Dynamic currency conversion

Dynamic Currency Conversion (DCC) or Cardholder Preferred Currency (CPC) is a financial service in which holders of credit cards have the cost of a transaction converted to their local currency when making a payment in a foreign currency. Currently this feature is only possible for Visa and MasterCard networks. American Express provides for multi currency transactions for ecommerce merchants.

For example, the following is a typical DCC transaction at point of sale. 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 device (POS), which identifies that the card is a USA issued card. The cashier asks the cardholder to pay in US dollars and the POS converts the euro amount into US dollars (based on a margined daily rate). This exchange rate is a manipulated exchange rate in order to take more money from the cardholder. 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, to the benefit of the merchant.^{[citation needed]}^{[citation needed]}

Prior to scheme rules relating to DCC, cardholder transactions were converted without the need to disclose that the transaction was converted into their home currency, in a process known as "back office DCC". Ironically "back office DCC" is exactly what happens without DCC - i.e. when a traveler pays for something using their USD card in for example a London hotel and no DCC is performed, the schemes convert the transaction from GBP to USD without the card holders knowledge or consent. "Back office DCC" has since been amended by the card schemes and participating acquiring banks and merchants are restricted from doing this.

Interestingly in 2007 Visa and MasterCard and its members settled $336 million in a landmark case regarding undisclosed foreign currency revenue. The antitrust litigation settlement was one of several against the schemes for activities that have been shown to be illegal, uncompetitive or monopolistic. Dynamic Currency Conversion gives Acquirers the ability for the merchant to disclose the true rate at the point of sale thereby removing the problem of undisclosed profits in a consumer friendly way.

Many of the largest internet sites (such as Paypal, Digital River, hotel booking engines, and Amazon) and mail order companies are also offering this service.

Some providers of dynamic currency conversion also guarantee better exchange rates than customers would get from their card providers,^{[citation needed]} making DCC quite compelling for consumers, given the added transparency of seeing the exact rate of exchange at point of sale rather than waiting for a statement at the end of the month.

A few merchants have run dynamic currency conversion without giving the option to the cardholder but this is in the minority.^[1]

Cardholders are handed a slip to sign in their home currency with an explanation of the exchange rates used.^{[citation needed]} The rates used are based on the wholesale rate so more often the not the customer benefits from transparency and certainty.

DCC has proved incredibly popular to acquirers as the foreign exchange revenue that was earned by the issuer is now transferred to the acquirer. Given that in most countries, issuers are also acquirers. the FX revenue they have lost from their card holders who travel overseas, they also have benefited from implementing DCC at their merchants in their country. For most acquirers, the two level each other out creating a zero net effect.

For acquirers DCC also has protected them from Card schemes who are regularly increasing international interchange fees making the Acquiring business more difficult and often loss making. The DCC revenue offsets the increases in interchange fees applied on them to at least make the acquiring business break even.

Among the biggest advantages to travellers according to proponents:

the visibility of charges made in foreign countries
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 fee 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 exhange 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 main providers for the Card Present Environment (POS) are

The main providers for the Card Not Present Environment (Internet) are

Gateways supporting DCC for merchants include

References

^ Collinson, Patrick (12 July 2008). "Going to Spain? Just say no". The Guardian. London. Retrieved 1 May 2010.

External links

[1] Collinson, Patrick (12 July 2008). "Going to Spain? Just say no". The Guardian. London. Retrieved 1 May 2010.

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