This article was first published in the July 2011 Ireland edition of Accounting and Business magazine.
Dynamic currency conversion (DCC) has its origins firmly rooted in Ireland, where the concept was developed in the 1990s in a small town in Kerry.
It has grown to become a significant business, which merchants have sought to maximise and which the credit card companies (VISA and MasterCard primarily) have tried to minimise and standardise, with varying degrees of success.
The concept is also presented under the guise of ‘customer-preferred currency’ (CPC), as merchants have moved to make the idea more palatable to their customers.
DCC is only available where there is a difference between the denominated currency of your credit card and the currency in which you are transacting. So, if you have a credit card issued by an Irish bank, DCC will only be possible where you travel outside of the eurozone.
How it works
In the past, merchants would simply send their accumulated daily transactions to an acquirer who would, in turn, settle the next day in the transacting currency. The acquirer would then convert this transaction into the card holders’ currency and send this to the issuing bank for settlement.
Herein lies the opportunity: the exchange applied includes an uplift/administration fee, which is built into the exchange rate. The rate of the uplift applied differs, depending on the issuing bank, but can vary from 1% to 4% worldwide.
Merchants have become much more active now in performing this conversion for the customer and, thereby, removing the need for the banks to undertake this task. Of course, the merchants will also charge for this and they can set their own rate.
This may appear very easy but there are certain rules which the credit card companies have put in place to try and help protect their revenue streams and also the customer. For example:
- DCC can no longer be passive, i.e., the customer must opt in, and this must be verifiable;
- There must be a conversation with the customer, where he or she is asked if they wish to pay in their home currency;
- The final bill or statement of charges must also show the exchange rate applied; and,
- The merchant must disclose the administration fees applied.
The credit card companies have also become much more active in conducting audits to ensure compliance with these rules. The penalties for non-compliance are high, with fines of over €20,000 per incident. Merchants with multiple points of sales need to ensure that the process is kept as simple as possible and training is effective to ensure maximum uptake of DCC, while complying with the rules.
Merchants and DCC solution providers are also required to register with the credit card companies. All this can be considered good practice, although it is arguable that the credit card companies and banks are not as transparent and upfront about where their own charges are applied.
Advantages to customers
There are a number of benefits to accepting DCC by customers:
- There is comfort in knowing the charge in your own currency;
- There is certainty about the charge which will be passed through to your credit card;
- Business travellers can submit expenses without having to wait for their statement arrives;
- It offers choice, transparency and the provision for dispute resolution.
Disadvantages to customers
There can be pitfalls to DCC, meaning customers need to be aware of who they are dealing with.
- Some merchants apply excessive conversion fees, which are not in the interest of their customer;
- Smaller merchants may not always be able to get the best wholesale rates available;
- Not all merchants have a provision for dispute resolution with respect to foreign currency rates applied; and,
- The rules may not always be applied and DCC can be applied passively.
Advantages to merchants
While banks are losing a revenue stream, which had been uncontested for many decades, for the merchants the advantages of DCC are:
- The revenue stream for any merchant with a high volume of customer fitting the DCC profile can be significant and adds an extra 100 to 300 basis points to the transaction value;
- The merchant owns the conversation with the customer;
- If managed well, the merchant can drive down disputes and chargebacks;
- It allows settlement in multiple currencies; and,
- It enhances cashflow management.
The next generation in DCC is now coming upon us, with merchants requesting their acquirers to process multi-currency files for settlement in a number of core currencies.
This allows the merchant to convert the currencies themselves and benefit from natural hedging and more competitive exchange rates than those offered by the banks.
There is a level of expertise required, although a good DCC provider will offer this as an add-on service. DCC is here to stay, which makes it essential that all of us start to understand how the credit card process works and what our merchants are selling.
With this knowledge, consumers will be able to make an informed decision about what suits them best.
Benefits for SSCs
For our own shared service centre, the DCC offering allowed us to move further up the value chain. We moved from being solely a service provider to a revenue generator.
We have established an excellent and collaborative relationship with Monex Financial Services in Killarney, Co. Kerry, which has helped us manage the process and ensure compliance with the rules for our benefit and the benefit and protection of our customers.
DCC has helped create a new dynamic as the Hertz European Service Centre is now an enabler for most of the new global and regional products, services and brands being rolled out.
Colm D’Arcy is director of financial operations, Hertz European Service Centre