typically ranging from 1% to 3% of the transaction amount, is applied to cover the expenses associated with currency conversion and processing international transactions. Businesses involved in import and export activities should consider these fees when utilizing credit cards for international transactions, as they can impact overall operational costs. Exploring credit card options that offer waived foreign transaction fees can help minimize expenses and streamline international payment processes.
In the Indian business context, obtaining a credit card without foreign transaction fee involves several steps:
Adding markup fees for foreign currency transactions to your budget might not be the best scenario, but it could be necessary when dealing with foreign vendors.
These fees have the potential to hinder your company's profits. However, there are ways to steer clear of credit card fees linked to foreign currency transactions.
Foreign exchange fee-less credit card is one of the best ways. Another option to consider is getting a no-foreign transaction fee credit card. These cards do not charge extra fees for foreign transactions and are available from various credit card providers, including Mastercard.
However, obtaining such a card includes research, application, and setup time. Also, these cards typically come with their terms, conditions, and other charges that you should be aware of.
Make Note: Check with your bank for the foreign transaction fees. In India, fintechs charge less for automated international payments. Consider these fee-free options to save on business purchases.
When dealing with outward remittances from India, particularly for sending money abroad, it's essential to consider potential foreign transaction fees. Here's an example of how to calculate foreign transaction fee in the context of an outward remittance:
Therefore, the total cost of sending ₹50,000 from India to a foreign recipient, including a 2.5% foreign transaction fee, would be approximately $683.34.
Make Note: With Karbon Forex the bank foreign transaction fee for outward remittances is at a flat 0.15% for A1 remittances and 0.25% for A2 remittances. Contact us to know more!
The specific types of business transactions subject to foreign transaction fee can vary among banks and financial institutions. However, common scenarios where foreign transaction fee may be applied include
Let's say an Indian software development company, TechSolutions Pvt Ltd, needs to pay a software licensing fee to a U.S.-based software provider, SoftwareTech Inc. The licensing fee is $50,000, and TechSolutions wants to transfer this amount through an international wire transfer.
Conversion to Local Currency:
International Wire Transfer:
Foreign Transaction Fee:
Total Cost:
In this example, TechSolutions would pay a total of ₹37,01,000 for the $50,000 international wire transfer, including the foreign transaction fee.
Let's consider a real-world example of a business in India, Global Fashion Ltd, purchasing clothing materials from a supplier in Italy, ChicFabrics S.r.l., and receiving a foreign currency invoice:
Chic Fabrics S.R.l issues an invoice for the supply of textile materials amounting to 20,000 Euros.
Global Fashion needs to convert the invoice amount from Euros to Indian Rupees. Assuming an exchange rate of ₹85 for 1 Euro:
€20,000 converted to INR: €20,000 * ₹85 = ₹17,00,000.
When Global Fashion makes the payment in Euros, their Indian bank charges a foreign transaction fee of 1.5% for currency conversion.
Foreign transaction fee: 1.5% of ₹17,00,000 = ₹25,500.
Total Cost:
The total cost of making the payment, including the foreign transaction fee, is the sum of the converted invoice amount and the fee.
Total cost: ₹17,00,000 + ₹25,500 = ₹17,25,500.
Therefore, Global Fashion will pay a total of ₹17,25,500 for the €20,000 invoice, including the foreign transaction fee.
This example illustrates how foreign transaction fees can be incurred when a business deals with foreign currency invoices and makes payments in a currency other than the local currency. Actual fees and exchange rates can vary, contact Karbon Forex to know about the markup fee you are eligible for under the foreign transaction fee!
Let’s consider a simple example:-
Suppose XYZ Electronics Pvt Ltd, an electronics manufacturing company in India, needs to purchase machinery from a supplier in Germany, TechMachines GmbH. The machinery costs 100,000 Euros.
XYZ Electronics needs to convert the purchase amount from Euros to Indian Rupees. Assuming an exchange rate of ₹90 for 1 Euro:
€100,000 converted to INR: €100,000 * ₹90 = ₹90,00,000.
XYZ Electronics makes the payment to Tech Machines GmbH using their Indian business account. Their bank charges a foreign transaction fee of 2% for the currency conversion.
Foreign transaction fee: 2% of ₹90,00,000 = ₹1,80,000.
The total cost of the overseas purchase, including the foreign transaction fee, is the sum of the converted purchase amount and the fee.
Therefore, XYZ Electronics will pay a total of ₹91,80,000 for the €100,000 machinery purchase, including the foreign transaction fee.
If we consider an example:-
ABC Furniture purchased MYR 50,000 worth of furniture from Timber Craft , converting it to ₹9,00,000 at an exchange rate of ₹18 for 1 MYR.
ABC Furniture's bank imposed a 1.5% foreign transaction fee on the converted amount.
Foreign transaction fee: ₹13,500.
The comprehensive cost, including the foreign transaction fee, is ₹9,13,500.
In conclusion, ABC Furniture's purchase of MYR 50,000 worth of furniture from TimberCraft Sdn Bhd resulted in a total cost of ₹9,13,500. This included the conversion of MYR to ₹9,00,000 at an exchange rate of ₹18 for 1 MYR, along with a 1.5% foreign transaction fee imposed by the bank, totaling ₹13,500. The foreign transaction fee contributed to the comprehensive cost, highlighting the importance of considering such fees in cross-border transactions.
In conclusion, foreign transaction fees can be a significant cost when conducting international business in India.
Businesses need to understand these fees and consider ways to minimize them, such as using a credit card with no foreign transaction fee or partnering with a local bank that offers lower fees.
Yes. A foreign transaction fee noted as an FX fee, is an additional charge on your credit card statement incurred when making a purchase that involves a foreign bank or is conducted in a currency other than the U.S. dollar (USD). This fee, imposed by numerous credit card issuers, usually falls within the range of 1% to 3% of the transaction amount.
A foreign conversion transaction fee is a charge by financial institutions for transactions in a different currency than the account's or card's currency. It covers currency conversion costs and is typically a percentage of the transaction amount.
To avoid a foreign transaction fee, consider:
- Selecting a credit card without a foreign transaction fee.
- Choosing a travel credit card that provides benefits such as waived foreign transaction fees.
- Contact your bank or credit card issuer to discuss potential fee waivers, especially if you have a good credit history or are a valued customer.
- Using local currency for purchases abroad to bypass currency conversion fees.
Ways to bypass the 3% Foreign Transaction Fee:
Fortunately, there are deliberate approaches to sidestep foreign transaction fees. You have the option to acquire a credit card or open a checking account that does not impose such fees. Alternatively, opting for cash to cover all your foreign expenditures is a straightforward way to avoid foreign transaction fee.
If you bought and later returned an item for a refund on your credit card while overseas, there's a possibility of incurring a foreign transaction fee. The exact percentage of this fee varies among credit card companies, but it generally hovers around 3% of the total purchase amount.
Generally, no. Fintechs and banks operate on a commission basis for both personal and business remittances. Consequently, while foreign transaction fee might not be reimbursed, the principal payment amount can typically be refunded upon request.
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