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Charge It . . . but Check the Math

By Gayle Keck and R. Paul Herman
Special to The Washington Post
Sunday, July 31, 2005

Faith and begorrah! Was it the work of currency conversion leprechauns? On a recent trip to Ireland, we were astonished to see our credit card purchases ringing up in U.S. dollars at most tourist-related merchants, restaurants and hotels. Clerks and wait staff told us their machines had been spitting them out this way "since last year," explaining that their credit card transactions were automatically converted to the currency of the card issuer's country of origin.

On the surface, it sounds swell: You see instantly what you're paying in your home currency. So what's the big deal?

It could be a bad deal. If the transaction is run in dollars, cardholders can get socked with a dismal exchange rate, compared with charges that are processed in the local currency (euros, for example) and converted at or near the interbank clearing rate by Visa or MasterCard.

Example: When we laid down a credit card at an Irish hotel, the 617.22 euro bill was "dynamically" converted to dollars by the hotel's credit card processing terminal, which printed out a ticket of $832.88, at the exchange rate of 1.3494 dollars to the euro. We requested that the charge be voided and rerun in the local currency, deciding to take our chances on the exchange rate we'd get through Visa. The resulting charge that appeared on our credit card statement (processed the same day) was $801.73 -- an equivalent exchange rate of 1.298937, for a difference of $31.15, or nearly 4 percent.

This burgeoning phenomenon is known as "dynamic currency conversion," or DCC. It turns out that some companies with a large volume of tourist business, such as Avis and Europcar, started the practice in select countries several years ago.

The service is offered to merchants by technology providers through the merchants' banks. It happens at the point of sale, so neither credit card companies nor the banks that issue your cards have anything to do with it.

It's important to note that DCC transactions currently apply almost exclusively to MasterCard and Visa. If you use an American Express card, your life is simpler and in some cases cheaper. AmEx is a closed system, without all the intervening banks and processors. The company adds a flat 2 percent currency conversion fee to overseas transactions and, aside from one merchant account, has "not had demand from merchants or cardholders for DCC," said spokeswoman Christine Elliott. (Discover Card doesn't add a fee for any foreign transactions, but is accepted in very few countries outside the United States.)

'Wave of the Future'

David Robertson, publisher of the Nilson Report, which analyses the consumer payment systems industry, says DCC is a way for merchants and their banks to benefit from international transactions where they didn't before. "You will find it at hotels, airlines, rental cars and restaurants serving tourists -- and in famous department stores, like Harrods in London," he said. According to Robertson, "two dozen" different technology providers offer the service.

Planet Payment is a U.S. company providing DCC for merchants in eight countries. Tom DeLuca, senior vice president of corporate development, sees it as "the wave of the future, where you can buy anything globally in your home currency." Planet Payment processes purchases for banks and merchants, adding as much as a 3 percent spread on the currency conversion. In other words, it calculates an exchange rate that leaves you paying up to 3 percent more than if your charge cleared at the interbank rate (the rate big banks charge each other). Planet Payment takes 1 percent, according to DeLuca; then merchants and their banks split the remaining 1.5 to 2 percent.

We tracked down our Irish hotel's DCC provider, Fexco Group. Deputy Managing Director Denis Crowley asserted that the "convenience" of seeing the amount to be charged in a customer's home currency is more comfortable for users -- and a better deal than changing hard cash at the local currency exchange bureau. But, based on our experience, it is clearly not always a better deal than asking that the transaction be run in local currency and allowing our credit card company to handle the conversion to dollars.

Crowley said his Killorglin, Ireland-based company adds an "uplift" -- that's a fee, to the rest of us -- of 3 percent on an exchange rate it derives from the Reuters service. He attributed our larger-than-3-percent spread to the fact that Fexco had fixed its rate on a Friday and we'd checked out the following Sunday, when the dollar was up slightly. We used a Capital One Visa card and actually received an exchange rate slightly better than that day's interbank rate.

When DCC began about four years ago, the theory was that it could all be a wash for consumers. Visa and MasterCard added a 1 percent conversion fee to foreign currency transactions; many of the banks that issue credit cards (Bank of America, Citibank, Chase) passed along Visa's charge and added on 1 to 2 percent fees of their own. Providers of the DCC technology figured they'd do an end-run by delivering transactions to the processors in dollars, thus sparing consumers the currency conversion fees and handing the profits to themselves, the merchants and merchant banks.

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