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Dynamic currency conversion don t be tempted to pay in your home currency
Dynamic currency conversion (DCC) or cardholder preferred currency (CPC) is a financial service in which credit card holders, when making a payment in a foreign country, have the cost of a transaction converted to their home currency at the point of sale. DCC allows customers to see the amount their card will be charged, expressed in their home currency. DCC services are generally provided by third party operators in association with the merchant, and not by a credit card company. (There is no technological reason for credit card companies not to give cardholders a DCC option at the point of sale.) The exchange rate used by DCC operators is generally less favorable than that offered through their credit card company. The DCC exchange rate would incorporate the foreign exchange rate charged by the credit card company, in addition to a fee paid to the merchant and that retained by the DCC operator. Furthermore, the credit card company may charge an additional fee for charges made outside the card holder's home country, though the charge appears to have been made in the home currency under DCC.
Contents
- Dynamic currency conversion don t be tempted to pay in your home currency
- All about dynamic currency conversion
- History
- How it works
- Impact
- Advantages
- Disadvantages
- In summary
- DCC providers
- References
The currency conversion is done by the merchant or his representative card processor at the point of sale instead of by the credit card company when the account is charged. The financial benefit to the merchant or their provider may be an incentive for the merchant to use DCC even when it would be disadvantageous to the customer. The merchant is now obliged to ask the customer if they want to use DCC but sometimes false information is given by the merchant to persuade customers to use DCC, such as that "DCC bypasses foreign transaction fees" or that "their machines automatically convert purchases to the home currency at the point of sale", which are both not true. Most credit card companies and advisers recommend that consumers not use DCC when it is offered to them. Credit card companies claim that they are required by law to permit DCC operators access to their platforms.
Many sources report that customers do not understand DCC, are not properly informed of the terms, and are not able to make an informed decision whether to elect to pay in the local currency or in their home currency. Proponents of this service suggest that the benefit to travelers is that it allows them to view and therefore understand prices in foreign countries in their home currency and for business travelers making it easier to enter expenses.
All about dynamic currency conversion
History
Dynamic currency conversion was created in 1996 and commercialised by a number of companies including Monex Financial Services and FEXCO
Prior to the card schemes (Visa and MasterCard) imposing rules relating to DCC, cardholder transactions were converted without the need to disclose that the transaction was being converted into a customer's home currency, in a process known as "back office DCC". Visa and MasterCard now prohibit this practice and require the customer's consent for DCC, although many travelers have reported that this is not universally followed.
Visa Chargeback reason code 76 explicitly covers situations where the "Cardholder was not advised that Dynamic Currency Conversion (DCC) would occur" or "Cardholder was refused the choice of paying in the merchant’s local currency". Customers have a strong chance of successfully disputing such transactions, especially in situations where they pay with a credit card and where Verified by Visa or Securecode is not involved.
How it works
When a customer wants to pay for a transaction using a credit card, the payment device will detect whether the base currency of the card is different of the local currency. With a customer-facing payment device, the cardholder will be prompted with the option of paying in their own currency. The payment device will display the exchange rate used and the amount in the cardholder's currency. The cardholder must then select the currency they want the transaction to be processed in.
If the cardholder elects to pay in their own currency, the transaction will be converted into the cardholder's currency using an exchange rate which includes the margin for providing the service. The exchange rate and the margin must be disclosed to the cardholder to be deemed a compliant solution.
The DCC provider guarantees that the amount in the cardholder's currency will be debited to the cardholder's account, and that the merchant's account will be credited with the amount in the local currency. The exchange rate risk is borne by the DCC provider. The cardholder's credit card issuer may choose to impose an additional foreign transaction fee on the transaction, which appears on the statement, but typically they will not charge this fee when not providing a service.
DCC operates similarly with Internet transactions. When credit card information is entered to finalize payment, the system can detect the home country of the cardholder and offer the cardholder the option of paying in their currency. DCC is also available for cash withdrawals at ATMs.
An example can be seen in the following image, where the same GBP purchase is made twice just after each other: one with DCC and one without DCC. In both cases, the original amount is GBP 6.90 and is paid with a Visa card denominated in EUR. When applying DCC (left part of the image), the amount becomes EUR 8.20. This will also be the amount on the credit card statement. Without DCC, the amount is GBP 6.90 and the resulting EUR charge can be found only at the credit card statement, and can vary with any fluctuations between the GBP and EUR currencies.
On the card statement, the difference in charges can be seen: the DCC transaction is correctly charged at EUR 8.20 while the non-DCC is charged at EUR 8.04 - a difference of almost 2%. While this may seem a small amount for the customer, it can mean a big income stream for the DCC operator and merchant.
Impact
DCC has proved popular with merchants because it enables them to profit from the foreign exchange conversion that occurs during the payment process for a foreign denominated Visa or MasterCard.
Credit card acquirers and payment gateways will also take a profit on the foreign exchange conversion that occurs during the payment process for foreign denominated Visa and Master cards when DCC is used. DCC revenue has been important for them because it offsets increasing international interchange fees.
Advantages
The main advantage of DCC is that for a non-DCC transaction the customer does not know exactly the exchange rate that the credit card company will apply (and the final cost) until the transaction is cleared, so the actual rate is not known to the customer until it appears on a monthly statement.
Other advantages to customers, according to proponents, are:
For the merchant which normally accepts credit cards, DCC offers an opportunity to earn a margin on the transaction with no exchange rate risk, which is borne by the DCC operator.
Disadvantages
The main objection to DCC is the unfavorable exchange rates and fees being applied on the transaction, resulting in a higher charge on their credit card, and that in many cases the customer is not aware of the additional and often unnecessary cost of the DCC transaction.
The size of the foreign exchange margin added using DCC varies depending on the DCC operator, card acquirer or payment gateway and merchant. This margin is in addition to any charges levied by the customer's bank or credit card company for a foreign purchase. In most cases, customers are charged more using DCC than they would have been if they had simply paid in the foreign currency. This is not necessarily the case however because the issuers also apply a spread when converting transactions from a foreign currency to the statement's currency.
In summary
DCC providers
The main DCC providers are: