Friend or Foe? — The Dynamic Currency Conversion (DCC)
Swetha, a traveler, is currently on her first cross-border journey to Paris. Upon arriving at the airport, she decides to buy a luxurious watch from the store. After choosing the watch, she decides to pay with her card. As soon as she inserted her card into the merchant’s PoS and entered the PIN, she was presented with a message asking if she preferred to proceed with the transaction in her native currency (INR) or in the local currency (EUR).
Swetha was puzzled by this situation!
Are you also perplexed like Swetha?
Don’t worry! Here you go!
A few weeks ago, we explored cross-border payment and its intricacies. Today, our attention is drawn to a fundamental aspect of such transactions that fosters familiarity, provides choice, and reduces confusion and uncertainty for cardholders engaging in transactions abroad or with merchants registered overseas.
Curious about our subject?
The topic of today is an unfamiliar territory known as the Dynamic Currency Conversion (DCC).
Come, Let’s get started!
Dynamic Currency Conversion (DCC)
DCC is a payment feature available for cross-border transactions conducted at a Point of Sale (PoS) terminal or online. With DCC, cardholders have the flexibility to pay in their home currency, even when making purchases in international locations or with merchants based abroad.
This service is facilitated by acquirers along with their affiliated merchants. It empowers cardholders to decide whether they want to complete their cross-border transaction in the local currency of the merchant, or in the currency in which their card was issued (known as their billing/home currency).
You’ve likely grasped what DCC is, now, let’s see its significance!
Significance of DCC
Clarity and Choice
Empowers cardholders to make informed decisions by offering them the choice to conduct transactions in either their home currency or the local currency. This transparency helps users understand the cost of their transactions better.
Familiarity
By allowing transactions to be processed in the cardholder’s native currency, it creates a sense of familiarity and comfort, particularly for cardholders who may be unfamiliar with the local currency.
Reduced Confusion
DCC reduces confusion and uncertainty by providing clear information about exchange rates and transaction amounts in both the home currency and the local currency. This helps prevent surprises related to currency conversion fees and rates.
By offering flexibility, clarity, and control, DCC contributes to an overall enhanced user experience for cardholders, making transactions abroad or with overseas merchants smoother and more straightforward.
DCC Vs Non-DCC Transaction: A Comparison
Let us take the above scenario and know how the process works with/without DCC.
Two transaction options:
Swetha can choose whether to be charged in EUR (local currency) or INR (home/billing currency).
Process with DCC
· Swetha chooses INR (charged in home/billing currency)
· Receipt is in EUR and INR
· EUR to INR conversion by merchant
Process without DCC
· Swetha chooses EUR (charged in local currency)
· Receipt is in EUR
· EUR to INR conversion by the issuer
We’ve explored the surface of DCC, its significance, and its process. Now, let’s chart the technical waters!
The nitty-gritty of DCC
For acquirers and merchants
- Registration is Mandatory: Acquirers must register themselves with the card network (like Visa/Mastercard etc) if they want to offer DCC at any of their merchants’ locations.
- Third-Party Providers Need Registration Too: If the acquirer uses a separate company to handle DCC (DCC service provider), that provider also needs to be registered.
- Cardholder Choice is Key: DCC cannot be forced upon the cardholder. The transaction must be processed in the local currency by default unless the cardholder explicitly chooses to convert it to their home currency using DCC.
- Transparency is Essential: There should be a clear presentation of DCC as an option, allowing the cardholder to make an informed decision.
What Cardholders Must Know?
If you are a cardholder who is doing cross-border payments, know what details the acquirer/merchant must provide you:
Before the Transaction:
- Acquirers/merchants must clearly inform you of your rights and the details of DCC before they ask for authorization or pre-authorization.
- They need to provide the following details:
a) Your right to choose the currency (local or home/billing currency).
b) The exact amount of the transaction in both the local currency and in your billing currency.
c) The exchange rate that will be applied if you choose DCC.
d) Any additional fees associated with DCC, such as commissions or VAT.
During the Transaction (if you choose DCC):
- If you agree to use DCC, you must be provided with a clear receipt containing:
a) The total transaction amount in both the local currency and the converted currency.
b) The corresponding currency symbol or code for each amount.
c) The exact exchange rate used for the conversion.
Here is the illustration of Transaction Receipt which involves DCC
Alright, let’s face the reality check!
Here’s the catch!
Fees
“Convenience comes with a price!”
Exchange Rate
This is the standard conversion rate between currencies, like how many rupees you get for one Euro. It changes based on market conditions.
But here comes the big fish!
Markup Fee
The DCC Markup Fee is an additional charge applied by merchant’s operators when offering cardholders the option to pay or withdraw cash in their home currency instead of the local currency.
i) Markup Rate:
The DCC Markup Fee is typically represented as a percentage added to the interbank exchange rate, which is the rate at which banks exchange currencies with each other. This markup rate can vary widely depending on the merchant, ranging from 3% to 7% or even higher in some cases.
ii) Difference from Interbank Rate:
When a cardholder opts for DCC, the merchant applies their own exchange rate to convert the transaction amount from the local currency to the cardholder’s home currency. This rate is usually less favorable than the interbank rate, resulting in the cardholder paying more for the transaction.
Cardholders should understand that the DCC Markup Fee represents an additional cost imposed for the convenience of paying in their home currency. However, this fee is often not transparently disclosed, making it challenging for cardholders to compare the true cost of DCC with other currency conversion options.
(NOTE: Both Exchange rates and markup fees are set by merchants and their acquirers.)
Now our touchpoint!
Chargeback
Here are some factors that can contribute to DCC chargebacks:
- Miscommunication or Misunderstanding: Sometimes cardholders may not fully understand the implications of choosing DCC, leading to confusion or dissatisfaction with the final transaction amount. This misunderstanding could prompt them to initiate a chargeback.
- Mismatch Exchange Rates: Errors in the exchange rates applied during the DCC process can lead to discrepancies between the amount the cardholder expected to pay, and the actual amount charged. If the cardholder disputes the transaction due to this discrepancy, it could result in a chargeback.
- Hidden Fees or Higher Costs: Cardholders may be unaware of hidden fees or higher costs associated with DCC along with their home currency. If they feel they were misled or charged unfairly, they may initiate a chargeback.
- Merchant Non-Disclosure: If merchants fail to properly disclose DCC terms, including exchange rates, fees, and the cardholder’s right to choose their currency, it could result in disputes and chargebacks.
P.S: What topic do you think we should explore next? Let us know in the comments.
