Recently, I renewed my membership with a professional body using my credit card. My credit card statement was shocking. The bank charged me around 7.4% over-and-above the forex rates for that same day. Knowing Visa charges 1% interchange service assessment fee for cross-border transactions; my bank had made around 6.4% of this payment. It’s their business to charge for the services they’re offering, but this was too much – anything above 3% is big! There was nothing, I could do – chargeback was not an option.
If I’d been offered MCP or DCC during checkout that would’ve saved more than 1,000 PKR or around 9 USD on this transaction; which means, 2 to 3 applications I could’ve purchased on Google Play or just donate that money.
If you’re wondering what is this MCP or DCC, then please read on.
It’s not a new concept and has been around for quite a while. I conducted a knowledge-sharing workshop a couple of weeks back, and the topic was the Dynamic Currency Conversion (DCC).
Let me share a few insights with you.
By offering DCC at any ATM, point-of-sale (POS) or over the Internet, the cardholders are offered to proceed with their transactions, either in the currency of their host country (local currency) or in the currency set by the issuer of their card (home currency). The service is mostly available for Visa and MasterCard cardholders. It does involve forex margin that’s added over-and-above the wholesale (or interbank) rate, but the least benefit is that the cardholder is aware of the amount they will eventually end-up paying.
Once the cardholder is ready to check out at a merchant location, a typical DCC experience involves,
- The merchant swipes (or dips, taps) the card
- The transaction goes to a DCC provider to determine eligibility and convert the amount to the cardholder’s home currency
- Merchant presents amount both in local and home currency to the cardholder
- Cardholder accepts the offer to proceed in home currency
- The transaction goes for processing to issuer through the merchant’s bank and the card scheme
- The cardholder’s bank processes transaction in home currency
- The merchant gives a receipt with amount printed in both currencies and the conversion rate that includes forex margin
- The cardholder’s bank also bills in home currency – no conversion is involved at this stage
Airports, transport rental locations, train or bus stations, hotels, shopping malls and resorts, are mostly targeted to offer DCC because of the high volume of transactions from international travelers at these locations. It has great potential in retail, education (e.g., MOOCs), hospitality, gaming and airline businesses.
DCC impacts existing scheme-based payment ecosystem in different ways. In a nutshell,
- Cardholders: Informed choice and the full disclosure of the conversion rates reduce the possibility of the chargebacks. Besides this, the ability to track their spending in their home currency and with the help of competitive exchange rates they can manage their budgets conveniently.
- Merchants: A new risk-free income is available to them in the form of the rebate that is usually offered by the DCC providers. This way, merchants can provide a value-added service to their customers who not only improves the overall customer experience, but in most of the cases, results in repeat business.
- Acquirers: Additional revenue opportunity for the acquirer because of margin offered by the DCC provider. DCC as a value added service gives them a competitive advantage over those that are not providing these services.
- Card Schemes: No impact as Visa managing this through interchange service assessment fee (MasterCard must have applied similar workaround.)
- Issuers: Loss of revenue they used to earn through hidden charges applied to cross-border transactions.
Now, a new player has secured its place in the market – the DCC provider. These are typically forex companies now providing DCC services as well. They offer dynamic hedging of forex and guarantee forex rate backed by treasury services. During transaction processing, they determine DCC eligibility and may settle with card schemes based on the arrangements.
Earlier, issuers have raised security concerns; however, to address this concern the DCC providers may also be PCI DSS certified.
Some of DCC providers listed on Wikipedia are,
- FEXCO Merchant Services (Ireland)
- Planet Payment
- Global Blue (Switzerland)
- Six Payment Services
- Elavon Inc. (United States)
- MONEX Financial Services
- Premier Tax Free, Fintrax Group (Ireland)
Two conversion approaches are available for the acquirers.
- Non real-time DCC: In this first approach, the POS fetches forex rates from forex provider, converts the transaction amount during transaction processing and sends transaction in home currency to the acquirer. Rates can be fetched automatically after every batch settlement or by the merchant during any time of the day.
- Real-time DCC: In this case, the POS sends every transaction to the DCC provider directly or via acquirer and sends transaction in home currency to the acquirer once cardholder opts-in. The acquirer may send the transaction for authorization directly to card scheme or via the DCC provider. In the latter situation, the provider may also settle with the card network.
Occasionally, POS devices have built-in capability to fetch forex rates from the DCC providers. The DCC providers must have arrangements with POS vendors for such capability. They may also have agreements with card schemes to work as a third-party processor on behalf of financial institutions availing their services.
There are some related concepts called customer-preferred currency (CPC) conversion and multi-currency pricing (MCP). The latter is usually offered through online stores, e.g., Google Play, which lists prices in cardholder’s home currency. Alternatively, the cardholder is asked to provide his or her preferred currency before the transaction is completed by the merchant.
The flip side
Not every provider is reliable, and there’s a chance that one ends up paying more through DCC than the standard conversion process.
Make sure as a cardholder, you are offered guaranteed rates and better if you also know the forex rates of your home currency for the day; otherwise, I advise not to opt-in for DCC when offered by the merchants.
I hope this article will be helpful. Please do let me know your comments.
(Image source: UniBul Credit Card Blog via Google Images)