Understanding Dynamic Currency Conversion and Its Impact

Dynamic currency conversion (DCC) is a service offered by banks and merchants that allows customers to pay for transactions in a currency other than their own. This service can be beneficial for travelers who want to avoid exchange rate risks.

The fees associated with DCC can be high, often ranging from 1% to 3% of the transaction amount. These fees can add up quickly, making it a costly option for customers.

To put this into perspective, if you're traveling to Europe and make a purchase worth $100, you could end up paying $3 to $6 in fees. This can be a significant amount, especially if you're making multiple transactions during your trip.

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Dynamic currency conversion, or DCC, is a convenient feature that lets you make purchases in a foreign country using your home currency.

It's also known as cardholder preferred currency, or CPC, which is a fancy name for the same thing.

DCC makes it easier to understand the price you're paying by avoiding the math of currency conversion.

But, be aware that DCC often comes with a poor exchange rate, which can make the transaction more expensive.

You'll also encounter other fees on top of the poor exchange rate, which can add up quickly.

It's worth noting that using DCC can make the transaction more expensive than if you simply made it in local currency.

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Dynamic currency conversion (DCC) is a process that allows customers to pay in their home currency when making a transaction abroad. This is done through a special terminal provided by the DCC operator, in association with the merchant.

The terminal determines the card's country of issue from the card's issuer identification number, and if it detects a foreign card, the transaction is routed through the DCC provider. The terminal sends the transaction details to the DCC operator, who performs card verification checks and determines whether to offer DCC to the customer.

The customer is not aware that their card and transaction information has been forwarded to the DCC operator, and they also don't know who the DCC operator is. Visa and Mastercard require the DCC provider to disclose the exchange rate and margin to the cardholder, but not all merchants comply with this obligation.

If the DCC operator offers the customer DCC, the POS terminal displays the transaction amount in the customer's home currency. The customer can then select whether the transaction is to be processed in the local or home currency.

Here's a step-by-step breakdown of the DCC process:

Some card issuers impose an additional foreign transaction fee on DCC transactions, even though they are denominated in the card's home currency. The exchange rate risk is borne by the DCC operator, which may carry that risk or set up hedging arrangements to minimize or transfer it.

In this example, a customer pays GB£6.90 with a Visa card denominated in EUR, and the amount becomes EUR 8.20 with DCC, at an exchange rate of 1.1882.

The DCC provider discloses that it's using the Reuters Wholesale Interbank exchange rate plus 2.95%. This results in a difference of just over 2% compared to the amount without DCC, which was EUR 8.04.

Even without DCC, the card issuer converts the transaction amount using its own exchange rates and margins, which in this example was 1.16522. This shows that DCC providers aren't the only ones making money from currency conversions.

Dynamic currency conversion (DCC) may seem like a convenient option for travelers, but it comes with its own set of limitations and disadvantages.

DCC terminals can only detect the card's country of issue, not the currency of the account, which can lead to incorrect DCC offers. This means that customers may be presented with DCC options when it's not actually needed.

The DCC process can result in multiple conversions, which can lead to higher charges for the customer. For example, a customer using a US dollar credit card issued in China to make a purchase in the Eurozone may experience three conversions: from the merchant's local currency to CNY, from CNY to USD, and then from USD to the cardholder's account currency.

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In some cases, merchants can change the transaction amount and currency after the customer has entered their PIN, allowing DCC to be carried out without the customer's consent. This can lead to customers being charged more than they expected.

The main objection to DCC is the unfavorable exchange rates and fees applied on the transaction, resulting in a higher charge on the customer's credit card. In many cases, customers are not aware of the additional and often unnecessary cost of the DCC 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.

Here are some key points to consider when using DCC:

The convenience of DCC is often offset by a poor exchange rate and additional fees that make the transaction more expensive.

Dynamic currency conversion isn't just limited to physical stores; it also happens online and at ATMs.

Many commercial websites can detect the country from which a query has come and quote prices in terms of the enquirer's country, often without disclosing the exchange rate used to convert prices.

Visa and Mastercard now offer DCC for cash withdrawals at ATMs as of 2019, requiring merchants to inform customers that DCC is optional and provide clear information to make a decision.

The reality, however, is that the screen on an ATM often presents a "take it or leave it" scenario, with small type giving the percentage of the commission and stating it's not an additional charge, which is false.

DCC operates similarly with Internet transactions, detecting the home country of the cardholder and offering the option to pay in their home currency.

Many commercial websites can detect the country from which a query has come and quote prices in the enquirer's country, but often the prices in the local currency of the supplier are not indicated.

Visa issued a rule making DCC available for cash withdrawals at ATMs as of 13 April 2019, and Mastercard now does the same.

If you choose not to use DCC, Visa converts currency at the wholesale rate and adds a 1% charge for performing the conversion.

The customer gets the "real" exchange rate without commission unless the card issuer adds a charge for international transactions.

American banks often charge 3% for international transactions, even though the debit order is already presented for collection in US dollars.

Some banks and other issuers make no extra charge, so the full international transaction cost is just the 1% charge.

Visa rule 5.9.8.3 of 13 April 2019 requires ATM customers to be given a clear choice whether to use DCC or not.

However, the reality is that the screen on an ATM often announces the exchange rate and asks whether the customer accepts or refuses that rate, without explaining the consequences of refusal.

Refusing the rate does not end the transaction, but rather means the exchange will be done without charging the commission.

The clear "choice" required by the rule is not presented, and the small type on the screen often gives a misleading explanation of the commission.

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Adyen supports a wide range of currencies, including AED, AUD, and many others, with over 20 different options available. You can even select a custom subset of currencies for Dynamic Currency Conversion (DCC).

If you're looking to offer DCC in a specific country, it's good to know that it's available almost everywhere Adyen has a POS solution. In the Americas, DCC is supported in countries like Canada, Mexico, and the United States.

However, if you're based in Brazil, you won't be able to offer DCC. And if you're in Bulgaria, be aware that settlement in the local currency incurs an additional fee for foreign exchange.

Here are some of the countries where DCC is supported in the APAC region:

If you're in Iceland, you'll find that settlement in the local currency is not supported.