Dynamic currency conversion was created in the year 1996.
Dynamic currency conversion is also known as a cardholder preferred currency.
It is a financial facility which is provided by Visa or master card credit holders while making a payment in the foreign country.
While exchanging the domestic currency with the foreign currency in the foreign country at the point of sale, one has to pay the cost of a transaction, it means one has to pay some charges charged by a foreign country.
But the Dynamic currency conversion enables their client to see the amount their card will be charged, expressed in their domestic currency.
This type of facility is not provided by the credit card company but by the third party operators by associating with the trader.
The DCC facility can be availed at the point of sale by the trader or their card processor.
A DCC operator must have to disclose the exchange rate which was used to convert the transaction at a time.
A DCC Exchange rate must be based on the wholesale interbank rate, in which extra mark-up is added and this markup is also disclosed to the card holder.
The credit card company also charge and additional fees for making a transaction in the foreign country, although the transaction made by his domestic currency through DCC.
The trader gets an opportunity to earn an extra profit on the transaction with no exchange rate risk.
How it works?
When a client requires paying for a transaction using the card, the payment device will recognize the base currency with the local currency.
If it recognizes the difference, it will give an option to the card holder to which one to use.
Then the payment device will show the exchange rate along with amount in that card.
The card owner selects the option in which currency to process the transaction.
If card owner choose to pay in his home currency, the transaction
Converted to the card owner's currency by using an exchange rate which also includes the marginal profit for providing the service.
The DCC provider guarantees that the trader's account will be debited in time. So, the exchange rate risk is taken by the DCC provider.
Advantages:
The client is able to know the exact exchange rate that the credit card company applied.
The client is able to know the prices of foreign items in his domestic currency.
It is beneficial to both the parties like the buyer and seller because they don’t have to deal with changes in the exchange rate.
Disadvantages:
It is more unfavorable to the DCC when there is more fluctuation in the exchange rate due to some factors.
Due to risk in the exchange rate to DCC, there is a chance that the DCC provider may charge somewhat more fees from the card holder.
Sometimes a client is unaware of fees charged and it makes uncomfortable to a client to use the service.
The marginal profit charged from client varies from DCC provider to DCC provider, so a client is not able to know the exact extra amount charged.
Sometimes it happened that if the client chooses an option to pay in foreign currency, a customer has been charged less as compare to using DCC.
