Complete guide to Dynamic Currency Conversion

With the ever-growing global economy, the need to facilitate international payments is becoming increasingly apparent. 

A solution to this can be found in the face of Dynamic Currency Conversion (DCC). The service, which offers a fixed exchange rate and certainty on the final billing amount, undoubtedly has many advantages for businesses and customers alike. 

But in order for both parties to get the most out of it, it is important to first understand how the service works.

So what exactly is DCC, how does it work, and are there chargeback risks? The answers to all these questions and more can be found in this blog post.

What is the Dynamic Currency Conversion?

Dynamic Currency Conversion, also known as the cardholder preferred currency (CPC), is a payment service provided by acquirers and their merchants. It essentially allows foreign cardholders the option to choose whether to make a credit or debit card purchase in the local currency or their billing currency. 

The DCC option removes any ambiguity around the final price that the cardholder will pay. This is because they will be able to compare the purchase amount in both currencies and make an informed decision. In addition, they will have a clear idea of their spending at the time of the sale. 

It is, however, important to note that the decision to accept or reject it always lies with the cardholder.

How DCC Works

The way DCC works is to convert the local currency into the cardholder’s currency. Processing such a transaction is simple and requires minimal steps. The POS device itself triggers the service automatically at the point of sale when it detects that the card is foreign. The only action required is for the client to choose whether to accept it or not.

The DCC service is available to all myPOS merchants and it is free of charge. The only condition for the service is for the cardholder’s billing currency to be supported by us.

To help you better understand how Dynamic Currency Conversion works, we’ve gathered all the necessary steps here:

1. The customer swipes their card through the magstripe of the POS terminal or taps it on the chip reader.
2. The device detects that the card is in a non-local currency and automatically triggers the option.
3. The POS terminal screen or the PIN PAD will then show the amount in the local currency, the billing currency and the exchange rate. Depending on the device, the customer may have to scroll down to see all the information.
4. The cardholder evaluates both options, selects the currency they want to proceed with and confirms the transaction.

In case the DCC option has been chosen, the receipt will show the purchase amount in the local currency, the applied exchange rate and the amount in the cardholder’s currency.

It’s important to note here that the cardholder has the right to terminate the purchase and process the payment as a non-DDC before the transaction is sent for authorisation.

An Example of Dynamic Currency Conversion

To make DCC easier to understand, let’s look at a real-life example.

Let’s say business travellers on a trip to Paris use their debit cards to purchase souvenirs priced at €50. At checkout, they have the option to pay in British pounds (the one currency they’re most familiar with) or euros (the foreign currency). 

Selecting the pounds option would mean that the DCC system will be able to instantly compare prices taking into account the current exchange rate. The DCC vendors will accumulate fees and exchange rates that the shoppers will need to cover.

Conducting a detailed price comparison between paying in euros and in British pounds is likely to uncover the substantial cost differences. To avoid paying extra fees, most would select the euro option. 

Note that when making cash withdrawals, the machine may ask if you accept DCC. 

DCC vs. Traditional Currency Conversion

One of the most important questions when it comes to DCC is how does it differ from traditional currency conversion. 

While both are used for card transactions between two foreign countries, they are characterised by fundamental differences such as: 

• Exchange rates;
• Fees;
• Options;
• Profit.

When it comes to the DCC exchange rate, it usually consists of a markup on the daily bank exchange rate. The markup, in most cases, represents a merger between the currency conversion fee and a profit margin (either for the DCC provider or the business).

In the case of traditional currency conversion, the exchange rate is set by the customer’s bank or card issuers once the payment process has been completed. Usually, traditional currency conversion offers competitive exchange rates for the customer as they are similar to that of the interbank. 

On the other hand, DCC usually comes with additional fees which are normally combined with the exchange rates. These can be different with each conversion and are based on the company and the DCC service provider. 

With traditional currency conversion, there may be hidden fees and foreign transaction fees to acknowledge. Traditional currency conversion fees are normally a percentage of the transaction amount. On standard, they’re considered individual from the exchange rate. 

For example, when the conversion is performed by a debit card payment processor, a credit card company, or an ATM network, the fees are usually around 1% of the transaction amount. This charge is then added to the processor’s foreign transaction charges, increasing the total cost to up to 3%. 

What Are the Benefits of DCC Transactions?

Dynamic Currency Conversion offers numerous benefits to businesses and customers alike, making it a win-win situation. 

Here are some examples of the main advantages DCC brings about:

• Comparison of the amount in both currencies: with the option to see the purchase amount in both the local currency in the foreign country and their home currency, customers can assess the conversion rate and make an informed decision on which suits them better. This access to a customer’s home currency or their own currency when making a sale gives them the ability to minimise risks associated with exchange rate fluctuations or extra charges. 

• Locked-in exchange rate: one of the most prominent advantages of a DCC transaction is the fixed rate. When you accept DCC, the exchange rate applied is the current market rate in addition to a markup for the product or service provider. This offers customers the security of knowing the exact amount they are paying at the time of the purchase, without having to worry about handling multiple currencies or conversion rates.

• Preferential exchange rates: with such transactions, often the exchange rate proves to be more favourable for the cardholder than the one the card issuer will apply later on. If a purchase is processed as a non-DCC, the exchange rate may end up higher than expected because of additional post-purchase fees. In addition, as opposed to traditional conversion, DCC offers revenue opportunities for companies and financial institutions from currency conversion rates. 

• Minimised disputes and chargebacks: international payments without it can hide a higher risk of chargeback. That’s because a customer may fail to recognise the payment due to a price that seems higher than the cardholder expected. 

• Immediate currency conversion: with DCC transactions, the currency conversion takes place immediately and in real time, at the point of sale. This is another powerful point of contrast with traditional currency conversion, where the costs are only visible once you gain access to your statements in the mail. 

Overall, DCC helps you improve customer loyalty and satisfaction. By being flexible and transparent with your customers and providing more options for them, you improve their experience when purchasing from you. This in turn increases the loyalty of your customers and encourages recurring activity.

Disadvantages of DCC

Despite the advantages that DCC offers, it also comes with a few challenges that are worth addressing:

• Potentially higher foreign transaction fees: DCC is often associated with unexpected additional fees, meaning that you’ll end up paying more than the interbank rate.

• Higher exchange rates: when compared to paying directly in the foreign currency, DCC may mean paying higher exchange rates. This is one of the reasons why a lot of people avoid dynamic currency conversion.

• Limited currency choice control: on some occasions, dynamic currency conversion can be automatically applied, meaning that customers don’t have the option to decline DCC. This is popular for busy locations like shoppers, terminals, or some ATMs.

• Misleading convenience: although DCC is presented as extremely convenient, it may not be the best option if you’re looking to save money. 

Make sure that you take into account these drawbacks and risks before using DCC for your next purchase. 

How to Avoid DCC Chargebacks

Chargebacks on Dynamic Currency Conversion transactions may occur when the cardholder does not recognise the payment. 

This may be a result of them not fully understanding the terms surrounding DCC or them not being the one to select the option. 

To avoid having to deal with chargebacks, consider the following:

• Inform all members of your staff about the service so they know how to react when handling international transactions.

• Always be honest, open, informative and transparent with your customers.

• Never choose the option by default, especially without the cardholder’s knowledge.

• Do not try to influence the decision of your customer whether to avail of the service or not.

When considering currency conversions, make sure you can properly calculate your exchange rate. You can do this by using an exchange rate calculator online or in the form of an app. Providers like Mastercard and Visa offer such solutions that are available to the public. 

Takeaways

Dynamic Currency Conversion is a service, which provides international cardholders with the freedom to choose whether to pay in the local currency or their billing currency at the point of sale. The service is free of charge and usually offers preferential exchange rates. 

To avail of the service, the customer should simply select their home currency when the option appears on the screen of the card machine. For their part, merchants have a responsibility to help their customers make an informed decision regarding the DCC service, but never to choose the option by default or without consulting the cardholder first.

Disclaimer: Please be aware that the contents of this article and the myPOS Blog, in general, should not be interpreted as legal, monetary, tax, or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.