Saturday, February 11, 2012

Dynamic Currency Conversion - What a Credit Card Holder needs to know

Dynamic Currency Conversion (DCC) is something I came across when I tried paying a bill overseas using my Indian Credit Card . When I was first offered this option, (in spite of the really cool name - Dynamic Currency Conversion), I did not choose to pay using that option as I was not really sure of what it was. But I see that DCC is becoming pretty popular and couple of my friends use this option to pay when they purchase something overseas. In this blog article I will briefly throw some light upon Dynamic Currency Conversion viz. something that all Credit Card holders need to know.

Gone are the days when people had to carry a lot of foreign currency bills when they travelled abroad for  work or vacation. Credit Cards and Forex Cards have made life a lot easier, by giving you the required amount in the local currency almost acting like carrying an exchange in your pocket! However with banks coming up with creative ways of milking customers, you need to be careful with how you use your credit card abroad.

Very recently, when I tried to use my Indian credit card overseas, I was offered a choice by the storekeeper - to use Dynamic Currency Conversion (DCC) or use the regular method to pay the bill. I never knew there were two ways of making a credit card payment in the first place. I always thought, it was swipe the card and your payment is done! Again the name 'Dynamic Currency Conversion' did sound very cool, and as a general thumb rule I have observed that when a financial transaction or product  has a really cool name, it almost always ends up burning a hole in my pocket! But curiosity got the better of me and I asked the salesperson what DCC was. I was told that since I was using an Indian credit card, I could pay in Indian Rupees if I chose to use DCC. The cashier would give me a bill showing Indian rupees and I wouldn't have to do all the forex conversions in my head. It sounded good but however, I still chose the regular method of bill payment and later when I did find out what this  'Dynamic Currency Conversion' was, boy was I glad that I had unwittingly made the right choice by avoiding it!

Dynamic Currency Conversion is a service provided by merchants (not network service providers like Visa or MasterCard) in some foreign countries where the merchant will convert the transaction amount of purchase at the point of sale from the currency in which the price (i.e., foreign local currency) is displayed into another currency (i.e. your domestic currency) using an exchange rate that typically includes a service charge.The currency exchange rate offered is over and above the wholesale exchange rate being offered by Visa/MasterCard normally.

If a customer chooses the DCC option for making payments he is approximately overcharged by 5 to 7%. It's a case of nice profit margin for the banks just by making the customer choose DCC option. Some merchants (particularly restaurants and merchants in parts of Asia and Europe) may even use DCC option without asking you!  If you don't use the DCC option, the conversion rate applied is the wholesale currency conversion rate. So you save approximately 3% in the currency conversion and you are also saved from paying the DCC service charge of 2.5 to 3.5%. Visa/MasterCard too charges a fee in the range of 1 to 2% for currency conversion but these charges are comparatively better to the charges applied for DCC.

Visa/MasterCard requires the merchant to disclose the DCC charges and they must provide the customer with a choice of getting the bill in foreign or the domestic currency. If you do not want to use DCC when making a purchase, then you have the right to refuse the offer and have your transaction billed in the foreign local currency, which will then use Visa's/MasterCard's conversion rate. If you did not agree to DCC and have been charged for the same then you can ask your issuing bank to revert back the charges.

So pay attention the next time you swipe your domestic credit card overseas!

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  1. This is a very useful article sir. When I had visited Kuala Lumpur airport, the cafe there had offered me to bill me in INR which was my local currency. I think they might be charging me this DCC

  2. ^^ Same here. I was billed in INR at Bangkok airport. The previous day, I was billed in Thai Baht at a electronics shop in Thailand. However, when I calculate the INR value of both the transactions, it doesnt make so much of a difference. The Thai Baht transaction got be a surcharge of 3.5%+cess at an exchange rate of 1.59 while the INR transaction didnt attract a surcharge, but had a bad exchange rate of 1.61. So either ways, its coming almost the same. :\

    1. Glad that you weren't overcharged but keep a look out for this all the same Berty!