Ever wondered how card networks like Visa make billions from international transactions? Part of the answer lies in the seemingly simple process of currency conversion, and it's costing businesses more than they might realize. Visa generated $12.7 billion¹ from cross-border transactions in 2024, with currency conversion being one of the major components.

1. Visa Annual Report 2024

Imagine a USD-billed cardholder from the United States, swiping his card at a Swiss cafeteria using Swiss Franc as the currency. The cafeteria’s Acquirer is based in Amsterdam and gets settled in EUR. The transaction may need to travel through multiple currency conversions before it's complete.

This isn't just a technical detail; it's a significant revenue stream for card networks. Currency conversion in card payments occurs mainly at two points. Using the example above:

Each conversion represents an opportunity for card networks to apply their exchange rates and a markup. This markup is reflected in the buy and sell rate of a currency pair.

Every currency pair has three rates:

The difference between buy and sell rates is called the "spread". One way to measure the impact of costs is to look at the percentage between the spread and the sell rate (see here). For example, if USD/EUR has a sell rate of 1.050 and buy rate of 1.045, the spread measured in percentage equals 0.48 percent, or 48 basis points (0.005/1.050). The actual cost of currency conversion for acquirers is typically calculated as half the spread, since conversion only happens in one direction (e.g. going from transaction currency to acquirer settlement currency). Thus, in this example, the cost of currency conversion can be defined as 24 basis points.

24 basis points may not seem large, but it can become a significant cost driver on the already tight margins in payment processing.

What Drives These Spreads?

Several factors influence how wide or narrow these spreads become. Some important ones are:

For businesses processing significant international volume, these FX costs can add up quickly. Consider an acquirer processing 50 million in Swiss Franc transactions annually, which are now being settled in EUR, since that is the only settlement currency set up. They could be paying 125 thousand euros in currency conversion costs if their cost of currency conversion is 25 basis points. Note that this number does not take into account that the merchants transacting Swiss Franc may opt to be paid out in that same currency as well, leading to another currency conversion event.

To tackle this problem, acquirers are increasingly setting up "like-for-like" (L4L) settlement arrangements with card networks. This means if a transaction happens in Swiss Franc, it settles in Swiss Franc, eliminating the need for currency conversion, at least on the acquirer settlement side.

However, this optimization strategy also comes with some considerations. Setting up new currencies has a cost with the card networks, it potentially requires opening a new bank account, and it may increase operational overhead in terms of reconciliation.

Currency conversion in card payments represents a massive, often overlooked cost center for international businesses. While card networks have built sophisticated revenue streams around FX spreads, savvy merchants and acquirers are finding ways to optimize these cost centers.

The key is understanding when the business case makes sense. Processing high volumes of specific currencies can justify the upfront costs of setting up like-for-like settlement, as well as managing the additional operational overhead.

As international commerce continues to grow, businesses that understand and optimize their currency conversion costs will have a significant competitive advantage. The question isn't whether you're paying these costs, you almost certainly are. The question is whether you're paying attention to them. Are you?