Dynamic currency conversion

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For other uses, see DCC (disambiguation).
Part of a credit card slip, indicating that DCC takes place
Part of a credit card slip, indicating that DCC takes place.

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. Though it allows customers to see the exact amount their card will be charged, expressed in their home currency, the exchange rate is generally less favorable than that offered through their credit card company.[1] 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. However, 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.

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 clients 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.

Anecdotal evidence suggests many 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.[citation needed] Proponents of this service suggest that the benefits 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.

History[edit]

Dynamic currency conversion was created in 1996 and commercialised by a number of different companies including Monex Financial Services[2] and FEXCO[3]

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.[4][5]

Even with Visa and MasterCard's rules, it can be argued that the customer is not given enough information to make a truly informed choice.

Example[edit]

The following is a typical DCC transaction at point of sale (POS). A cardholder (say, from the United States) that is traveling in Europe presents a Visa/MasterCard for payment for a product/service priced in euros.

The credit card details are captured on the point of sale, which identifies that the card is a USA issued card. The cashier asks the cardholder if he/she would like to pay in US dollars, and if so, the POS converts the euro amount into US dollars based on a set exchange rate. This exchange rate is selected by the merchant, but is usually less favorable to the cardholder than the rate offered by the card card company.[6]

The cardholder signs a receipt that shows the euro amount, rate of exchange and the US dollar amount. The service guarantees that this exact US dollar amount will be debited to the cardholder account, and the exact euro amount will be credited to the merchant’s account. However, the US bank that issued the card may impose an additional foreign transaction fee on the customer.

Impact[edit]

DCC has proved popular with merchants.[citation needed] DCC enables merchants to profit from the foreign exchange conversion that occurs during the payment process for a foreign denominated Visa or MasterCard.[citation needed]

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[edit]

The main advantage of DCC is that for a non-DCC transaction, the customer does not know the exchange rate that the credit card company will apply (and the final cost) until the transaction is cleared, so the rate is not known to customers until it appears on their statement. While DCC transactions will have a less favourable exchange rate than that charged by the credit card company, the DCC amount will be displayed up-front to the cardholder before the customer confirms the transaction.

The advantages to customers, according to proponents, are:

  • the ability to view and therefore understand prices in foreign countries in their home currency
  • the ability to enter expenses more easily (for business travellers)
  • EU regulation 2560/2001 could make non-eurozone cash withdrawals within the European Economic Area cheaper for eurozone customers, because euro cash withdrawals are regulated. A Swedish law (SFS 2002:598) combined with the EU resolution does the same thing for Swedish cards if the transaction is in SEK or EUR. Generally, Eurozone banks charge a fixed fee for foreign cash withdrawals while domestic withdrawals are free of charge. Because of the EU regulation, this makes EEA withdrawals in euros free of charge. For example, let's say that a eurozone card is used for a withdrawal in the UK. With DCC there are two options: processing the transaction in pounds (good exchange rate but a fixed cash withdrawal fee) or processing the transaction in euros (bad exchange rate but no fixed cash withdrawal fee). For small amounts, the latter option may turn out cheaper.

The advantage to the merchant is the ability to charge an additional foreign exchange margin on the transaction.

Disadvantages[edit]

The main objection to DCC is the unfavorable exchange rates being applied by the merchant, 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 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.[7][8][9]

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.

Dcc versus non dcc.png

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.

Statement dcc and non-dcc.png

In summary:

  • Rate can be less favourable than the actual exchange rate as the merchant sets the rate in its favor
  • Customers may not be advised of the choice open to them to select the local currency or may not notice that DCC is being used
  • Customers may find DCC to be forced upon them, without a clear choice, as merchants falsely claim their machines automatically convert purchases to home currency at the point of sale
  • Credit card disputes can be lengthy or impossible if a customer signs the receipt with / without a clear choice.

DCC providers[edit]

The main DCC providers are:

References[edit]

  1. ^ The Age, 30 March 2015: Dynamic currency conversion - robbery by choice
  2. ^ "About us". Monex Financial Services. Retrieved 9 June 2014. 
  3. ^ "Dynamic Currency Conversion (DCC)". FEXCO. Retrieved 9 June 2014. 
  4. ^ Collinson, Patrick (12 July 2008). "Going to Spain? Just say no". The Guardian (London). Retrieved 1 May 2010. 
  5. ^ "Dynamic currency exchange". FlyerTalk. Retrieved 31 December 2011. 
  6. ^ Keck, Gayle (31 July 2005). "Charge It . . . but Check the Math". Washington Post. Retrieved 31 December 2011. 
  7. ^ Steele, Jason. "The Foreign Conversion Scam". Retrieved 31 December 2011. 
  8. ^ Keck, Gayle (31 July 2005). "Charge It . . . but Check the Math". Washington Post. Retrieved 31 December 2011. 
  9. ^ "Dynamic Currency Conversion: Still A Scam". 9 March 2008. courant.com. Retrieved 31 December 2011. 
  10. ^ FEXCO Merchant Services
  11. ^ Fintrax Group
  12. ^ Global Blue
  13. ^ Monex Financial Services
  14. ^ Planet Payment
  15. ^ Pure Commerce
  16. ^ Merchant Services
  17. ^ TransferWise
  18. ^ Six Payment Services
  19. ^ ConCardis

External links[edit]