Article: Why is Dynamic Currency Conversion Even Legal?

[oz_mark]

Except it’s not the merchant directly charging you the forex fee. It’s a 3rd party creaming a junk service fee that’s completely useless.

The merchant will happily take your payment in local currency (and usually no card payment fee - unlike AU/NZ).

My experience in a few cases is that they don't take it 'happily' in local currency.

 

[SYD]

My experience in a few cases is that they don't take it 'happily' in local currency.

Recent travels in Europe and most the staff (usually restaurants) normally prompt you to pay in EUR.

Some hotels have had a bad reputation processing without asking/telling you. But that’s been very rare in my experience.

Upthread, I mentioned a friend in BCN who advises his clients to pay in EUR but some opt to pay in home currency - although he doesn’t mind getting the kick back…

 

[serfty]

That's exactly what I am getting at, and DCC makes no difference to the process. If you already pay POS fees of 1% to 2% in your home currency then it shouldn't be a surprise if someone overseas does it as well and adds a currency conversion fee and variable spot rate.

It is not a surprise to me that someone overseas is doing it.

It is up to me to reduce my costs. Avoiding DCC is one way to do so. Avoiding use of a CC card that charges currency conversion fees is another.

So what I do is:

1. Keep an eye out for attempted charging in AUD via DCC while overseas &
2. Employ a CC that does not charge a currency conversion fee.

I have posted upthread where the DCC for a particular transaction would have been charged at a rate of 15% relative to the Mastercard rate that day, said MasterCard having no conversion fees and no apparent arbitrage.

 

[Beano]

It is not a surprise to me that someone overseas is doing it.

It is up to me to reduce my costs. Avoiding DCC is one way to do so. Avoiding use of a CC card that charges currency conversion fees is another.

So what I do is:

1. Keep an eye out for attempted charging in AUD via DCC while overseas &
2. Employ a CC that does not charge a currency conversion fee.

I have posted upthread where the DCC for a particular transaction would have been charged at a rate of 15% relative to the Mastercard rate that day, said MasterCard having no conversion fees and no apparent arbitrage.

If you are going for a "fee free" conversion, check the rate your bank is giving you. How much does it vary from the mid-market rate? Is it worse than a bank with a fee?

"There is no such thing as a free lunch?". You will pay in some way.

 

[Beano]

Also when comparing conversions check the time and date they occurred. Currencies vary on a minute-by-minute basis. The AUD changed from 1.12 to 1.11 against the NZD over a period of one day. That's a change of 0.8%, almost a conversion fee's worth! It has been know to change by 3%. How does the AUD change? It has been known to vary by 6% over 4 weeks (July/August 2024) against the Euro. We are at the mercy of currency variations when travelling overseas!

Who keeps track of this on holiday? Few people. I certainly don't. It would spoil my holiday.

 

[SYD]

If you are going for a "fee free" conversion, check the rate your bank is giving you. How much does it vary from the mid-market rate? Is it worse than a bank with a fee?

“Banks” generally don’t do the conversion when using Credit/Debit cards OS. It’s VISA, Mastercard and AMEX (for most peeps). As posted earlier, VISA and MC publish (and update) their effective exchange rates with their built in fee (again, circa 0.5%).

If the bank or card issuer charges an international transaction fee (often 3%) that’ll be in top of the VISA/MC rate - often shown separately on your statement. As far as I know, all or most AMEX cards charge 3%.

"There is no such thing as a free lunch?". You will pay in some way.

As little as about 0.5% using an “international fee free” card. No escaping the VISA/MC conversion fee - that’s the fee you pay for using the VISA or MC systems. That’s seperate to what your bank may or may not charge for using their card and seperate to what the merchant might pass on to cover the cost of using a POS machine. Outside of Oz, NZ is one of the few other countries that I’ve been where you routinely see a card surcharge (of 1% to 2% fee).

Also when comparing conversions check the time and date they occurred. Currencies vary on a minute-by-minute basis. The AUD changed from 1.12 to 1.11 against the NZD over a period of one day. That's a change of 0.8%, almost a conversion fee's worth! It has been know to change by 3%. How does the AUD change? It has been known to vary by 6% over 4 weeks (July/August 2024) against the Euro. We are at the mercy of currency variations when travelling overseas!

This is not exactly new. The AUD was floated back in the 1980s! But we were still using travellers cheques, so you’d effectively locked in one conversion and fee.

In reality, the effective exchange rate you see doesn’t vary every minute. Buying several rounds of drinks at the same pub over a couple hours will invariably post at the same amount. Not worth worry about.

Who keeps track of this on holiday? Few people. I certainly don't. It would spoil my holiday.

Some people do get hung up about it. Again, really not worth worrying about. It is what is - it might go up one day and down another. If you luck in, the exchange rate could improve over the course of a trip and you’re eating lobster towards the end. Or it could go pear shape and it’s boiled rice.

If you want some certainty, try a coughty travel money card or better, something like Wise. You might luck in if the exchange rate falls or lose out because the exchange rate improves and you locked in at a lower amount - and then you back to worrying about exchange rates again…

One thing for certain, accepting DCC will just make that lobster at least 6% more expensive!

 

[Beano]

“Banks” generally don’t do the conversion when using Credit/Debit cards OS. It’s VISA, Mastercard and AMEX (for most peeps). As posted earlier, VISA and MC publish (and update) their effective exchange rates with their built in fee (again, circa 0.5%).

If the bank or card issuer charges an international transaction fee (often 3%) that’ll be in top of the VISA/MC rate - often shown separately on your statement. As far as I know, all or most AMEX cards charge 3%.

As little as about 0.5% using an “international fee free” card. No escaping the VISA/MC conversion fee - that’s the fee you pay for using the VISA or MC systems. That’s seperate to what your bank may or may not charge for using their card and seperate to what the merchant might pass on to cover the cost of using a POS machine. Outside of Oz, NZ is one of the few other countries that I’ve been where you routinely see a card surcharge (of 1% to 2% fee).

Correct, up to 3% with some providers, or even 100% when there is a fixed transaction fee, e.g. Parking machines.

This is not exactly new. The AUD was floated back in the 1980s! But we were still using travellers cheques, so you’d effectively locked in one conversion and fee.

In reality, the effective exchange rate you see doesn’t vary every minute. Buying several rounds of drinks at the same pub over a couple hours will invariably post at the same amount. Not worth worry about.

Some people do get hung up about it. Again, really not worth worrying about. It is what is - it might go up one day and down another. If you luck in, the exchange rate could improve over the course of a trip and you’re eating lobster towards the end. Or it could go pear shape and it’s boiled rice.

If you want some certainty, try a coughty travel money card or better, something like Wise. You might luck in if the exchange rate falls or lose out because the exchange rate improves and you locked in at a lower amount - and then you back to worrying about exchange rates again…

One thing for certain, accepting DCC will just make that lobster at least 6% more expensive!

I can go with that. I've never used DCC. Thinking of a pre-loaded travel card on my next trip. Wise looks good, but I have a little money in Cash Passport.

 

[JohnK]

If there is any rort it is in the lack of knowledge of the purchaser and in sellers pre-empting your choice as illustrated in other posts.
The process itself is not a rort and perfectly legal. You can accept or decline any service and take an alternative.

It is a rort. Just like ATM fees. Just like credit card surcharges. It offers nothing to the card holder other than knowing the inferior AUD amount. And if you know the amount is inferior not sure why anyone would use it. Personally I wish Dynamic Currency Conversion was never offered as an option on my card.

I know I may pay 3% foreign currency conversion if I don't have a fee free card and I do alternate between 28 Degrees which does not have foreign currency fees or Virgin Money, ANZ, NAB which all have a foreign currency fee. But everything I have seen with DCC points to 5%-6% charge if not more.

And I'm not stupid that I don't always use fee free card for foreign transactions. It depends on the situation and available credit limit at the time. We buy a lot of things from HomePro in Thailand. They do not accept 28 Degrees. Go figure. Can't be bothered arguing or finding out why.

 

[serfty]

If you are going for a "fee free" conversion, check the rate your bank is giving you. How much does it vary from the mid-market rate? Is it worse than a bank with a fee?

"There is no such thing as a free lunch?". You will pay in some way.

I did check the rate. The 28º gives very close to the Mastercard rate. Sometime slightly better, sometime slightly worse. In this particular MYR999 case referring to the Mastercard conversion rate for that day results in AUD347.12 - the statement shows $347.20, so 8¢ or 0.022% worse. If I'd paid the DCC amount of AUD499 that means the additional cost would have been $52.03 - much worse.

So, while not a free lunch, I had more money to spend than otherwise.

Direct Currency Conversion - you have to be alert.

Today I was paying for a hotel booking MYR999 using my 28º and the pinpad was handed to me to enter my PIN - I saw on the screen AUD399.

Handed back and said I wanted to pay in MYR, they indicated what to do and the transaction completed. I have checked my account and the authorisation is AUD347

$52! That's spot on 15% - really taking the p!55

Mastercard Currency Converter | Currency Exchange Rate Calculator

Mastercard currency converter tool calculates foreign exchange rates for all the major currencies worldwide to enable cross-border purchases and ATM transactions.

www.mastercard.us

 

[pyramidforce]

I think I agree with the general sentiment that as long as you avoid DCC you are fine with pretty much any other option.

Assuming you travel an above average amount and spend 10k per year overseas in person-present transactions,

0.5% Mastercard/Visa spread = $50
3% Bank FC rate + 0.5% Mastercard/Visa rate = $350 (not good but honestly if you have 10k to spend on a holiday do you really care)
Wise, HSBC or a similar pre-load with small exchange fee =$0-500 depending on if you get lucky or very unlucky with exchange rates
DCC=$1500

 

[oz_mark]

3% Bank FC rate + 0.5% Mastercard/Visa rate = $350 (not good but honestly if you have 10k to spend on a holiday do you really care)

Yes, I care, given how relatively easy it to avoid that charge. That's a hotel night or two!

 

[Beano]

I have noticed that Paypal doesn't give a choice. I can't set it on their website and a recent purchase did not offer a choice. I use Paypal in countries where the seller asks awkward questions like identity card number and get sticky if you use a non-European passport number.

 

[JohnK]

You may as well say any mark- up should be illegal, even finance companies must live! In some stores the mark-up can be 100% over wholesale.

Finance companies must live by ripping off people further? What ever happened to offering something useful? This is useless and only benefits the bank/finance company.

 

[SydneySwan]

I have an email from Agoda somewhere and I'll tell you that you'll struggle to avoid Agoda dynamic currency conversion.

Say you're staying in Thailand and you choose AUD as charge currency they'll go from THB-USD-AUD but use very poor exchange rates and it works out to 5% or more but never less.

If you choose THB you'll pay in THB but they'll convert to USD and back to THB and there'll be 5% or more difference.

I may use Booking.com pay at hotel feature but never use Agoda pay later feature. I pay now if I'm happy with AUD amount.

a bit off-topic but the Agoda pay later feature did once do me a favour. I rarely use the site and generally have only booked stays at very short notice but in September 2022 I booked a hotel in Devon for August 2023 in order to attend a wedding. I selected the pay later option without thinking. The AUD gradually declined over the year and I was thinking that was a very bad decision BUT it appears Agoda fixed the AUD-GBP exchange rate in September 2022 plus the 5% so when charged in August 2023 I ended up paying much less than the then current spot rate. Obviously it would have been even better to have paid in advance as I would have avoided the 5% fee completely.

I have read and reread the Agoda t&cs and believe that Agoda made an error and they should have used the Bloomberg Composite rate + 5% at the payment date.

 

[SYD]

I have noticed that Paypal doesn't give a choice. I can't set it on their website and a recent purchase did not offer a choice. I use Paypal in countries where the seller asks awkward questions like identity card number and get sticky if you use a non-European passport number.

I don’t use PayPal for foreign purchases anymore. I got fed up with cough rates. Especially the old “pay in AUD” but still get stung the local card 3%. Easier to just use my 28° MC directly.

They used to be ok.

 

[grandir]

Been seeing a lot of comments on this thread about the merchants benefitting from DCC and just want to set the record straight.

In the vast majority of instances where DCC happens, it is not the O/S merchant who is benefitting from it, it is the payment services provider who is benefitting i.e. the O/S bank who provides the credit card reader to the merchant to process their payments.

Essentially what DCC is is the foreign bank offering a "service" to both the merchant and the international customer. The merchant punches in the amount of euros they will charge you into the machine. The machine then reads your card as a foreign non-euro card and "offers" to charge you in AUD instead. You accept and the bank facilitating the purchase takes AUD from your card, converts it into euros, and gives the merchant the amount of euros they originally punched into the machine.

What DCC really is is the facilitating bank double charging you to (a) converting the EUR to AUD and then (b) converting the AUD back to EUR. This is why DCC is consistently around 5-6% vs the ~3% fee that your bank charges you. The forex fee that your bank charges you is really for your bank to convert your AUD to EUR before sending it to the foreign bank/merchant. So basically DCC is you unecessarily paying the foreign bank's int forex fee twice over. And that's even before you get slapped with your Australian bank's int forex fee.

TL;DR DCC is nothing more than greedy banks creaming ignorant tourists

 

[Beano]

Been seeing a lot of comments on this thread about the merchants benefitting from DCC and just want to set the record straight.

In the vast majority of instances where DCC happens, it is not the O/S merchant who is benefitting from it, it is the payment services provider who is benefitting i.e. the O/S bank who provides the credit card reader to the merchant to process their payments.

Essentially what DCC is is the foreign bank offering a "service" to both the merchant and the international customer. The merchant punches in the amount of euros they will charge you into the machine. The machine then reads your card as a foreign non-euro card and "offers" to charge you in AUD instead. You accept and the bank facilitating the purchase takes AUD from your card, converts it into euros, and gives the merchant the amount of euros they originally punched into the machine.

What DCC really is is the facilitating bank double charging you to (a) converting the EUR to AUD and then (b) converting the AUD back to EUR. This is why DCC is consistently around 5-6% vs the ~3% fee that your bank charges you. The forex fee that your bank charges you is really for your bank to convert your AUD to EUR before sending it to the foreign bank/merchant. So basically DCC is you unecessarily paying the foreign bank's int forex fee twice over. And that's even before you get slapped with your Australian bank's int forex fee.

TL;DR DCC is nothing more than greedy banks creaming ignorant tourists

It's really a merchant providing another service for its customers, like any other one. It's your choice which you accept, you know, like the Trivago ad! No point in winjing, whining,whinjin complaining if you aren't going to use the service anyway.

 

[SYD]

Been seeing a lot of comments on this thread about the merchants benefitting from DCC and just want to set the record straight.

In the vast majority of instances where DCC happens, it is not the O/S merchant who is benefitting from it, it is the payment services provider who is benefitting i.e. the O/S bank who provides the credit card reader to the merchant to process their payments.

Essentially what DCC is is the foreign bank offering a "service" to both the merchant and the international customer. The merchant punches in the amount of euros they will charge you into the machine. The machine then reads your card as a foreign non-euro card and "offers" to charge you in AUD instead. You accept and the bank facilitating the purchase takes AUD from your card, converts it into euros, and gives the merchant the amount of euros they originally punched into the machine.

What DCC really is is the facilitating bank double charging you to (a) converting the EUR to AUD and then (b) converting the AUD back to EUR. This is why DCC is consistently around 5-6% vs the ~3% fee that your bank charges you. The forex fee that your bank charges you is really for your bank to convert your AUD to EUR before sending it to the foreign bank/merchant. So basically DCC is you unecessarily paying the foreign bank's int forex fee twice over. And that's even before you get slapped with your Australian bank's int forex fee.

TL;DR DCC is nothing more than greedy banks creaming ignorant tourists

The merchant does get a kick back (to encourage them to enable the system) but yes, the DCC service provider takes the biggest cut. AFAIK, actually not the foreign bank, but a 3rd party “service provider” the payment is routed through. A bit like PayPal etc.

It's really a merchant providing another service for its customers, like any other one. It's your choice which you accept, you know, like the Trivago ad! No point in winjing, whining,whinjin complaining if you aren't going to use the service anyway.

Not necessarily. I believe it’s turned on by default and the merchant has to opt out - if they even know how to.

It’s a junk “service” that should be avoided. Defending it as some how the merchants right gives it some form of credibility. Which is doesn’t deserve.

 

[serfty]

It's really a merchant providing another service for its customers, like any other one. It's your choice which you accept, you know, like the Trivago ad! No point in winjing, whining,whinjin complaining if you aren't going to use the service anyway.

It is not so much being able to opt out of the service, it is that sometimes it is difficult to do so.

As per many anecdotes herein, DCC is presented as a default process and even sometimes as a fait accompli.

About a decade ago, I had a situation when checking out of the DoubleTree hotel in Kuala Lumpur where I was presented with an AUD docket to sign (before PIN's became the norm). I refused to sign and had it redone in MYR (or so I thought) - made no difference, I was still charged in AUD with a 5% DCC.

 

[JohnK]

It's really a merchant providing another service for its customers, like any other one. It's your choice which you accept, you know, like the Trivago ad! No point in winjing, whining,whinjin complaining if you aren't going to use the service anyway.

That's not right either. I don't want to be presented with that choice each time I make a purchase. I have to keep telling them to charge in THB and when wife is around they confirm with her that I dont want to be charged in AUD.

If they are really providing a service then it should be switched off as a default and if you want this service to switch it on. Same as international roaming. Ours is switched off by default.