You’ve probably never heard of the term ‘dynamic currency conversion’. But you’ve probably done it on holiday or on a business trip. And it’s most likely cost you money.
Dynamic currency conversion is a service merchants offer consumers when they are abroad so they can pay in their home currency. It is also offered by ATMs to allow the consumer to see how much they are about to withdraw in their home currency. For example, a Spanish tourist, when buying a souvenir in a shop in Poland, will be offered to pay in Polish złoty or in euros (the consumer’s home currency).
Always pay in the local currency.
In case the consumer chooses euros, the amount is immediately converted and displayed to the consumer in euros. And that means the currency conversion is made at the exchange rate of the merchant’s bank, which is often costlier to the consumer, than the rate of the consumer’s card provider. If the consumer chooses to pay in the local currency, the conversion would take place at the rate of the consumer’s card provider.
What is at stake for consumers?
The practice was created in the 1990s and is increasingly used across EU countries, especially in non-euro Member States. Firms that offer the service play the convenience card – the consumer can immediately choose to see the transaction in his own currency when paying. But it’s far more ‘convenient’ for the trader and his bank.
Dynamic currency conversion is a lucrative and opaque business model. It generates substantial income for merchants and their banks. Together with the merchant’s commission, and because merchants get a share if their customer chooses his own currency, the cost to consumers can increase the transaction amount by 5-6 percent. For tourists who make several payments and cash withdrawals, these fees can easily eat up a chunk of their holiday budget.
British consumers travelling abroad are being charged more than £300 million every year in dynamic currency conversion fees.
The practice is structured in a way that makes it virtually impossible for the consumer to make an informed decision at a merchant’s shop or cash dispenser. In order to take that decision the consumer needs to know the exchange rate of his card provider (Visa, MasterCard, Amex, etc.), the exchange rate of the merchant’s bank, the conversion fees if any, and then to be able to calculate in a fraction of a second what the best option is. Does this sound realistic?
And this form of currency conversion hits consumer pockets hard. British consumers travelling abroad are being charged more than £300 million every year in dynamic currency conversion fees. That means billions of euros to EU consumers annually. If consumers were aware, would they opt for the so-called ‘convenience’?
What does the law say?
An EU law on payments obliges merchants to disclose all charges to the consumer as well as the exchange rate used for converting the payment transaction BEFORE the transaction takes place.
Yet this rule can not work in practice.
Even if the merchant ensures total cost transparency at the time of the transaction, the consumer is still trapped by the complicated calculations he has to make. Furthermore, the cost of the service is almost always much higher than if you pay in the local currency. That’s why the advice is simple: always pay in the local currency.
So is there an added value to a ‘service’ that all informed people should try to avoid? In our view, dynamic currency conversion is a legal scam that costs consumers billions of euros every year. EU policy-makers are keen to help consumers make informed decisions, but that appears impossible when it comes to dynamic currency conversions. Policy-makers should fix the rules so that consumers are not hit by unjustified fees. For that, dynamic currency conversion should be banned altogether.