A recent PayThink article described Dynamic Currency Conversion (aka DCC) as a “global scourge,” “rip-off” and a “deceptive industry that only exists to profit by shafting unsuspecting consumers.” Those are some pretty strong opinions — but not necessarily the facts.
DCC allows Visa and Mastercard cardholders to pay in their home currency rather than the merchant’s local currency using a credit or debit card. Tourists, business travelers and online shoppers routinely experience it, and when they do, they are aware of it. There are strict compliance programs in place that have been mandated by the card brands and that require payment processors and merchants to provide full disclosure and transparency with DCC — which is a very different experience than with a non-DCC transaction.
With DCC, the exchange rate and markup used to convert a transaction must be disclosed to the cardholder, typically in a customer-facing manner, and an explicit choice must be made by the cardholder to use DCC. This stands in sharp contrast to a non-DCC transaction, which when processed in the local currency, will be converted using an undisclosed exchange rate with an unknown markup plus additional international transaction fees set by the issuer.
Markups of 500 basis points at the point of sale, 9% in an Indian hotel and DCC transaction costs that are 12% higher on an ATM sound outrageous — and they are! But they are also not typical. When offered in a fair and transparent manner, DCC provides real value and benefit to both the cardholder and the merchant striving for new ways to remove friction and improve their customer service experience.
There are numerous providers and merchants offering this service in a fair and equitable manner that provide consumers with transparency and choice. While many consumers are savvy enough to know when they are being offered bad DCC deals, there is no way to know if they are being offered a bad deal on non-DCC transactions which are later converted and provide no real transparency of the exchange rate or markup. The notion that all businesses would purposely offer a solution to their customers that would rip them off is the furthest thing from the truth.
No doubt, there are some “bad apples” that are charging excessively, but the majority of businesses are offering their customers fair rates and a better payment experience. Businesses cannot grow and increase sales if they are ripping off their customers. Simply generalizing all DCC as a rip-off is not only incorrect, but runs contrary to the goals and principles of most businesses.
The Brussels-based consumer-advocacy group BEUC conducted a study that, while seemingly critical of DCC, also cites that the Australian Competition and Consumer Commission (Australia's competition regulator and national consumer law champion) took Visa to court when it tried to block merchants from using DCC.
Visa was ordered by the high court to pay AUD 18 million in penalties because they engaged in anti-competitive practices. In their words, “Dynamic Currency Conversion (DCC) is a service that competes with Visa’s currency conversion services and gives international cardholders a choice to complete a transaction in their home currency rather than in the local currency of the merchant.”
DCC is unpopular with issuing banks and the card brands because they are the beneficiaries of revenue earned on non-DCC converted transactions. As such, they have waged an endless PR campaign to make consumers unreceptive to paying in their home currency using DCC. DCC offers the consumer a choice of how they want their transaction converted, and without DCC they have no choice — which is why Visa lost in the Australian courts.
Since 2006, both Visa and Mastercard have passed on excessive fees to merchants for accepting cards issued outside their borders while card issuers have added foreign transaction fees hidden in their terms and agreements. Since 2015, both card brands also charge an additional 40-basis-point fee when a merchant conducts any transaction in a currency other than their local currency. This second-tier fee is meant to both preserve and increase profits without providing any additional service. These costs have placed an unfair burden on both merchants and consumers. It is equally important to understand that the increased fees charged by the card brands are a major driver for increased FX margins. Card brands are recovering FX losses with increased costs and punitive fees for consumers selecting DCC.
Conducting business in today’s global world can be expensive and requires intelligent, well-thought-out solutions. DCC is a service that when conducted properly offers the consumer very competitive rates, full transparency and most importantly choice. It provides them with the opportunity to make an educated and informed decision. Suggesting that Visa or Mastercard should eliminate DCC and be the sole means to convert a transaction using an unknown, undisclosed rate of exchange with an unknown margin is like buying a used car from a salesman who says “trust me.”
Currently, Visa continues to operate from a position of power, and its aborted attempt to curb DCC was intended to protect its profits and those of their issuing banks derived from non-DCC converted transactions. It would be difficult for any competition authority to promote mandating the use of an anti-competitive offering that provides no choice and no disclosure of the costs associated with paying in the local currency.