There are some countries, such as Greece, with intense tourist traffic from all over the world. In cases like these, banks and acquirers that have terminals located at major tourist attractions see a sharp increase in transaction volumes that starts at May, lasts throughout the summer and starts to decline in October. It's no wonder that transaction numbers go through the roof mostly because of acquiring traffic that increases.
If an acquirer or bank find themselves having a lot of well-placed terminals in such a scenario, then an attractive solution that's worth looking at is Dynamic Currency Conversion or DCC at the ATM and the POS. When a cardholder that comes to Greece from outside the Euro zone tries to perform a cash advance at the ATM, the acquirer gives out Euro notes or charges for goods and services in Euros. In order to do that, the acquirer first requests authorization from a card association which in turn routes the transaction to the issuer.
During this process, the card association or the issuer have to do a currency exchange in order to buy Euros. When this happens, a small percentage is charged by whoever is doing the currency exchange and is added to the settlement amount that is debited to the cardholder account. Sometimes this is done by the card issuer, who directly charges the account of their cardholder with this FX charge. Most commonly, this is provided as a service by the card associations to the issuers but when this happens issuers can (and frequently do) request from the card associations an additional percentage to be charged. In essence, the cardholder pays for the FX charge which is pocketed by the card associations and/or the issuers.
The acquirer typically does not see any part of this action. Unless the acquirer performs DCC at the ATM or the POS. When this happens, the cardholder is given a DCC offer by the acquirer at the transaction terminal: get billed in Euros (the transaction currency) or get billed in your own currency at this rate. If the customer selects the DCC offer the acquirer gets to specify the exchange rate, keeps the FX commission and sends the transaction to the card association with the transaction currency, the settlement currency and the exchange rate used.
Why would a cardholder choose DCC? Most of the time, the answer is simply because the cardholder is familiar with his own currency but not the local currency. A Briton understands 100 British pounds but needs to think about what 100 Euros mean. Some cardholders compare the exchange rate of the DCC offer to that given by local exchange rate kiosks and choose the DCC offer because they perceive that it is attractive. Whatever the reason, the business case is huge for the acquirers as they're taking a piece of the pie out of the card associations and the issuers. There are some hidden pitfalls here and there as DCC is a pretty complicated process especially with clearing, settlement and disputes. But still, the business case is very real.
There's a small little catch. It's easy for the acquirer and the merchant to get greedy. Too greedy for their own good. Cardholders forget their typical transactions after a few days but they remember their bad experiences for a very long time. And they let their friends know. That kind of negative viral marketing can go a long way towards hurting the acquirers and the merchants that don't play nice.
How does greed come into play in this business? By understating the simple fact that more DCC uptake means more income. When offering DCC, merchants are supposed to clearly present this as a choice and not as mandatory to the cardholder. Merchants may not do this simply to get the added income; this is particularly true for specific merchants such as hotels. Acquirers, on the other hand, may elect to elevate their exchange rate commissions at specific times and specific places. For example, it's easy to think that for transactions originating from bar or other type of entertainment facilities at 2:00 after midnight the acquirer can get away with doubling their exchange rate - the cardholder probably has other things in mind to notice the inconspicuous exchange rate offered at the terminal.
Eventually, this doesn't go unnoticed. The DCC process is already associated with the word "scam" by some cardholders, simple because they were raped once (or, alas, more than once) in Italy, Spain or Ireland to name some of the European countries where DCC is in widespread use. Eventually, cardholders don't even look at the exchange rate offered and they prefer to deal with the devil they know (Visa, MasterCard and their own bank) than get charged through the nose. Acquirers looking to implement DCC should pace themselves and realize that, if configured wisely and respectfully towards the cardholders, it can provide a respectable source of income.
