In theory, they should make it easier to pay in foreign currency abroad. In practice, they often complicate the process and expose payment card users to additional costs. What are DCC transactions? When can they be profitable, and when should they be strictly avoided?
It is likely that most people who have paid abroad with a payment card or withdrawn money from an ATM have faced the DCC mechanism or dynamic currency conversion. In short, it consists of offering the payer the possibility of transaction settlement in the currency of the card.
Thanks to this, we immediately pay in that currency, and we do not have to be concerned about the currency conversion in the bank at an unspecified rate. In theory, this mechanism is to facilitate our abroad payments. In practice, however, whether it is profitable for us depends on the exchange rates offered. Those are set by the provider of the DCC function and not our bank.
How does DCC work, i.e. dynamic currency conversion
The basic assumptions of DCC have already been explained above. However, it is worth illustrating it with an example. We are going on holiday with our family to Greece, but we do not have a euro currency card with us. Instead, we decide to pay with a usual payment card in the currency, which we use every day in our country.
The waiter in the restaurant gives us a bill, then we ask whether we can pay by card. When we insert it into the credit card reader, the DCC service, if available, will offer us a settlement in the currency of our country.
In such a case, the waiter should ask us what currency we want to settle the transaction in — the currency of Greece, i.e., the euro, or any other. Depending on which option we decide on, the final amount of the transaction may be determined.
All this depends on the exchange rate set by the DCC service provider and the payment commissions it charges. It is worth remembering that these are not the rates and commissions of our bank. If we decide to use the DCC, all fees are set by the service provider and independent of the bank.
Alternatively, we can opt-out of the DCC mechanism and settle the transaction in the euro. In this case, the currency conversion and the calculation of any commission will be handled by our bank.
Which is more cost-effective? It all depends on the exchange rates and commission charged by the DCC mechanism and those charged by our bank. On the spot, during the payment, however, it isn't easy to compare it at a given moment. It will definitely be more profitable to skip the DCC mechanism and entrust the currency conversion to our bank. However, it should be remembered that this is a case by case issue and depends on the conditions offered by the bank.
The advantage of transactions using DCC is that we immediately know the final amount to be paid. Still, the statistics indicate that it does not necessarily have to be less than the currency conversion performed by our bank.
You use DCC — usually you lose
According to a report by the European Consumer Organisation (BEUC), which analysed payments in foreign currency in 13 countries outside the eurozone, each time the DCC service was used, the final cost was higher than in a situation when a bank handled the currency conversion. The difference in the final amount ranged from 2.6% to as much as 12%. That much the card users who decided to use the DCC lost. The most unfavourable DCC mechanisms were observed in the Czech Republic, Poland and Hungary.
Norwegian Bank also analysed this subject, verifying more than 1500 transactions of its customers conducted abroad. Only in 4 cases of ATM withdrawals, the exchange rate was more profitable than the one offered by the bank. Almost all clients of this bank lost on DCC transactions — on average 7.6%.
How not to lose money on card payments abroad
If the DCC mechanism is mostly unfavourable, why do so many people use it? This service evokes customers' uncertainty about their finances. After all, they do not know how much precisely the bank will charge them for a given transaction. Meanwhile, the DCC presents the final amount they will pay, for example, for the cash withdrawal from an ATM. This is one of the reasons why they decide to choose this option.
Another reason is the design of the screens which display DCC information. They are constructed in such a way that using DCC is the default option. A user who does not want to agree to it often has to confirm the decision several times, and at each stage, the uncertainties are further aroused.
So what should we do to not lose on card payments abroad? If we are sure that our bank offers a good currency exchange rate and does not charge a high commission, we should inform the staff of the credit card reader each time that we want to pay in local currency. In the case of ATMs, however, you should carefully read all the messages appearing on the screen and not agree to the dynamic currency conversion.
DCC vs multi-currency cards
The situation becomes even more complicated if we use multi-currency cards. Such a means of payment is becoming more and more popular (it will soon be available for Conotoxia.com clients). There is nothing strange about it; after all, we can pay in many currencies and save thanks to attractive exchange rates.
A multi-currency card works on a simple principle — it automatically recognises the currency of the payment and collects the amount due from the appropriate currency account. Basically, it functions similarly to DCC, so this mechanism is unnecessary.
Unfortunately, it looks different in practice. Each card is issued in a specific country. Therefore, Conotoxia's multi-currency card — although it supports over 160 currencies — will still be recognised by the DCC mechanism as a transaction settled in the currency of your country.
During the transaction, we may therefore be asked whether we want to settle the payment in our country's currency, even though we are in Greece, for example. If we agree to this, we will be charged with double currency conversion. First, the DCC operates and converts the euro into our country's currency at its rate. Then the multi-currency card will work. By default, when recognising a payment abroad, it will debit our account in euro, which will result in another currency conversion, this time with our home's currency back to the euro.
Beware of DCC also in your country
Customers should also be aware of the dynamic currency conversion mechanism in their own countries. In what cases may it occur? For example, when we work abroad and use a card issued by a local bank. In shops, it will be recognised as foreign so that the DCC service can be activated.
People who live and work in their countries, but for some reason, use a card issued abroad, may find themselves in a similar situation. They also have to watch out for the DCC, which may appear during payment in local shops.
Multi-currency card most profitable
How to pay to save the most? An ordinary payment card denominated only in local currency will not be the best solution when going abroad, even if we avoid transactions with the DCC.
A much better choice will be a multi-currency card, which automatically recognises the currency of the transaction and, if necessary, conducts an immediate currency conversion. Essentially, it is the exchange rate that is usually better than in the case of a bank currency conversion when paying with a "regular" local currency card.
Multi-currency cards will soon be available in the Conotoxia.com offer. The card will support payments in over 160 currencies. It enables withdrawals from ATMs worldwide, and the customers will gain access to 20 foreign currency accounts — completely free of charge. It will be a great means of payment, regardless of where we are. It will work both at home and abroad.