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.

Oops. No way did the credit card companies want to lose out on their hefty fees. Visa International took in \$424 million in currency exchange fees for the fiscal year that ended September 2004, according to Robertson of the Nilson Report. That's nearly 30 percent of its annual revenue, he said.

This past April, Visa began adding a 1 percent fee onto any foreign transaction, whether dynamically converted to dollars or charged in local currency. But then in June, it suddenly rescinded the move, and went back to the previous policy of charging a 1 percent fee only on transactions made in foreign currency. In a statement, Visa said it made the change to "address issues raised by cardholders, merchants, and member financial institutions." In other words, almost everybody was upset. The company is "now reviewing the fee structure related to single-currency cross-border transactions," according to Rhonda Bentz, Visa's vice president of public affairs.

MasterCard currently charges 1 percent on foreign currency transactions only, but has announced that, in October, it will switch to charging 0.8 percent for all foreign transactions, with an additional 0.2 percent fee for transactions made in foreign currency.

Hefty Penalties

Whether you get socked with these fees -- and more -- all depends on the bank that issues your credit card. Some issuing banks, such as MBNA, are charging fees on any foreign transaction, regardless of whether you pay in dollars or local currency. According to MBNA spokesman Jim Donahue, the company levies a flat 3 percent fee on every foreign transaction; in the case of a charge made in foreign currency, MBNA absorbs Visa's 1 percent currency conversion fee.

So let's say you wander into a European shop that uses Planet Payment's DCC system and buy an irresistible trinket with your MBNA Visa card. Unless you request that the charge be processed in euros, you'll likely pay an extra 3 percent for the dynamic currency conversion. Then, MBNA will tack on another 3 percent for itself. That's a total of 6 percent on top of the price of your bauble. Consider what you spend on an entire trip -- at hotels, restaurants and rental car companies -- and it could be a hefty penalty.

In the same scenario, if you asked for charges to be run in local currency, typically the most you'd pay is the extra 3 percent charged by MBNA.

But wait! Just when you were ready to lie on the beach and sip a silly cocktail charged in local currency, there's another posibility. Bank of America currently imposes a 3 percent fee for transactions in foreign currency, but doesn't charge a fee for DCC transactions converted to dollars, according to spokeswoman Betty Riess. Chase does the same, spokeswoman Jessica Iben said. So with these cards, you'll pay about 3 percent more, no matter which currency you choose.

In our case, though, we did even better -- no fees on any foreign charges whatsoever, using a Capital One Visa. According to spokeswoman Diana Don, Capital One absorbs Visa's fee and adds no additional fees on foreign charges, whether they are made in dollars or the local currency. That's why we did so much better at our Irish hotel by paying in local currency.

(Other banks that have no fees attached to foreign transactions, according to Consumer Action, an advocacy group, are Amalgamated Bank, BMW Bank and Thompkins Trust Co.)

Bottom line: While MBNA cardholders could end up paying 6 percent extra by using DCC, and Chase or Bank of America customers will likely fork over 3 percent no matter which currency they choose, if you carry a no-fee card and pay in local currency, you'll come out the winner, with nothing extra added to your bill.

Global car rental chain Hertz has rolled out DCC to its corporate-owned outlets in nine European countries, according to Richard Broome, Hertz vice president of corporate affairs. Broome reported that in general, customers are satisfied with the "convenience" of immediately seeing their cost in dollars rather than euros, despite a 2.5 percent conversion fee -- but said that in some cases, Hertz has reversed the fee when customers complained. Broome said information about the transaction system is disclosed when customers pick up a car.

Shouldn't all merchants have to alert you about DCC? Visa's Bentz says yes. Visa requires merchants to disclose any add-on fees to customers, she said, and considers the DCC conversion-rate spread to be a fee. But during our Ireland trip, we were never once informed about it in advance or offered a choice.

DeLuca of Planet Payment claims the company's "disclosure and consent" method of informing customers is "very different from the abysmal experience" we had in Ireland. He provided us with a presentation that details how salespeople are to be prompted by the technology to ask, "Would you like to pay for this in your home currency?" Then the presentation continues, "If customer asks for exchange rate or final cost, sales clerk provides information." The clerk is then directed to enter the customer's currency choice into the system.

This is definitely a step up from our Irish experience. But nowhere on Planet Payment's prompt screen, or in a sample customer flier, does the company mention that you'll be anteing up a 2.5 to 3 percent premium for the convenience of paying in your home currency.

A Service to Consumers?

Hotels are taking to DCC in a big way. Fexco's Crowley says his company provides DCC services to the Ritz in London, the Mandalay Bay in Las Vegas and chains such as the Marriott, Intercontinental and Accor groups. The Starwood hotel chain is in the process of rolling out DCC for all its Asia-Pacific properties, using Planet Payment's system,according to Corporate Communications Manager Hwee Peng Yeo.

Yeo said in an e-mail that the company is "fully committed to the disclosure and consent requirements of Visa and MasterCard regulations." She outlined a procedure whereby customers will be asked at check-in whether they would like to pay in their home currency, based on the exchange rate in effect on their checkout date. Cardholders will then be requested to acknowledge their choice on the registration card, she noted. At checkout, she said, customers will be presented with both the local-currency price and their home-currency price and can opt out of the conversion.

Don Taylor, associate professor of finance at the American College -- a Bryn Mawr, Pa., institution that provides education, certification and degrees for financial advisers -- answers consumer questions for Bankrate.com, a Web site that provides credit rate information and other financial content. "You're taking a risk that you're not getting a competitive conversion rate if you're using DCC," Taylor said. "You're just adding another level in the transaction process for people that are looking to make a margin -- and they're looking to make that margin off of you."

Of course, as Planet Payment's DeLuca suggested, some merchants might forgo their financial gains from DCC and provide it merely as a service to consumers. But so far, no one we contacted is aware of this occurring.

Expect to encounter DCC in more countries, from more merchants. Planet Payment says the company plans to roll out its service in three more countries before year's end. "The market will continue to grow," the Nilson Report's Robertson said. "It's inevitable."

Gayle Keck and R. Paul Herman are freelance writers in Arlington.

Keck will be online to discuss this story Monday at 2 p.m. during the Travel section's regular weekly chat onhttp://www.washingtonpost.com.

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