Dynamic Currency Conversion
On a recent skiing holiday I took the opportunity to research the murky subject of Dynamic Currency Conversion (DCC) applied to card payments abroad. DCC is a service which some merchants offer to foreign cardholders, whereby a currency conversion to the cardholder’s currency of domicile is conducted at the point of sale. Although it has been around for several years I had never experienced it first hand. This year, by contrast, practically every retail outlet in my French resort offered me the choice of paying in euros or pounds sterling when using my credit card, via a message displayed on the POS terminal of the form “enter 1 to pay in GBP; 2 to pay in euros”. Significantly, the DCC option was always the first choice!
Anecdotally, DCC is usually reported as being a bad deal for the cardholder. I was able to put this to the test by alternately paying in sterling or euros, often at the same outlet for the same items (eg the daily lift pass). Sure enough, subsequent examination of my card statement revealed that the DCC option cost me on average about 1% more.
Of course this was a very informal survey which only suggests that at this particular location at this particular time DCC is a relatively expensive option for the cardholder. More interesting are the implications for the card payments industry if, as my experience suggests, DCC is likely to become standard practice, at least in tourist destinations.
Although there are a few notable exceptions, most UK credit card issuers earn a healthy income on foreign currency transactions by adding a markup to the interbank rate. The card schemes also charge the issuers a currency conversion fee. Typically, this will result in a UK cardholder paying about 3% more for a foreign currency card transaction than could theoretically be obtained at the interbank rate. I assume broadly similar practices apply worldwide. DCC has the effect of transferring this revenue stream away from the issuer side of the business to the merchant/acquirer side (my understanding is that both merchant and acquirer normally gain). In other words, very bad news for issuers!
It will be interesting to see how this story plays out. Given the maths, widespread adoption of DCC by merchants and acquirers would seem inevitable in the short to medium term. But in the longer term, there is the risk that cardholders will learn to routinely reject the DCC option if it becomes widely perceived to be disadvantageous to them. Instead, merchants and acquirers would be well advised to be less greedy and ensure that the DCC option is always better value. After all, it is better to earn some foreign exchange income than none at all. Maybe DCC will eventually turn out to be in the interests of the consumer after all.
Nick Collin, Banking Automation Bulletin Opinion Article, April 2013