The dangers of dynamic currency conversion

burning dollarProcessing a credit card charge for overseas purchases used to be pretty simple. You swiped your card while on vacation, your bank changed the money from pesos or euros into greenbacks, and the amount you’d spent appeared on your bill. Maybe you paid a small conversion fee, but you also got a competitive exchange rate.

Not anymore. Just ask Jae Cuadra, who recently tried to buy a round-trip train ticket between the Swiss cities of Interlaken and Lauterbrunnen. The purchase, at a train station in Interlaken, went on his Capital One Visa card, which doesn’t charge to convert foreign currencies. But “for the first time, I was offered a choice,” says Cuadra, a registered nurse from Westbury, N.Y. “Did I want to pay in dollars or Swiss francs?”

Cuadra was being offered a service called a dynamic currency conversion (DCC), in which merchants process a charge in a cardholder’s home-country currency rather than in the merchant’s transaction currency. In a DCC, a company converts the purchase price of a ticket or hotel room from, say, euros to dollars directly at the point of sale. But if you’re not careful, a DCC can cost you a lot more than you expected.

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DCC offers are becoming increasingly common, according to travelers and industry experts. You’re more likely to run into them on Visa and MasterCard transactions overseas; American Express currently doesn’t allow such conversions on most of its cards, according to a company spokeswoman.

Why bother offering this service to travelers? The answer becomes clear when you read the promises made by companies that allow merchants to run DCC transactions and when you ask travelers to do the math: money.

As one third-party provider of dynamic conversion services promises prospective merchants on its Web site, “You will generate revenue on every DCC transaction.”

How so? Because merchants can charge for making the conversion. Cuadra says that he “hastily” and reflexively opted for dollars when he bought his train tickets. When he looked at his receipt afterward, he discovered a markup of 3 percent on the international conversion. “I ended paying more in dollars than if I’d paid in local currency,” he says.

How much you stand to lose on each conversion depends not only on the company but also on your bank. Cuadra used a card that doesn’t charge to convert francs to dollars. Other cards do — anywhere from 1 to 3 percent. The DCC charge is on top of that.

But if you want to avoid extra fees, “the most effective way to pay is either with cash in the local currency or make sure that your charges are in the local currency,” says Andrew Coggins, who teaches international management and hospitality and tourism management at Pace University.

Cuadra’s conversion didn’t happen by the book, according to a Visa representative. He should have been told about the 3 percent DCC before he paid for his tickets. “Visa requires retailers to disclose currency conversion rates plus any associated fees and ensure that cardholders are offered a choice to accept the DCC services,” says Visa spokeswoman Sarah Pew. “Merchants must only do DCC with express cardholder agreement.”

Visa has a global compliance program to ensure that consumers are given proper choice and disclosure. In other words, if you feel as if you’ve been duped by a DCC, you can let Visa know, and it may be able to help fix the unfavorable exchange.

An informal survey of other travelers suggests that accepting a conversion to dollars has no benefits save one: You get to know exactly how much you’re spending, in dollars, at the point of sale. But that information may not be worth the price.

Why is the travel industry trying to profit from foreign exchanges? In part, because it can. Who has the time or inclination to do the math while on vacation? But it’s also partly because banks that issue credit cards have profited from currency conversions, says Coggins. And not just with a fee.

Take a typical credit-card conversion from euros to dollars, for example. The euro is currently trading at around $1.30, but if you look at the exchange rate more closely, you’ll find two numbers — a “buy” rate and a “sell” rate.

“If I’m buying euros from the bank, I pay $1.33 for each euro, and if I have euros left and want to sell them back, I get $1.27 for each euro,” explains Coggins. “But the bank is not paying the same rates, since they are changing millions of euros to dollars. The difference between what they charge me and what they actually pay is where they make their money.”

Put differently, your credit card could represent a slow, unexpected money leak from the moment you cross the border until you come home.

Your bank is earning money by exploiting the spread between the “buy” and “sell” rates. Your credit card may be charging a fee for handling an overseas transaction. And the merchant you’re doing business with is taking a little extra off the top by converting your money into dollars for your “convenience.”

Trevor Saxty, the president of Explore!, a tour operator in Oakland, Calif., that specializes in small-group adventure travel, says that he’s surprised by how few travelers are aware of these credit-card traps when they’re on the road, and particularly of the dynamic conversion service. “These fees may add more cost to the transaction than the exchange rate itself,” he says. “It may cancel out any benefits of the credit card, such as earning frequent-flier miles.”

Saxty tells clients to use a credit card that doesn’t charge a foreign transaction fee and to always decline a dynamic currency conversion.

That’s good advice.

Of course, many of these fees are nothing more than a shameless money grab designed to take advantage of international visitors who don’t know any better, couldn’t be bothered or are powerless to stop it. But until they’re outlawed, these foreign-exchange shenanigans are bound to continue.

Should "dynamic" currency conversions be allowed on a credit card?

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41 thoughts on “The dangers of dynamic currency conversion

  1. someone should tell this to our men and women stationed overseas. as a solider or airmen you live in their countries; Spain ,England ,Germany ,Japan, etc- and you are faced with “would you like to pay in dollars” at least once a week (yes we shop on base but not all the time.)

  2. Also worth noting is that the DCC is offered for ATM withdrawals too.

    I first ran into this last summer in England. I was attempting to withdraw 100 pounds (GBP) from an HSBC ATM in the middle of nowhere. The screen popped up with a very cheery greeting and welcomed me as a visitor from the US and as a “Convenience” would charge me in USD. The DCC rate offered was around 15 cents more per GBP than the official rate. On 100 GBP, that’s $15! Needless to say I declined the “convenience” and had the transaction go though as GBP. My bank gave me the official rate and only charged 1% for the conversion. A much better deal!

    So far I have not had any issues with merchants when I decline the offered DCC. But I also tend to just get cash from a bank ATM and pay with that for most things except hotels, rental cars and fuel.

    I have a couple credit cards that do not charge the foreign exchange fee. I thought they would use a bad exchange rate to bill me to make up for it, but so far the rate has always been the exact same rate that Visa or MC posted for the day.

    Oh, and as far as banks paying exchange rates on their credit and debit card settlement which they attempt to use as an excuse for the 3% extra charge they want to pass on to you? Doesn’t happen. Your bank is payed or billed by the card network (Visa, MC, American Express) in its home currency, never in any foreign currency. The card networks move so much money around every day that they don’t actually do any (or do very little) foreign exchange. When all the daily transactions are netted out worldwide, there usually is no need to move any money cross borders. So that 3% the banks charge is pure profit for them in addition to the merchant interchange fee they receive.

  3. I don’t have a problem with DCC as an informed option. If a merchant offers me the choice and says the cost is x% and I can decline then that’s fine. My problem, and its happened to me several times in Asia so far this year is when the merchant automatically does the conversion without notice or option, you just get your receipt stating the charge in dollars. Now I say to the clerk that I’d like to be charged in whatever the local currency is before I hand over my card. If they say they can’t do it or say its programmed into their system, Or some other excuse I either pay cash or go elsewhere.

    1. You can’t go elsewhere after you’ve already eaten the meal, but yes, I agree that when possible that’s the thing to do. It’s a ripoff.

      1. I’d check my receipt before leaving the counter, well before I’ve actually consumed the meal. The only time I haven’t is when Im on the go, but by then I’m not usually in the same place to inquire with the food service purveyor. If I was sitting down at a meal and presented with the bill in USD I would inform the server i wanted to pay in the local currency as I was presenting my CC and if afterward found I was charged in USD, I would summon the server and require the bill charge be corrected into the local currency, and if necessary I would speak to the manager to correct the issue, and if they then refused I would refuse to sign the charge authorization and pay cash.

    2. PsyGuy, see my question to you above. Let’s say your CC charges a 3% foreign transaction fee based on the origin of the charge. You go to a store in Italy and purchase a $100 sweater, and they inform you it’s only 0.5% extra to be charged in USD. Under what conditions would that charge be favorable to you?

      1. As I wrote above, if I was expensing that sweater, and it was just after my most recent statement, then being able to submit that receipt for reimbursement quickly which would require me to do it in USD, as opposed to waiting for the settlement statement, then that might very well be worth the half percent or $.50 charge. I have to submit all my travel expenses at one time, or they are disallowed unless the expense has been pre approved, so depending on my other travel expenses, it would be worth it to pay the $.50 DCC fee so that I could submit ALL of my expenses sooner, instead of waiting on the sweater charge to be settled in my statement.

    3. The problem is that DCC is very rarely, if ever, adequately disclosed. Wherever I’ve seen it used, the bill is just foisted on you in USD. No being asked which currency you prefer, no disclosure of the hidden fee you’re paying by way of a crappy exchange rate, no mention that you’re probably also going to have to pay a foreign transaction fee on top of it all. It’s little more than a profitable trap for the unwary.

      1. I agree, and for most of us on this forum, who are savvy travelers, we know better. Most of the traveling public don’t have a clue. Maybe Visa/MC or the issuing banks should send out a notice by email or in your monthly statement advising consumers about the existence and mechanics of how DCC works.

  4. Firstly, I thought I would point out that even if you do accept this “competitive offer” some credit cards STILL charge you a foreign transaction fee even if the charge is in USD meaning it usually makes even less sense to use DCC. Since you are going to get charged either way, you might as well get charged in local currency, as it’s unlikely your credit card will be more expensive than the DCC option.

    However, on a recent trip to Costa Rica, I was actually charged MORE by Visa/Cap One than local merchants charged to convert. For convenience, nearly every merchant in places tourists visit takes USD, and does so at the rate of 500CRC:1USD (makes the math easy.) Depending on the week, the interbank rate might be a few CRC lower or higher. (Note: this has not always been the case, but it has held for the past couple of years.) I suppose Costa Rica is somewhat special, because there the USD is pretty much treated as a second currency and often used for everyday transactions (even by non-tourists) vs. being treated like a truly foreign currency. (I saw plenty of USD in the drawers of random roadside grocery stores or cafes that were in places that were anything but touristy.)

    (The lack of knowledge amongst travelers of the best way to convert money was typically high. The airport exchange booths had long lines, despite their horrible markups, just like in pretty much every international airport. This was more tragic than usual since this was one country where you didn’t even have to use the trick of finding a bank ATM…)

    Where you REALLY have to look out is places that post individual prices in both USD and local currency. At such places, it’s usually pretty safe to assume that the USD prices will be a horrible deal. At a bar in a touristy place in Mexico I was at once, it was something like a ~15% markup! Make sure you insist on being charged in local currency in such places; they will conveniently assume you want to pay USD if you don’t. Your credit card receipt will confirm which currency you’ve been charged in.

  5. I agree with sirwired: Credit cards that have foreign transaction fees treat charge those fees no matter what currency the charge is made in. They use the country of origin to decide whether to charge it. It’s not a “conversion” fee so much as an origin fee, and the ‘conversion’ calculation is fair once you pay the foreign transaction fee.

    So other than the OP’s understandable “reflexive” decision to have the transaction charged in dollars – is there any value whatsoever in DCC? It’s not like your CC bill is going to show up in Euros otherwise.

    Psyguy, for example, assume you were an informed consumer and told that the DCC is a mere 0.5% extra. What advantage could having the charge made in USD possibly provide?

    1. None whatsoever. The only “advantage” is that someone who is closely keeping track of expenses in dollars knows then what the exact amount will be. But that’s a steep price to pay, as opposed to a quick calculation.

    2. No value to the customer in DCC – ever.

      Also, think about this. If you do accept the DCC, the price you pay will be higher than if you don’t. And your card issuing bank bases its 3% fee on the total in USD. So you are paying not only more for the item you are buying, you are paying even more in fees to your bank. While 3% of a few percentage points markup in the DCC is not all that much on a single transaction, it adds up.

      1. Good point — compounding the fee on top of the transaction. I’d like to just avoid it and take a big wad of cash on my next trip..but that has problems too.

    3. Well time is money is the main difference. When I submit my expense reimbursements, I have to submit those in USD, if I have all my receipts and invoices in USD I can scan them and send them off much faster, meaning I get reimbursed faster. When I have receipts in foreign currency I have to wait until I get the settlement statement from the card issuer, before I can submit my reimbursement. That can be two weeks to a month, which is a cost to me.
      My company won’t reimburse for the DCC cost anyway as it’s a convenience fee, so it’s an issue of is getting faster reimbursement worth .5% to me. For a $6 croissant it probably isn’t but I’d pay cash in a foreign country for that kind of purchase, anyway and charge it against my general per diem expenses.
      Anyway it’s an academic point because the charge isn’t half a percent, its 5%-15% depending on the merchant.

  6. I’ve got news for “visa”. *most* merchants that offer DCC, rather than ask if you`d like to pay in dollars or the local currency, do not ask at all. They present you with the pin pad and you see the amount in dollars. When you object, they then do it in the local currency. Yes, some do ask, but NO ONE in the past several years has disclosed anything about the fees., Visa has some work to do here.
    Quite frankly, it should be banned.

    1. Well, it isn’t technically a “fee” if you accept the DCC. It is only a different exchange rate than Visa or MasterCard will give you if the transaction goes through in local currency. The same as using the currency exchange booth at the airport. You just get a crappy rate. And why don’t the merchants ask? Because they get a piece of that fee.

      And it is your card issuing bank that needs to tell you about the foreign transaction fee that they add to your purchases, not Visa or MasterCard, because it is your bank that adds the charge, not the card network.

      1. Mark, I am quite happy with how my bank charges things. They are entitled to make a profit and I get the convenience. What I don’t like is the merchants trying to get me to use the DCC. Hotels do it automatically without asking you – so I tell them every check in, NO DCC. Salespeople pretend to not even know what it is.

        I would prefer that the requirement was to present the purchase in local currency and those who wanted DCC could opt in, not the other way around.

        1. I am happy with the way my bank charges for things too, most of the time. And like you, I prefer not having the DCC forced on me.

          Unfortunately, since the merchants get a piece of the fee, it is in their best interest to get as many customers to accept it as possible. Also can’t blame them since they are just trying to make a profit as well. I just feel that the DCC was a bad idea all around and never should have been allowed.

  7. Numerous friends who frequently travel overseas told me about this new “idea” last year. They are finding that merchants don’t ask and just show you the bill in dollars hoping that you are just happy to see your cost in dollars. And, if you ask it to be changed to the local currency, you get a hassle. Why is every aspect of travel becoming so complicated? Expensive to fly, hassle to get on the plane, seats too damn small to fly that long, excessive fees on currency exchanges, hassle to pay – the list is becoming endless!

  8. My Capital one CC does not make foreign transaction charges nor currency conversion charges so there is no need to use DCC. Most of the time when you charge a foreign transaction your receipt shows the fee in the local currency. I have never been asked if I wanted to convert it. On a cruise their may be a block if you are from another country and want the cruise line to bill it in your local currency, but this should be denied unless there is a reason to let the cruise line do the exchange for you. When you get home you can compare the currency conversion rate you got and it is usually as good as or better than the local exchange rate at the bank in the host country and there is no fee like there is when you exchange cash.

  9. In Portugal once I was advised that I could pay with a CC but the establishment would add a 2% charge to cover what the CC company charged them. I thought that was fair.
    OH! American express makes a currency conversion charge and I think also a foreign transaction fee, so they would not like you to use DCC. I think even if you use DCC you could still get a foreign transaction fee. Any ideas.

  10. When we were in Spain last October, we knew that we didn’t want to be charged in dollars when using our credit card, and erroneously thought that if that was an option, we would be asked if we wanted to do it. Not until we got home did we realize that several restaurants had charged us in dollars. It may be VISA’s policy that customers should be asked, but compliance is not there. While a piece of me wants to make a fuss about it, my time is worth far more than the tiny amount I might get back. However, a warning should help others avoid this problem. We know now to make sure we are charged in the local currency.

  11. Every time I go onto the Elliot site, a message covers part of the screen for me to sign up AGAIN for the e-mail, which I already get. Now there is no way to get rid of the message which covers part of the text. VERY annoying,every time I try to read the blog, and unnecessary. Elliott, can you fix this??

  12. ou’re missing the best part of this site.
    You DEFINITELY want to sign up for ELLIOTT’S E-MAIL, my freeweekly newsletter.

  13. This practice is invasive, and is getting more and more so every day. Seems the airlines and hotels aren’t the only ones engaging in “drip pricing”. Fortunately for most of my guests, Panama uses the US dollar interchangably with the local “Balboa”, on a one-for-one basis. This alleviates any currency exchange math since most guests carry US cash.

    For those guests whose home currency is not US, I always advise to go to a large bank in Panama City (or other many centers in Panama), and exchange their currency for US dollars directly with the bank. This way, fees are reduced or eliminated altogether.

  14. Always say “No”. Be fair Chris, it’s also much simpler than it used to be. Today you can see instantly online what you spend overseas. In the past you had to wait for the statement or call the bank.

  15. I started to use in my trips a pre-paid card / debit card charged in the destination currency to avoid these and other problems. I don’t have any surprise at the payment moment, and it avoids me the extra 6% tax my government charges me for any int’l transaction via credit cards… 😉

    Of course it doesn’t cover all the countries, but my usual destinations are covered.

        1. Yes, it is Brazil. But this rate of 6,38% is only for credit card operations. If I use my bank debit card to withdrawn money from any ATM overseas, I’ll pay a 0,38% rate of this IOF tax. In both cases, plus all fees and exchange rates my bank will charge me.

          The official goal was to refrain the expenses when traveling – these expenses jumped from USD 16 billions in 2010 to USD 21 billions in 2011.

          Of course it didn’t work (at least for the official goal) – the prices for consumer goods in Brazil are higher than in US (and probably most of the world). When traveling, Brazilians usually spend a lot of money to buy electronics, clothes, perfumes, etc. These items may cost 2, 3 times or more than in US.

  16. how stupid can you get.
    When in Switzerland, who on earth would anyone get the bill charged the the NAP (North American Peso) otherwise known as the US dollar.

  17. Ai yi, whenever they come up with a new “something to serve you better” you just KNOW it’s going to cost you. Just like those airline miles cards!

  18. Chris – I was looking at buying some new luggage and just for fun, was checking the Ryanair site to see if the “international” carry on met their restrictions. it does not.

    I was reading their conditions of carriage and saw the information regarding credit card billing.

    They stipulate that DCC WILL be used and there is no choice.

    I immediately thought of this article and the statement that Visa requires a choice be given. Ryanair does not appear to do this, so they must be in violation of the Visa policy.
    Passengers who pay for their flights with a credit card billed in a currency other than the currency of the country from which the flight departs will be charged in the currency of issue of the credit card, inclusive of a ‘foreign user’ charge but you can check the actual amount to be billed in the currency of your card prior to payment being made.

    It is under article 18:

    1. Bill_A, it looks like Ryanair’s T & C have changed since your post. They no longer require DCC & I’m guessing they got in some hot water with Visa/MC over their illicit policy.

      1. I wish that Visa/MC would get on Marriott for forcing it upon customers who use express check out, even if they have specified NO DCC in advance.

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