Many factors coalesce to make certain revenue opportunities for ISOs and merchant level salespeople (MLSs) especially attractive at any given moment in time. Recently, the value of the U.S. dollar against the euro and other currencies has slid downward, while foreign spending in the United States has increased.
These two factors have bolstered dynamic currency conversion (DCC) as an appealing and sustainable value add ISOs and MLSs can offer merchants.
From an American perspective, DCC is technology and networks that allow foreign consumers to shop in their home currencies for goods and services from U.S. businesses. When MasterCard Worldwide or Visa Inc. payment cards are swiped or otherwise employed at the POS, DCC recognizes cardholder home currencies and converts transactions from U.S. dollars into currencies such as the euro, yen or British pound.
On receipts or on ATM screens, cardholders see exchange rates and how much they are being charged for purchases in their home currencies; they are also given the choice to either accept or reject the conversion. Given the convenience to consumers of shopping in their home currencies (sparing them the need to compute in foreign currencies) and the ability to opt out if they so choose, DCC is seen by many in the industry as a service foreigners would readily utilize.
Also, since DCC allows consumers to have foreign purchases reported on their bankcard statements in home currencies, confusion as to purchase amounts is reduced, which means they are less likely to initiate chargeback disputes - a boon to consumers, merchants and acquirers alike.
By reducing the burden of chargebacks, DCC becomes an obvious value add for U.S. merchants. But DCC offers other benefits to retailers: It helps to retain and increase merchants' international clientele and it opens up a new source of revenue.Cardholders are charged a fee for accepting DCC. That percentage - generally no more than 3 percent of the transaction - can then be divided among merchant acquirers, ISOs, MLSs and merchants.
"[DCC] is the best thing that the industry has seen in the past 15, 20 years," said Tom Morris, President of DCC Merchant Services. The Long Beach, N.Y.-based ISO has only been in business for two-and-a-half years, but its DCC service is meeting the company's expectations.
According to Morris, only a few acquirers and ISOs knew about the technology in late 2005 and early 2006, and even fewer U.S. merchants had heard of it, but the combination of increased marketplace awareness and the weakening U.S. dollar is driving DCC into the mainstream.
"More and more foreigners are looking to the U.S. to purchase their goods and, as a result, more and more merchants are paying attention to the foreign trade as it relates to those individuals coming into this country," Morris said.
But Morris pointed out that DCC is not the only currency conversion service. Multiple currency conversion (MCC) is the Internet equivalent of DCC. Where DCC is implemented in face to face, brick-and-mortar retail environments, MCC is employed in the card-not-present, e-commerce realm.
Merchants can have their Web sites configured to allow international customers to pay in home currencies. Just like DCC, regardless of what currency is used for purchases, payments to merchants can be settled in U.S. dollars.
The value proposition of MCC for merchants may be even greater than DCC. According to Carrie Bardeen, Senior Vice President of Sales, North America, for Payvision, "U.S. Web site sales are somewhat static.
"They're in single digits these days with perhaps 2 or 3 percent growth. When they globalize and allow their international customers to shop in their own currency, we've seen double and triple digit growth."
Morris agrees. "What the industry has done to itself in terms of competing against price, the margins on the basis points that ISOs enjoy today are very minimal," he said. "So, yeah, this does double and in some cases even triple their revenue opportunities because they have MCC and DCC."
Among its suite of payment processing services, Payvision provides multiple currency processing (where no currency conversion is necessary) and MCC to its international merchant clientele through ISO partnerships. Half of the battle, Bardeen said, is in educating ISOs about the different forms of currency conversion.
"ISOs and merchant level salespeople can learn this," Bardeen said. "It may feel complicated but it's very doable and highly profitable. The sales professionals who have been dealing in shards of basis points no longer have to. ... You don't need to charge in a very thin margin internationally.
"There's lots of room for revenue, so it's a win-win for everybody. The cardholder has a better experience. The ISO earns more residuals and has a better offering for their merchants. And the merchant gets more revenue."
Both Bardeen and Morris agree that the front-end technologies for DCC and MCC are different. Software needs to be downloaded for DCC to be integrated into POS terminals.
For Web-enabled MCC, Web sites can be configured to default to the cardholder's home currency by using the Internet protocol address of the cardholder's browser. Or sites can employ drop-down lists for consumers to pick the currency in which they want to pay. Or merchants can build country specific Web sites, Bardeen said, where only one type of foreign currency is accepted.
But the back-end processing of DCC and MCC are identical. When the card is swiped at the POS or inputted on a Web page, it is processed like a normal transaction with authorization, capture and settlement functions. But the terminal or Web application also recognizes that the bank identification number is foreign.
The exchange rate comparison of the foreign currency to the U.S. dollar on the transaction date is generated for each transaction, and the foreign exchange (FX) rate is divulged to the cardholder. The conversion process, which takes places in real time, does not add discernable time to the average 2- or 3-second transaction time.
One size does not fit all for most products and services in the payments industry. Foreign currency conversion is no different. Each provider implements the same technology in different ways.
Payvision, for instance, receives its FX numbers (also known as exchange rate pairs) from TFX Inc. in Coral Springs, Fla. U.S. Bank-owned acquirer Elavon Inc. (formerly NOVA Information Systems) gets its numbers directly from U.S. Bank.
And DCC Merchant Services obtains numbers from multicurrency payment and data processor Planet Payment, which in turn uses Visa and MasterCard's exchange rates.
But the differences don't end there. Philip Beck, founder and Chief Executive Officer at Planet Payment, said, "There are two models in the marketplace. There's the Planet model which is a cross-currency model where we would send a transaction in one currency to associations, and the banks would get paid in another. We don't touch the money. We are the pure data processor."
And then there is what Beck calls the treasury model. It began in Europe and introduces "all sorts of inefficiencies into the process," Beck said. In the treasury model, U.S. multicurrency transactions are settled in Europe, which means that U.S. merchants have to set up European bank accounts to receive revenue from foreign cardholders, according to Beck.
But Beck said the Planet Payment model streamlines the process, allowing U.S. merchants to get all their foreign transactions settled in U.S. dollars. "So ours is a much simpler, purer processing play that allows a small merchant or a large merchant to get the benefits associated with marketing and selling to foreign visitors, but without any of the inefficiencies or the extra costs that come from the treasury model."
Planet Payment has had success implementing DCC in the Asia-Pacific region through its Pay In Your Currency program. Beck offered Planet Payment's operations in mainland China as an example of why.
"Every single Visa or MasterCard transaction [in China] is a foreign transaction," Beck said. "One-hundred percent of the bankcard activity is from foreign travelers." In contrast, foreign transaction volume in the United States can range from "a few percent to 30 percent," Beck said, depending upon the circumstance. The percentages are highest during the Las Vegas tradeshow season, for instance, or during San Francisco and New York peak travel periods, such as the summer or on holidays.
"So, it's important [in the U.S.], but it isn't of the same magnitude as its importance to customers in Asia," Beck said. "So it just got more push and more acceptance from merchants at the POS [in Asia]." And yet Beck expects Pay In Your Currency will become "even bigger in the U.S. as more and more customers are offered the product."
In contrast to Planet Payment, which is a third-party DCC processing provider, U.S. Bank-owned Elavon Inc. (the third largest in the United States) offers DCC to merchants through its ISO channel as part of its comprehensive package of services.
"Any of the Elavon ISOs, as an extension of their relationship with us, they automatically have access to offering the DCC product," said Michelle Wagner, Vice President of Global Marketing at Elavon. "So we're getting the exchange rates directly from our parent, U.S. Bank.
"We're processing the transaction within our own acquiring. We're settling them. So there's not two batch settlements. There's not two sources of customer service. There's not two sources of funding. There's not two contracts with the ISO. [DCC] truly is an extension of the acquiring services that Elavon provides."
According to Wagner, Elavon has been doing DCC in Europe since 2000 through its affiliate euroConex, which now processes 5 million DCC transactions annually. Elavon leveraged that experience when it instituted DCC in the United States in 2005.
Travelex, the world's largest nonbank provider of commercial foreign exchange services, has been doing ATM-based DCC processing in the Asia-Pacific region since 2004 through its alliance with Australia-based Pulse POS Pty Ltd, a subsidiary of Pulse International. In November 2007, Travelex purchased Pulse POS and its network of 2,000 DCC-enabled ATMs across Australia.
"DCC is something that we as a company identified as part of our long term strategic plan," said Christopher W. Russell, Executive Vice President of Outsourcing, Americas, for Travelex. "It falls right into our niche of being the world's largest provider of FX."
DCC from Travelex Outsourcing (formerly Pulse) "is the engine, if you will, to drive DCC transactions, and it was an engine that we can use essentially anywhere in the world," Russell said.
Russell added that Travelex is working with four major financial institutions in the United States and Canada, as well as an ATM provider, to roll out DCC at ATMs throughout North America.
DCC at the ATM works similarly to DCC at the POS. Australians traveling for business in Asia, for example, can have transactions settled in their home currency - the Australian guilder - rather than in baht (Thailand) or ringgit (Malaysia). Consumers have the choice of opting in or out of the DCC transaction.
According to Russell, "roughly two out of three people will opt in for a DCC transaction. It's actually a pretty good deal." Travelex research predicts the United States could one day represent the largest market for DCC in the world. The prediction is based on the $85.7 billion foreign travelers spend annually in the United States today; the majority of visitors come from Mexico, Canada, the UK and Japan.
Travelex sees a potential $171.4 million annual revenue opportunity from inbound travelers withdrawing currency from American banks and ATMs.
Another benefit of DCC is in its reporting functionality. Through DCC, Elavon and Planet Payment can help ISOs and merchants target customers.
Beck said that Planet Payment assists merchants in attracting foreign consumers to the POS through Web-based reporting - not just where travelers are coming from, but the percentage coming from Australia versus England, the average ticket, and who is spending more: Aussies or Brits. Planet Payment can do this by store department and by POS terminal, Beck said.
So merchants processing with Planet Payment get a cut of the revenue generated from Pay In Your Currency transactions, and they get a better understanding of their customers. "For the merchants, [DCC] is an absolute win-win solution," Beck said.
For ISOs, Elavon pinpoints merchants who could benefit from DCC. "We have the ability to analyze an existing base of merchants within a portfolio for an ISO and identify for them, 'OK, Joe, out of your portfolio you've got of 10,000 merchants in our base, here are the ones based on actual foreign card usage who are candidates for DCC,'" Wagner said.
A surprising thing Elavon discovered through its reporting capability is that DCC is not just ideal for the tourism market. Hotels, restaurants, tourist shops, rental car agencies and helicopter sight-seeing businesses are all obvious examples of where DCC can be employed. But auto parts suppliers?
According to Wagner: yes. "The thing that we have found is that some of the highest DCC users are automotive parts providers." For example, Canadian customers browse online for car parts in America they want shipped back to Canada.
Another merchant opportunity, Wagner said, comes from foreigners who have additional residences in the United States. Snowbirds use their foreign-issued bankcards to purchase countertops, flooring, appliances and countless other furnishings for their vacation homes.
In the aftermath of Hurricane Katrina, which ravaged the United States' Gulf Coast region in 2005, Elavon discovered that "all of a sudden we saw all this foreign card usage in flooring and things like that," Wagner said. "It was because of the flooding and people had to replace their floors; they were from the UK or Canada and they were using their credit cards."
DCC adoption in the United States has been slow. Unlike Europe - with many countries (offering many different currencies) in close proximity in a limited geographic area - the United States is one unified geographic location sharing a common currency. Therefore, no pressing need for currency conversion within America's borders exists.
Furthermore, it takes substantial research and development time for payments businesses in the United States to break into DCC processing. Additionally, a majority of merchants still don't know DCC even exists, making it hard for processors to recognize the market opportunity.
But now DCC is gaining traction due to increased awareness of its benefits and the economic forces driving its implementation.
"In the United States you have more and more foreign travelers," Morris at DCC Merchant Services said. "And each year, the expenditure of money by those travelers continues to grow. The more we cater to them, the more apt they are to continue to use the same vendors and the same merchants."
For those reasons, Morris believes currency conversion is here to stay. "I think it will be around forever," he said.
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