It is a common scenario when shopping abroad with a debit or credit card, that sometimes you are asked if you would like to pay in the local currency or your home currency? This could apply to an electronic payment terminal or an ATM if you are withdrawing cash.
Perhaps you are in a restaurant, a hotel or a department store. The merchant hands you the card machine and prompts you to respond, local or home currency? Certainly, there is a psychological effect when you view the price in your home currency. You know the currency and you feel comfortable with the value. The foreign currency is something that is surrounded in mystery and requires knowledge of the exchange rate and a mathematical calculation to determine the true value in your home currency. Invariably, this makes the transaction ‘feel’ more comfortable in your home currency. What should you do? This is a dilemma that we at Unique Boutique Travel have experienced many times.
Invariably,you should opt for the local currency. But why?
There are several parties involved here and all they are trying to make their cut from the sale, some legitimately and some are trying to take advantage of the psychological uncertainty. First, there is the merchant, they are making their money by setting the price and profiting from the sale in local currency. However, as we will see they too can profit from DCC.
Second, there is your bank, which makes money from possibly an annual fee for the card and a small foreign exchange (FX) charge when the transaction is converted to your home currency. This FX charge could be a flat fee or an FX charge that is at or very near to the market FX rate.
Finally, there is the vendor that provides the card machine utilised in the sale. They will profit from whatever transaction fees and charges they pass on to the merchant, plus an additional charge should you choose to pay in your home currency. This additional charge is known as Dynamic currency conversion or DCC.
Note: Some DCC vendors will pay a commission to the merchant for DCC transactions. In this instance, it is the interest of both the merchant and the DCC vendor to encourage the transaction to be made in the home currency.
What is DCC and how does it work?
DCC is only available at merchants that have signed up for the facility with a DCC provider.
When a customer is ready to pay for a transaction and chooses to pay with a debit or credit card, the payment terminal of the DCC merchant will determine the card’s country of issue. If it detects a foreign card, the transaction will then be routed through the DCC provider, which will offer a DCC transaction to the customer.
The terminal will provide the option to pay in the local or home currency. The cardholder can then select whether the transaction is to be processed in the local or home currency. If the home currency is selected the price of the transaction will be displayed in that currency. The DCC provider will apply an exchange rate to the conversion that may be considerably higher than the current market rate.
How much does DCC cost?
DCC allows the merchant, the merchant’s bank or the ATM operator to charge a markup on the exchange rate used. The rate is typically 8-10% higher than the market rate, but can be much higher. Where the DCC markup is less than the card issuer’s currency conversion rate, DCC can benefit the customer. However, in nearly all cases, DCC markups are considerably higher than the card issuer’s rate.
How can you avoid incurring unnecessary DCC charges?
There are two simple suggestions to avoid DCC charges:
- Pay cash.
- Always opt to pay with the local currency. If the merchant insists that you pay in your home currency, void the transaction and walk away. Report voided transactions to your card issuer.
An 8% surcharge on a round of drinks or a restaurant meal doesn’t sound like much, but the course of a few days or weeks the costs can add up. The money saved could go towards your next boutique travel experience.
In summary, when using a credit or debit card for your purchases abroad, always pay in local currency.