Dynamic Currency Conversion

I’ve written about getting cash while traveling in past newsletters, but I had an experience in Amsterdam which got me thinking about one specific aspect of the equation – dynamic currency conversion. Sometimes when you use a credit card or an ATM abroad, you’ll get the option of conducting the transaction in USD or the local currency. It’s usually not clear what the difference is, and it’s natural to select USD – after all, your bank account probably thinks in terms of dollars.

At best, this is actually a rip off, and at worst a downright scam. What’s happening is something called dynamic currency conversion or “DCC”.

Let’s say you’re trying to buy something for €20. At the current published exchange rate, that’s about $21 (wow, the euro is still cheap!). If you select the “euro” button on the credit card terminal, the credit card network will process a €20 charge against your credit card, and your bank will convert that to dollars at an exchange rate somewhat in line with the current rate. Maybe that transaction will cost you $22.00.

If instead you press the USD button, the credit card terminal use its own exchange rate to convert to dollars – probably at a much less favorable rate – and send that charge on to your bank.

A real life example

Last week in Amsterdam, I went to an ATM to withdraw €80. The machine duly offered the choice of processing the charge in USD or EUR. The screen informed me that processing the charge in dollars would have cost $106 (plus any fees from my bank). That’s an exchange rate of nearly $1.30 to the euro, a rate last seen in 2014. Instead, I selected the euro option and when all was said and done, my bank withdrew $86 from my account, plus a $2.50 fee. That’s a nearly 30% difference.

Now, there’s one exception to the “always choose the local currency” rule – if you’ve got an absolutely terrible bank which charges high foreign transaction fees. One of the perks of most travel cards is “no foreign transaction fees,” and honestly I’m not sure you could find any card with a fee high enough to beat my usurious Dutch ATM.

The simple summary is that if you’re traveling and you get the choice of processing a payment in the local currency or USD, choose the local currency.

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