Dynamic currency conversion (DCC) or cardholder preferred currency (CPC) is a process whereby the amount of a Visa or MasterCard transaction is converted by a merchant or ATM to the currency of the payment card's country of issue at the point of sale.
DCC allows the merchant, merchant's bank or ATM operator to charge a markup on the exchange rate used, sometimes by as much as 18%. Where the DCC markup is less than the card issuer's currency conversion fee, DCC can benefit card holders by allowing them to see the amount that their card will be charged expressed in the currency of the card's country of issue. However, in most cases, DCC markups are higher than the card issuer's currency conversion fee (which can be zero), thereby negating this benefit.
DCC services are generally provided by third party operators in association with the merchant, and not by a card issuer. Card issuers do not provide cardholders with a DCC option at the point of sale, but these two card networks permit DCC operators to offer currency conversion in accordance with their card processing rules.
Without DCC, the currency conversion is carried out by the card issuer when the transaction is charged to the card holder's statement, usually a day or two later, but for an increasing number of cards in real time. Even though the card issuer will publish the exchange rate used for conversion on the statement, most do not disclose the exchange rate used to convert a transaction at the time of payment. Both Visa and MasterCard state that the rates they publish in advance of a transaction posting to a cardholder's statement are indicative, since the rates they use for conversion correspond to the date and time they process the transaction, as opposed to the actual transaction date.
With DCC, the currency conversion is done by the merchant or their card processor at the point of sale. Unlike a credit card company, a DCC operator must disclose the exchange rate used for conversion at the time of the transaction according to credit card company rules which govern how DCC is offered. The DCC exchange rate must be based on a wholesale interbank rate, to which any additional markup is then applied. Visa requires this markup be disclosed to the cardholder. The credit card company may still charge an additional fee for charges made outside the card holder's home country, even when the transaction has been processed in their home currency with DCC.
Proponents of this service believe that customers can better understand prices in their home currency, and this makes it easier for business travelers to keep track of their expenses. They also point out that the customer has full transparency inclusive of conversion fees, and can make an informed choice whether or not to use DCC. The financial benefit to the merchant or their card processor may be an incentive for the merchant to offer DCC even when it would be disadvantageous to the customer.
Opponents of the service believe that customers do not understand DCC, and point out that DCC exchange rate markups are mostly higher than the card issuers' currency conversion fees that DCC avoids.
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History
Dynamic currency conversion was created in 1996 and commercialized by a number of companies including Monex Financial Services and FEXCO
Prior to the card schemes (Visa and MasterCard) imposing rules relating to DCC, cardholder transactions were converted without the need to disclose that the transaction was being converted into a customer's home currency, in a process known as "back office DCC". Visa and MasterCard now prohibit this practice and require the customer's consent for DCC, although many travelers have reported that this is not universally followed.
Visa Chargeback reason code 76 explicitly covers situations where the "Cardholder was not advised that Dynamic Currency Conversion (DCC) would occur" or "Cardholder was refused the choice of paying in the merchant's local currency". Customers have a strong chance of successfully disputing such transactions, especially in situations where they pay with a credit card and where Verified by Visa or Securecode is not involved.
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How it works
When a customer wants to pay for a transaction using a payment card, the point-of-sale terminal or ATM uses the card's issuer identification number (first 6 digits of the card number) to detect the card's country of issue. The terminal or ATM cannot detect the currency of the card or of its underlying account, only its country of issue, but an assumption is made that the card's currency is the currency in the card's country of issue. If this currency is different from the local currency, then DCC is offered. With a customer-facing payment device, the cardholder will be prompted with the option of paying in their own currency. The terminal or ATM will display the exchange rate used and the amount in the currency of the card's country of issue. The cardholder must then select the currency they want the transaction to be processed in.
If the cardholder chooses to pay in their home currency, the transaction will be converted into the that currency using an exchange rate which includes the margin for providing the service. The exchange rate and the margin must be disclosed to the cardholder to be deemed a compliant process. However, in an increasing number of cases, point-of-sale terminals allow merchants to change the currency and amount after the card holder has entered their PIN and handed the terminal back to the merchant. In this scenario, DCC is carried out without the card holder's consent, even though the receipt subsequently printed states falsely that the card holder gave their consent.
The DCC provider guarantees that the amount in the card holder's currency will be debited to the card holder's account, and that the merchant's account will be credited with the amount in the local currency. The exchange rate risk is borne by the DCC provider. The card issuer may choose to impose an additional foreign transaction fee on the transaction, which appears on the statement, but typically they will not charge this fee when not carrying out a currency conversion.
DCC operates similarly with Internet transactions. When payment card information is entered to finalize payment, the system can detect the home country of the cardholder and offer the cardholder the option of paying in their currency. DCC is also available for cash withdrawals at ATMs.
Because a point-of-sale terminal cannot detect the card's currency, only its country of issue, DCC is often offered incorrectly. For example, a DCC-enabled terminal in the Eurozone will offer DCC to a customer paying with a debit card issued in the United Kingdom on a euro bank account. If the customer mistakenly chooses DCC, then the transaction will first be converted from EUR to GBP by the merchant or the merchant's bank, often with a markup, and then from GBP back to EUR by the UK card issuer, often with another markup.
An example can be seen in the following image, where the same GBP purchase is made twice just after each other: one with DCC and one without DCC. In both cases, the original amount is GBP 6.90 and is paid with a Visa card denominated in EUR. When applying DCC (left part of the image), the amount becomes EUR 8.20. This will also be the amount on the card statement. Without DCC, the amount is GBP 6.90 and the resulting EUR charge can be found only at the card statement, and can vary with any fluctuations between the GBP and EUR currencies.
On the card statement, the difference in charges can be seen: the DCC transaction is correctly charged at EUR 8.20 while the non-DCC is charged at EUR 8.04 - a difference of almost 2%. While this may seem a small amount for the customer, it can mean a big income stream for the DCC operator and merchant.
Impact
DCC has proved popular with merchants because it enables them to profit from the foreign exchange conversion that occurs during the payment process for a foreign denominated Visa or MasterCard.
Credit card acquirers and payment gateways will also take a profit on the foreign exchange conversion that occurs during the payment process for foreign denominated Visa and Master cards when DCC is used. DCC revenue has been important for them because it offsets increasing international interchange fees.
Advantages
The main advantage of DCC is that for a non-DCC transaction the customer does not know exactly the exchange rate that the credit card company will apply (and the final cost) until the transaction is cleared, so the actual rate is not known to the customer until it appears on a monthly statement.
Other advantages to customers, according to proponents, are:
- the ability to view and therefore understand prices in foreign countries in their home currency,
- the ability to enter expenses more easily and promptly, especially for business travellers, and
- EU regulation 2560/2001 could make non-eurozone cash withdrawals within the European Economic Area cheaper for eurozone customers, because euro cash withdrawals are regulated. A Swedish law (SFS 2002:598) combined with the EU resolution does the same thing for Swedish cards if the transaction is in SEK or EUR. Generally, Eurozone banks charge a fixed fee for non-EEA and non-EUR cash withdrawals while EEA withdrawals in EUR are free of charge. For example, if a Eurozone card is used for a withdrawal in the UK, with DCC there are two options - processing the transaction in GBP (card issuer's exchange rate but a fixed cash withdrawal fee) or processing the transaction in EUR (DCC marked-up exchange rate but no fixed cash withdrawal fee). For small amounts, the latter option will often be cheaper.
For the merchant which normally accepts credit cards, DCC offers an opportunity to earn a margin on the transaction with no exchange rate risk, which is borne by the DCC operator.
Disadvantages
The main objection to DCC is the unfavorable exchange rates and fees being applied on the transaction, resulting in a higher charge on their credit card, and that in many cases the customer is 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. In most cases, customers are charged more using DCC than they would have been if they had simply paid in the foreign currency.
In summary
- Customers should check the spread that their issuer charges for their transaction in a foreign currency and compare it with the base rate and spread declared by the DCC terminal and choose the best option.
- Customers may find DCC to be forced upon them, without a clear choice, as merchants may falsely claim that their machines automatically convert purchases to home currency at the point of sale.
- Credit card disputes can be lengthy and/or impossible if a customer signs the receipt with/without a clear choice.
- Customers should be advised of the choice open to them to select the local currency, and if not they may report the case to their payment scheme customer service.
DCC providers
The main DCC providers are:
- Alliex Co.,Ltd based in South Korea
- ConCardis based in Germany
- Euronet Worldwide based in the United States
- First Data based in the United States
- FEXCO Merchant Services based in Ireland
- Global Blue based in Switzerland
- Monex Financial Services based in Ireland
- Planet Payment based in the United States
- Premier Tax Free, part of the Fintrax Group based in Ireland
- Six Payment Services based in Switzerland
- Travelex based in Australia
- Worldline based in the United States
Source of the article : Wikipedia
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