Dynamic Currency Conversion – re-routing
currency conversion fee revenues – is a powerful tool that can add
additional revenue streams to a merchant’s and acquirer’s balance
sheet, writes Duygu Tavan
Go deeper with GlobalData
The US Department of Commerce forecasts that
foreign travel to the US will grow by 36% between 2010 and 2016 to
81 million visitors by 2016.
On the other side of the pond, VisitBritain
estimates that 30.7 million tourists will travel to the UK in 2012
and spend £17.6 billion. This influx of tourists means big business
for merchants and acquirers, and Dynamic Currency Conversion (DCC)
could be the key to generating more business and revenue. But is
DCC as straight forward as it sounds?
DCC lets cardholders to see, in real-time,
what they are paying by converting the currency of the country they
are visiting into their local currency, or one the visitor is more
familiar with, says Jayadeep Nair, vice-president, small business
and new markets, at Streamline UK.
Nair explains that this action eliminates the
currency conversion fee and the customer ends up paying the amount
that appears on the POS, without any further bank charges from
their issuer.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataThe merchant’s needs a DCC-enabled POS, or in
the case of an online transaction, a DCC-enabled e-commerce
solution. Once a transaction is initiated, the system automatically
checks if the card is eligible for DCC: The card has to have been
issued abroad and the local currency of the country where the card
was issued needs to be supported by the DCC service. In these
cases, customers will receive the option to pay in their own
currency or the currency of the country they are staying in and
will see both amounts displayed on the POS.
Consumer appeal
The customer can of course still choose to pay
in the local currency rather their own, in which case the
transaction will be processed as usual, as a foreign payment and
the amount paid will be converted by the card holder’s issuing bank
into its local currency. But, Francesco Burelli, partner at Value
Partners, says “the merchant always has to give consumers an opt-in
option for DCC”. The rate of exchange will in non-DCC cases will
not be disclosed at the POS, but will later appear on the bank
statement.
According to a white paper from First Data,
even if the customer was to ask their bank about the exchange rate
in non-DCC transactions, they would not be able to have a
confirmation “until days later” – which makes DCC a more attractive
payment.
Apart from the conversion rate, the issuing
bank also charges international transaction fees, which according
to statistics could mean an extra 7% of the total transaction cost
on top of an undisclosed rate of exchange.”
“Payment schemes do the actual currency
conversion using a market rate that embeds a small bid/ask
differential margin,” says Burelli. “Then the issuer applies its
foreign currency surcharge, which typically is between 2-3%. With
few exceptions, this is a practice applied worldwide even though
there are some card propositions, such as the UK Post Office credit
card, which do not apply such a surcharge.”
Conversely, when DCC is offered, there should
be a guaranteed exchange rate to the merchant – a rate that
converts the currency instantly.
“The transaction remains in that
currency through the settlement process until it is funded back to
the merchant in their own currency,” First Data explains in a white
paper. Not all merchant acquirers that offer DCC services offer the
guarantee exchange rate, which in turn means the merchant may not
be refunded the amount in dollars that was converted into the
customer’s currency at the POS.
The difference between the value at the POS
and the refunded amount will in such cases be due to currency
fluctuations or card association exchange rate adjustments.
In DCC transactions, the receipt will show the amount in both
currencies, the exchange rate and any other additional DCC-specific
disclosures.
Definining value
Just how much revenue a merchant makes from
DCC services of course depends on how many foreign-issued cards are
used and how many of those card holders actually choose DCC. First
Data estimates that between 70-90% of consumers opt for DCC if
given the opportunity.
The common understanding among acquirers is
that DCC provides a new revenue stream, increased consumer
satisfaction and higher sales, a positive effect on chargebacks and
currency risk mitigation.
First Data suggest that merchants see a 1%
increase in sales from credit cards, which is the average margin
paid to merchants per DCC transaction. For instance, if a merchant
generates $65m in sales annually, and if 20% of these are on
foreign credit cards and DCC acceptance rate is 80%, then the
retailer will generate $104,000 a year (in profits, not sales) from
DCC.
This figure seems comparatively low, and
Burelli has another example to compare DCC with non-DCC
transactions:
“Say a consumer pays €100. When the card
network converts it back into the card holder’s local currency,
this amount may go up to the equivalent of €100.50 (assuming a
conversion mark us of 50bbp). When the issuer then adds another 2%
to it, the consumer may pay around €103 for a transaction that was
worth €100. When the acquirer makes this conversion, that 2.5-3%
gets routed away from the issuer.
“Let’s assume there is a 3% mark-up.
Generally, about a third of the mark-up goes to the merchants as an
incentive to offer DCC, and the remaining two thirds are additional
revenue for the acquirer and the FX treasury service provider. In
some cases the FX conversion is not provided by the same bank as
the acquiring bank”.
“Customers do not really end up paying more.
They either save a little bit, or pay more or less the same amount.
The only real difference is which part of the value chain that
benefits from the conversion mark-up.”
Projects in
development
First Data has
launched a DCC service in co-operation with card payments
integration
software solution provider AJB.
First Data plans to introduce
the service in the US and Canadian markets. AJB provides merchants
with an in-store payment processing application suite, such as
Flexible Integrated Payment System – which integrates the PIN pad
device into First Data’s DCC solution – and Retail Transaction
Switch, which authorises DCC payments in real-time.
Payment processor Vantiv is also going live
with a DCC proposition in the next two months. It has inked a deal
with Planet Payment, a multi-currency provider and the two
companies will offer a DCC service for 5,000 ATMs in the US.
