Cross-border transaction fees explained: Dynamic Currency Conversion (DCC) vs. Cross-Border Fee (CBF)

In today's interconnected global economy, merchants frequently face the challenges of cross-border payments, whether it's paying overseas suppliers, placing online ads, or subscribing to software. From managing transactions through online platforms in Hong Kong to making direct payments while traveling, cross-border transaction fees are inevitable when using debit or credit cards. However, there's good news: understanding how these fees are calculated can help significantly reduce operational costs.

Let's explore two common foreign currency transaction fees: Dynamic Currency Conversion (DCC) and Cross-Border Fee (CBF).

Types of foreign currency transaction fees

There’re 3 types of fees associated with foreign currency transactions. In addition to fluctuations in exchange rate and conversion fees, you should also be aware of: 

• Foreign currency transaction fee: the most common fee for cross-border transactions made in foreign currency

• Dynamic Currency Conversion: applicable to overseas physical transactions paid in the card’s local currency

• Cross-Border Fee: applicable to overseas online transactions paid in HKD

While these concepts might initially seem complex, you'll soon grasp the essence with our comprehensive guide. We'll also provide some simple strategies to help you save on transaction costs.

Dynamic Currency Conversion (DCC)

DCC is a financial service that enables merchants accepting Visa and Mastercard to offer currency conversion right at the point of sale. This service helps customers see the exact amount they'll pay in their home currency. DCC is widely available in Hong Kong, mainland China, and Europe.

For instance, when shopping in Europe, you might have the choice to pay in either Euros (EUR) or Hong Kong Dollars (HKD). If you choose HKD, DCC will be applied.

It’s important to note that the DCC rate is determined by the fund recipient (i.e. the merchant). It varies and can be as high as 7%.

Cross-Border Fee (CBF)

CBF is applied to all online transactions involving merchants registered overseas. So, if you're placing ads on platforms like Meta or Google, or using services like Uber or Airbnb during business trips, you'll want to keep an eye on CBF.

Traditional banks typically charge a CBF of 1%-4%. HSBC and Hang Seng Bank, while previously did not charge a CBF, have recently announced that they will start charging a 1% fee.

The difference between DCC and CBF

You can refer to the comparison table to quickly identify the differences between DCC and CBF.

Should you pay in foreign currency or HKD for overseas transactions?

The simplest advice is: pay in the local currency to avoid DCC and other hidden fees.

However, there are additional factors to consider, such as whether your card supports foreign transactions, the conditions for earning rewards or points, the transaction amount, and the risks of exchange rate fluctuations. While paying in HKD might incur higher fees, it's important to weigh all aspects to make the best decision.

Why is there a service charge for overseas transactions?

To understand how to save on DCC and CBF, let's explore the reasons behind these transaction fees.

Cross-border transaction fees mainly stem from two factors: exchange rate spreads and third-party bank service charges.

When you make a cross-border transaction, the processing bank or payment platform converts currencies based on the current exchange rate. However, due to the difference between the "buy" and "sell" rates, you end up paying the spread to ensure the bank/platform doesn't incur losses.

Additionally, third-party banks or payment platforms need to cover their operational costs, including maintaining financial infrastructure, processing transactions, settlement, and risk management, hence the cross-border transaction fees.

How can merchants save on overseas transactions？

Once we understand the origins of these fees, we can identify simple methods to save on transaction costs:

• Pay directly in foreign currency to avoid exchange rate spreads

• Apply for company cards from banks or payment platforms that offer lower service fees

Theoretically, saving on cross-border transaction fees is straightforward. The key is to implement these strategies effectively.

The answer may be simpler than you think.

Use Airwallex Borderless Card to avoid unnecessary cross-border transaction fees and earn up to 1.1% cash rebate

Airwallex Borderless Card supports 10+ major currencies, allowing you to pay directly from your multi-currency account without incurring conversion fees.

What’s more, there is no overseas transaction fees or hidden costs. The only fee you need to be aware of is a small markup as low as 0.2% above the interbank exchange rate when you convert currencies using our market-beating rates.

Opening an account and applying for the Airwallex Borderless Card is free, and takes as little as 24 hours to complete. Sign up now to start saving on cross-border transaction costs and enjoy up to 1.1% cash rebate* on every dollar you spend!

*T&Cs apply.