Paying for overseas purchases: Finding the best deal

Currency conversions, processing fees and administrative charges all add up to final cost

As Brexit became a reality, the plunging pound dived 10 per cent to US$1.3229 at one point - the weakest level against the United States dollar since 1985.

That may have led to British online fashion retailer Asos reportedly crashing on the same day, with consumers trying to take advantage of the diving pound to shop.

Or take the Swiss National Bank shocking foreign exchange and financial markets on Jan 15 last year, when it decided to abandon the minimum rate of 1.20 francs against the euro.

The Swiss franc's value spiked after the announcement, unleashing turmoil on global markets.

With events like these, and credit card issuers, retailers and tourism-related businesses dangling carrots and gimmicks to win customers, it can be complicated for the lone customer with a credit card to suss out what's best.


Credit card transactions processed overseas are subject to administrative charges from card associations. PHOTO: BLOOMBERG

The Sunday Times Invest looks at some common matters about credit cards, currency conversion and fees, especially regarding foreign-related transactions.

WHAT HAPPENS WHEN YOU BUY AN ITEM IN A FOREIGN CURRENCY

Personal finance comparison portal SingSaver breaks it down, saying goods purchased in any currency other than United States dollars will be converted first to US dollars, and then to Singapore dollars.

The US dollar is the intermediary currency, so conversion from a foreign currency to Singdollars usually involves two exchange rates that are determined by your credit card network.

SingSaver gives an example: You buy a dress in Europe for €100 and charge that transaction to your DBS Visa credit card.

The euro is first converted to US dollars and then to Singdollars. A conversion would look like this:

•€100 to US$110.19 (If €1 is US$1.1019)

•US$110.19 to S$155.46 (If US$1 is S$1.41)

After the transaction is converted to Singdollars, the foreign transaction fee of 2.5 per cent or more will then be imposed.

This means the final amount that is charged to the card is S$159.35 (S$155.46 x 1.025).

DBS notes all conversions are based on the prevailing wholesale interbank rates or the government-mandated rate, as determined by card associations such as Visa, MasterCard and American Express.

These card associations are also known as scheme operators, payment networks or association networks.

FEES AND CHARGES TO TAKE NOTE OF

The different types of fees when making a transaction in a shop overseas, on an overseas website, or on a website that uses either an overseas or local payment processor are mind-boggling.

You have fees on transactions in foreign currencies, fees on Singdollar transactions processed overseas, bank administrative charges and charges by the payment network.

A United Overseas Bank spokesman said: "Credit card issuers levy administrative fees for the convenience of making purchases online and overseas.

"While these fees are nominal compared with the total amount paid, customers should be aware of the different fees associated with such transactions before committing to their purchases. Fees can usually be found in the credit card's terms and conditions."

A Citibank spokesman said that different interest rates apply for items such as retail spend, a balance transfer or an equal payment plan.

"When the bank receives payment from the customer, it will automatically apportion the payment to whichever item has the highest interest rate, which is to the benefit of the customer. This is an industry practice adopted by all banks in Singapore."

HOW A BANK CHARGES

A Maybank spokesman says: "For transactions in foreign currencies and that are processed overseas - regardless of website or physical store - consumers' purchases are subject to bank administrative charges and charges by the scheme operators."

DBS says that all transactions in foreign currency are subject to a charge imposed by the networks - either as a reimbursement charge representing the charge imposed on the bank, or as a direct charge to the customer.

Maybank says: "For transactions in Singdollars and which are processed overseas - regardless of website or physical store - consumers need to bear the scheme operator charges, and potentially other markups computed within the transaction amount." The spokesman said the potential markups are not transparent to the card-issuing bank and scheme operator, but are acknowledged and accepted by the cardholder at the point of the transaction in Singdollars.

SingSaver said different credit cards incur different transactional charges and each bank has a different way of computing its charges. The three main ways are:

•Foreign transaction fees

•Dynamic currency conversion fees

•Dynamic currency conversion fees and foreign transaction fees

FOREIGN TRANSACTION FEES

SingSaver co-founder Rohith Murthy says: "All goods and services charged in foreign currencies are subject to foreign transaction fees.

"Such fees are usually imposed by both the credit card networks such as Visa, MasterCard and American Express, and the card-issuing banks."

OCBC Bank gives an example of a customer buying a watch at US$100 and opting to pay in foreign currency using his MasterCard. OCBC calculates it as:

•US$100 x an assumed exchange rate of S$1.35 = S$135

•S$135 + (S$135 x 2.8 per cent) = S$138.78, which is shown in one line in the OCBC statement.

OCBC says the thing to watch out for is that the final sum to be paid will not be known to customers until they receive their statements.

It notes that across banks, a Visa or MasterCard charge of 1 per cent would come with a bank charge ranging from 1.5 to 2.5 per cent.

Maybank also notes the market charges up to 3.5 per cent, but the bank levies a total of only 2.5 per cent for most cards such as the popular Maybank Family & Friends Card and the Maybank Horizon Platinum Visa Card.

OCBC adds: "The date of transaction posting and settlement - only merchants will know - impacts the foreign exchange rate applied."

DYNAMIC CURRENCY CONVERSION FEES

When shopping overseas and online, should you use Singdollars or foreign currency?

It is a gross and costly misconception that paying in Singdollars would avoid foreign transaction fees, says SingSaver.

Some merchants overseas offer the option of making a transaction in Singapore dollars, and such transactions are known as dynamic currency conversion, where goods are converted from foreign currencies to Singdollars, says the portal.

"Dynamic currency conversion is a service offered by merchants, not the credit card network.

"Therefore, the merchants are motivated to pick an unfavourable rate to boost their profit. In fact, the MasterCard site listed dynamic currency conversion as the reason for businesses to boost their profit," added Mr Murthy.

The site says: "Earn additional revenue on foreign card transactions by applying commission normally taken by issuing banks and card associations." Other payment networks also list this reason on fact sheets or on their sites. Banks also stand to benefit, said a 2015 Business Times report.

Dynamic currency conversion is a common service that online merchants or foreign sites use, so consumers should be aware.

The Monetary Authority of Singapore and the Association of Banks in Singapore also said card issuers generally state that Singapore dollar payments routed through overseas payment processors attract additional service charges.

Payment processors include major names such as PayPal and Alipay, and The New York Times said they act as digital couriers between card issuers and merchants.

"Processors help a merchant's payment terminal communicate with a bank, for example, by sending signals over electronic highways such as Visa or MasterCard," said NYT.

OCBC adds that as long as the settlement is in a foreign country, depending on the currency cardholders opt to pay with, they will be charged either the dynamic currency conversion or foreign exchange rate. For instance, Uber uses the dynamic currency conversion as settlement is in the Netherlands, and cardholders are charged in Singdollars .

SingSaver added that even though products are priced in Singdollars or when you shop at a Singapore site - those that end with .sg - as long as the payment is processed overseas, you will be charged foreign transaction fees.

For instance, with the €100 dress, the price is converted to Singdollars using the merchant's exchange rate.

With an exchange rate of €1 to S$1.60 for instance, the price would be converted to S$160.

SingSaver notes: "The merchant's rate can be 3 to 8 per cent higher than what is being used by the card network."

An illustration by the portal shows:

•Paying with a DBS Visa credit card that incurs only dynamic currency conversion fees: S$160 x 1.008 = S$161.28

•Paying with an HSBC Visa credit card that incurs only foreign currency transaction fees: S$160 x 1.025 = S$164

•Paying with a Citibank Visa credit card that incurs both dynamic currency conversion fees and foreign currency transaction fees: S$160 x 1.025 x 1.008 = S$165.31

Mr Murthy said: "The tricky thing about foreign transaction fees is that they do not appear in the checkout amount when you make a purchase online. Such fees will appear only in your credit statement."

SAY NO TO PAYING IN SINGDOLLARS

Mr Murthy said it tends to be more costly for you to charge Singdollars instead of foreign currency when you are overseas, simply because of the unfavourable exchange rates used by the merchants.

Always say no to paying in Singdollars when you shop overseas.

"When making online purchases, always check the terms and conditions to find out if payments are collected or processed overseas," he added.

You could look for cards to stretch your dollar, he said, noting that for CIMB, the 1.4 per cent administrative fee is waived for the CIMB Platinum MasterCard and CIMB Visa Signature Card.

"For these two cards, the fees are 1 per cent for Visa and 1 per cent for MasterCard. For all other CIMB cards, 2.4 per cent for Visa and 2.4 per cent for MasterCard still applies." Mr Murthy stressed that consumers must watch out for foreign transaction fees when they travel and spend overseas.

"These fees can be as high as 3 per cent of transaction amounts, resulting in avoidable expenses. A golden rule when shopping overseas is to always opt to pay in the foreign country's currency as these fees - commonly known as dynamic conversion fees - are marked up even more by merchants.

"There are a couple of Singapore credit cards that have waived these administrative fees and frequent travellers are better off using such credit cards to save hundreds of dollars on their overseas expenses."

TERMS AND CONDITIONS APPLY

When making online purchases, always check the terms and conditions to find out if payments are collected or processed overseas.

'' SINGSAVER CO-FOUNDER ROHITH MURTHY


Correction note: An earlier version of the story said the foreign transaction fee for the CIMB Platinum MasterCard was 1 per cent, and 1.8 per cent for the CIMB Visa Signature Card. It should be 1 per cent for both.

A version of this article appeared in the print edition of The Sunday Times on July 17, 2016, with the headline 'Paying for overseas purchases: Finding the best deal'. Print Edition | Subscribe