The dangers of dynamic currency conversion

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By Christopher Elliott

Processing 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.

The rising prevalence of the DCC

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.

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Optimal payment practices

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. The retailer should have informed him about the 3 percent DCC before he paid for his tickets. Visa spokeswoman Sarah Pew says Visa mandates retailers to disclose currency conversion rates and any associated fees and make sure cardholders are offered a choice to accept the DCC services. “Merchants must only do DCC with express cardholder agreement.”

Visa operates a global compliance program to ensure that consumers receive proper choice and disclosure. In other words, if you believe you’ve been deceived by a DCC, you can inform Visa, and it may be able to assist in rectifying 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.

Profiting from currency conversions

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.”

The ongoing challenge of credit card traps

Trevor Saxty, the president of Explore!, a tour operator in Oakland, Calif., that specializes in small-group adventure travel, expresses surprise at how few travelers are aware of these credit-card traps when they’re on the road, especially 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.” (Here’s how to win a credit card dispute.)

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. (Related: Exchange rate rip-offs, and how to avoid them.)

Of course, many of these fees are nothing more than shameless money grabs designed to exploit international visitors who lack awareness, can’t be bothered, or are powerless to stop them. But until authorities outlaw them, these foreign-exchange shenanigans are likely to persist.

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Christopher Elliott

Christopher Elliott is the founder of Elliott Advocacy, a 501(c)(3) nonprofit organization that empowers consumers to solve their problems and helps those who can't. He's the author of numerous books on consumer advocacy and writes three nationally syndicated columns. He also publishes the Elliott Report, a news site for consumers, and Elliott Confidential, a critically acclaimed newsletter about customer service. If you have a consumer problem you can't solve, contact him directly through his advocacy website. You can also follow him on X, Facebook, and LinkedIn, or sign up for his daily newsletter. He is based in Panamá City.

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