Decoding Cross-Border Card Transactions: FX Rates and Cash Flow

Have you ever wondered how the final amount appears on your statement after using your card abroad? Or perhaps you're a merchant navigating the complexities of receiving payments from international customers? The world of cross-border card transactions can seem like a maze, especially when foreign exchange (FX) rates and cash flow come into play. While the fundamental process mirrors domestic transactions, the introduction of currency conversion adds a significant layer of intricacy. Let's break down the mechanics and shed some light on how it all works.

Table of Contents:

1. The Standard Transaction Journey: A Step-by-Step Look

2. The Added Complexity of Currency Conversion: Where Things Get Interesting

   • Merchant and Acquirer Dynamics

   • The Payment Scheme's Role in FX

   • Issuer and Cardholder

3. Navigating the Complexity of Cross-Border Card Transactions

The Standard Transaction Journey: A Step-by-Step Look

At its core, a cross-border card transaction follows a similar path to a local one:

1. Initiating the Transaction: The cardholder presents the card to the merchant or terminal (either online by entering card data, or in a contactless way or as a standard plastic card transaction or at an ATM).

2. Data Acquisition: The acquirer gets card and transaction data from the terminal.

3. Authorization Request: Based on the BIN table, the acquirer sends transaction authorization to Mastercard or VISA (Payment Schemes).

4. Authorization Routing: The payment scheme transfers authorization to the card issuer.

5. Authorization or Funds Hold: The card issuer approves or declines the authorization and blocks the amount on the cardholder account.

6. Clearing File Generation: In case of approved transactions, the acquirer prepares a clearing file and sends it for settlement.

7. Clearing File Processing: TThe payment scheme receives a clearing file and processes it.

8. Interbank Settlement: The payment scheme takes money from the issuer settlement account and transfers it to the acquirer settlement account. 

9. Fee Settlement: The payment scheme settles fees between itself, the issuer and the acquirer. 

10. Merchant Payment: The merchant receives money for the transaction.

11. Merchant Fee Deduction: The acquirer charges merchant fees.

    
    

The Added Complexity of Currency Conversion: Where Things Get Interesting

The process outlined above remains consistent for both domestic and international transactions. However, cross-border transactions introduce the dynamic element of currency conversion, adding considerable complexity. This conversion can occur at various stages, as detailed below:

1. Merchant and Acquirer Dynamics

• The merchant can agree with the acquirer that they want to receive money in one or multiple currencies. Depending on this contract, the acquirer will transfer money to the merchant in those currencies. It is impossible that ALL currencies in the world will be used, so usually merchants want to receive money in a few main currencies

• The acquirer has Settlement Services with payment schemes in several or many currencies.

• Depending on the Settlement Services, if a transaction is performed in currency X, the acquirer receives money in currency X. No currency conversion cost will apply at a payment scheme.

• However, if the transaction is performed in currency X, but the acquirer does not have Settlement Service in this currency, the payment scheme will convert currency X to currency Y and send money to the acquirer in currency Y. 

• The acquirer will receive currency Y on their bank account and will either convert it to the merchant settlement currency or will transfer it directly to the merchant in currency Y.

• Various fees charged by the acquirer can apply if the acquirer is performing currency conversion.

2. The Payment Scheme's Role in FX

• As described above, acquirers have Settlement Services enabled by Payment Schemes. Issuers have the same.

• The issuer can have Settlement Service in main currencies:

                                                    i. Local currency

                                                   ii. EUR settlement

                                                 iii. USD settlement

                                                 iv. Eventually in other currencies

• Every new Settlement Service is a paid service, so both issuers and acquirers must decide which is the correct setup of settlement services. Depending on this decision, the Payment Scheme will perform more or less currency conversion operations and will earn fees during this process.

• The Payment Scheme provides issuers and acquirers with currency conversion tables which can act as a directional FX rate for them. However, the real FX rate for a particular transaction is performed at the moment of transaction settlement at the Payment Scheme.

• This means that if the cardholder performs a transaction, his/her issuer is never sure what will be the settlement amount for this transaction

3. Issuer and Cardholder 

•  Finally, depending on the Settlement Service agreed with the Payment Scheme, the issuer enables cards for their users.

• The cardholder has a payment account connected with this card and the cardholder knows that he/she holds money in a particular currency enabled by his/her bank / issuer. 

• It means that all transactions on this payment account will be charged in this particular currency.

• Depending on the currency of the transaction and the settlement service enabled by the payment scheme, the issuer will perform the currency conversion and charge the cardholder additional fees.

  
  

Navigating the Complexity of Cross-Border Card Transactions

As you can see, this topic is highly complex and depends on many factors. Issuers and acquirers must make a decision which approach is the best for them, which Settlement Services to enable with Mastercard or VISA and what should be the fee charged for this service because it is impossible to avoid all risks connected with currency conversion changes.