On 28 March 2018, the European Commission presented a proposal for an amendment to Regulation (EC) No. 924/2009 on cross-border payments within the EU (EU Fees Regulation). With the amendment, the Commission wants to create new information obligations regarding currency conversions. One of the Commission’s aims is to address some of the problems related to the dynamic currency conversion (DCC) as offered for credit card payments.
Currency conversions? Who or what is DCC?
Before we take a closer look at the Commission’s proposal, it is important to first of all clarify what DCC really is. According to Wikipedia, dynamic currency conversions | DCC is
a process whereby the amount of a Visa or MasterCard transaction is converted by a merchant or ATM to the currency of the payment card’s country of issue at the point of sale.
For those of you who prefer a more practical definition, we can explain it with the following example. Theodore May, a British citizen, wants to buy a bottle of “Tennessy Paradis Imperial” before Brexit. For this, he travels to Paris, where he has located a bottle of this exquisite cognac on offer for an unbeatable 1,500 euros. However, as a tradition-conscious but modern Briton, he is not a fan of cash and would therefore like to pay for the noble drop with his British Floyds MasterCard. After he has inserted his card into the merchant’s card terminal, the terminal offers him to pay the purchase price either in euros or British pounds (GBP). This possibility of paying the purchase price in a currency other than the dealer currency is called DCC.
For the payment in GBP, the card terminal offers a DCC exchange rate of 0.9333, which results in a purchase price of GBP 1,400. Since Theodore saw the bottle in London for GBP 1,800, he accepts what he thinks is a good deal. He doesn’t know the current exchange rates. At home, Theodore is informed by his wife Philippa that Floyds Bank would have offered him a much better exchange rate, so that Theodore would only have been charged GBP 1,350 if he had paid in euros. After washing down his anger with a glass of Tennessy, he writes a letter to EU Commissioner Valdis Dombrovskis to complain about what he calls a “rip-off”. Such “crap” should be forbidden, he writes, before drinking another glass of Tennessy.
What does the Commission want?
As Valdis takes the concerns of EU citizens seriously (even of those who no longer want to EU citizens), he looks into Theodore’s concerns. However, he does not think much of banning DCC as he is in favour of consumers having additional options. His colleagues also tell him that the DCC exchange rate does not always have to be worse than the exchange rate offered by the relevant card issuer. Valdis therefore wants customers like Theodore to be informed in future about the costs involved in using DCC. He believes this would allow customers to decide whether they would rather use DCC or the currency conversion offered by their card issuer. For this reason, he instructs his colleagues to draft a law that imposes exactly such an obligation to provide information on the fees involved.
Admittedly, we don’t know if the story really took place like this. What we do know, however, is that the Commission would like to add two new articles to the EU Fees Regulation, which would impose such an obligation to provide information on the fees involved. This obligation will take effect 36 months after the amendment has entered into force and will be specified further by the European Banking Authority (EBA). Until then, the fees that can be imposed on customers for the use of DCC have to be capped. Further details of the Commission’s plans can be found in its press release of 28/03/2018.
Does this mean the end of DCC?
I don’t think that this is the end of DCC. However, it is becoming much more difficult to give customers bad exchange rates. At the same time, this may well result in increased price competition between DCC providers and card issuers due to the additional transparency created by having to provide the required information. And competition is not necessarily a bad thing…
You are interested in the German version of this article about dynamic currency conversions (DCC)? Here you go.
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