You are buying your favourite Manga comics at a store in Tokyo. The bill for the eight books you have picked comes to ¥8,000. You tap your Indian credit card. The machine shows two amounts: ¥8,000 and ₹4,800. You think that’s great because ₹4,800 is a number you know and the exact amount that will go on your card statement. So, why not click that?
But you’re wrong. The reason is dynamic currency conversion or DCC.
This is a service where the merchant’s acquiring bank, which processes credit and debit card payments on behalf of a business—also called the DCC provider—allows the cardholder to pay in their home currency by displaying the amount to be paid right at checkout.
“The exchange rate applied in a DCC transaction is determined by the treasury team of the acquiring bank based on daily foreign exchange rates and a mark-up fee. This rate is displayed upfront to the cardholder before they choose whether to select local currency or the home currency,” said Sheik Mohideen, executive vice president of Worldline India, a provider of payment and transactional services.
In a non-DCC transaction, card networks such as Visa and Mastercard do the conversion later at a benchmark network rate. DCC is a real-time currency conversion service.
While it seems convenient because the price in your own currency can be seen immediately, the additional spreads and fees set by the merchant’s forex provider almost always work out higher than what your bank or card network would have charged. For instance, in the above example, by clicking INR instead of the JPY amount, the customer would pay roughly 3% more.
Effectively, in DCC the merchant pre-converts the foreign amount into INR and embeds a large spread inside that rate. The final value you pay includes the inflated rate plus other charges that can push your bill.
Studies from 2017 to 2019 by the European Consumer Organisation, an umbrella body for national consumer groups across Europe, showed that customers who opted for DCC ended up paying 2.6% to 12% more.
Apart from card payments at retail outlets, the DCC prompt can also appear when withdrawing cash from ATMs abroad.
How much extra you pay
In the non-DCC flow, the card network decides the exchange rate and your bank charges a spread called the forex mark-up. Indian debit and credit cards charge a forex mark-up of 1.5-4%.
In a DCC transaction, the spread is charged by the merchant’s bank and not your bank as the latter doesn’t exchange any money. However, even without your bank’s forex mark-up, the exchange rate offered by DCC providers works out far higher.
Besides, while there is no forex mark-up, most big Indian banks have now added a 1% or 1.5% DCC mark-up fee (plus 18% GST). So, you get hit twice—a bad exchange rate and a fee from your bank.
So, the forex mark-up charged by your bank is actually easier for you to understand because it is defined and published by the bank, whereas the DCC mark-up is not as visible and is buried inside the INR figure.
DCC particularly hurts when your card could be a zero or low forex mark-up card.
The benefit of DCC is that international travellers have the convenience of knowing exactly what they are paying in their home currency at the time of purchase, as per Mohideen. However, this would be helpful only if your card carries a huge forex mark-up, so you can quickly compare the net amount to determine whether the DCC rate is more favourable or not.
