As Christmas and the New Year approach, you may have plans to travel abroad or shop online and credit cards are often the choice of payment medium. This is why you are receiving through different channels reminders from your banks concerning the use of credit cards recently. Have you ever been offered a choice by an overseas merchant to settle your credit card transaction in Hong Kong dollars or the local currency of the foreign country? Why is it possible to settle the transactions in Hong Kong dollars even when you are overseas or shopping online at an overseas website? Does this come with any fees? And will it be a better bargain than settling the transaction in the local currency?
Typical Foreign Currency Transactions
Generally speaking, several parties are involved in a credit card transaction, including the cardholder, the card issuing bank, the merchant, the merchant acquiring bank, and the card association. When consumers make overseas or online purchases with credit cards in foreign currencies, apart from the exchange rates applied to convert the foreign currency amount into Hong Kong dollars, a “foreign currency transaction handling fee” which is around 0%-2.5% of the transaction amount will be levied by card issuing banks. This handling fee already includes the fee charged by the card association. Consumers do not know the exchange rates applied and the actual amount billed in Hong Kong dollars until they receive their credit card statements.
Why is it possible to settle overseas credit card transactions in Hong Kong dollars?
In recent years, some overseas or online merchants offer an option to settle your credit card purchases in Hong Kong dollars instead of local currencies. This credit card settlement arrangement involves a service called the Dynamic Currency Conversion (DCC). This arrangement does not involve the card issuing bank in Hong Kong. It is jointly provided by the merchant, the merchant acquiring bank and the foreign exchange dealer overseas. In short, the foreign exchange dealer converts the foreign currency transaction amount into Hong Kong dollars using the prevailing exchange rate, plus an extra percentage of the exchange rate as a mark-up margin. This sum of Hong Kong dollars, which includes the mark-up margin for the DCC services, will be the amount charged to your credit card account by the merchant. A cardholder may think that he/she has in effect locked in the exchange rate. However, cardholders should pay attention that the margin chargeable for DCC services is understood to range from 1.5% to 4% for overseas transactions of Hong Kong dollar denominated credit cards settled in Hong Kong dollars. The margin could be higher in some other places1.
Furthermore, cardholders using DCC services to settle transactions in Hong Kong dollars will be charged a fee of 0.4%-1% by the card associations through the card issuing banks. Some banks waive the fee, and a small number of others charge an extra handling fee. According to the relevant industry guidelines which the HKMA requires banks to follow, among other things, card issuing banks should set out the “fees relating to settling foreign currency transaction in Hong Kong dollars” in their credit card fee schedules.
Transparency and Smart Tips
Transparency in offering banking products and services is an important facet of the regulatory requirements of the HKMA. Transparency is also important when customers choose whether to opt for DCC services. As DCC services involve overseas parties beyond the regulatory reach of the HKMA, international collaboration is essential to protect the interests of consumers from Hong Kong and all over the world. The HKMA has been proactively lobbying overseas regulators and relevant international organisations to enhance the transparency of information related to DCC services through different international and regional platforms. The Organisation for Economic Cooperation and Development Task Force accepted the HKMA’s recommendation to include enhancement of the disclosure and transparency of DCC services as an effective approach for implementing the “G20 High-level Principles on Financial Consumer Protection” which was endorsed by the G20 Summit in November 2014. The merchant acquiring banks and merchants in Hong Kong are among the first to embrace the disclosure requirements for DCC services promulgated by the card associations.
While disclosure of information and transparency of charges for DCC services are being enhanced, consumers should also familiarise themselves with the fees and relevant information of different settlement options of credit card and choose the services suitable to them. In the past two years, the HKMA has been disseminating information about using DCC services when conducting credit card transactions overseas through different channels such as “smart tips” leaflets, radio broadcast and promotion materials in the press and on the HKMA website. Let me advertise a bit here. Starting from mid-December, in order to enhance banking consumers’ knowledge about various banking services, we will broadcast a series of short drama on TV and the internet to promote the smart use of banking services. The first episode in the series is about using credit cards for foreign currency transactions and the DCC services. Don’t miss it!
Let’s remember the following two tips if you want to be a smart credit card user in your overseas trips and online shopping –
First, do your homework. Gather information from your card issuing banks and understand and compare the charges for settling your credit card transactions in different ways and currencies.
Second, pay attention before you decide. Ask the overseas merchants about the exchange rate and applicable charges if you are offered the option to settle in Hong Kong dollars with your credit cards.
Wish you all a “smart” Christmas and New Year!
Deputy Chief Executive
Hong Kong Monetary Authority
10 December 2015