What Is Dynamic Currency Conversion and Why Should You Avoid It?

Jul 25, 2019

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If you use a card abroad to either make a purchase or withdraw cash from a cash machine, you may be familiar with the choice you are given between paying in the home currency of the card (i.e. pound sterling) or in the local currency of the country in which you are using the card (US Dollars, euro, etc). If you don’t know which option you should always choose and why, you may have been a victim of the travel scam known as dynamic currency conversion (DCC).

DCC allows the merchant (i.e. retailer from where you are purchasing) or the financial institution (the ATM you are using) to give you options of in which currency to pay. You can pay in the local currency, or they may also provide the option of paying in your home currency. The machine will strongly persuade you to choose the home currency option, giving you reasons like ‘lock in the rate now’ and ‘avoid uncertainty’, and maybe even ‘avoid foreign currency fees’.

Sounds great right?

It’s not.

Matt Schodorf, owner of Schodorf's Luncheonette, swipes a credit card on the Square Stand at his restaurant, of which he owns in the Highland Park area of Los Angeles on June 5, 2013. The Square Stand rings customers up on Squares applications. Merchants fed up with the clunky system they have for processing credit and debit card payments are moving increasingly to credit card swiping machines that plug into mobile pads. And Square and PayPal are launching initiatives in the hopes of getting their slice of the action. This is one of 13 establishments nationwide who have this technology, two in California. (Photo by Gary Friedman/Los Angeles Times via Getty Images)
Photo by Gary Friedman/Los Angeles Times via Getty Images

You should always choose to pay in the local currency of the country in which you are using the card. That is because the rate you will be given will always be close to the market rate, while the DCC rate offered will be far lower than the market rate. You will not realise this unless you check the market rates at the time of making the decision.

When using my GBP travel cards abroad in euro currency countries, I have regularly seen the DCC rate of a 100 euro purchase converted ‘for my convenience’ into a GBP rate of around £100. Even with the recent fall in the rate, this will cost you far more than the market rate.

Why do they do this? Because they can, and many people don’t realise they’re getting scammed. UK Finance estimates unsuspecting British travellers are wasting £1 million every day on DCC.

The huge profit margin provided by the dreadful conversion rate is usually shared between the retailer and the financial intermediary processing the transaction. For cash withdrawals at ATMs, it’s simply a huge profit for the financial institution providing the service.

The home currency option may be advertised as being fee free, although even if there was a €5 fee for choosing local currency, you are still in a far worse position by choosing the local DCC option. And remember even if it is billed in GBP, it is likely you will still be charged a foreign exchange fee by your credit card provider as the purchase is made and processed abroad.

Ryanair also has a similar scam with currency conversion — you can read about how to avoid here.

To summarise, no matter how strongly the machine encourages you to choose to pay in your home currency, always choose local currency instead.

Featured image by Gettys images

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