Dynamic Currency Conversion (DCC) - why is this valuable customer benefit so misunderstood?

Recently I was at the counter in a shop in London and I was given the option to pay for my purchases in Euro as I had issued an Irish credit card for the payment.  In moments like this, without a currency converter to hand, it can be tricky to figure out exactly what you are paying for the item in your home currency versus what it would cost if I paid in Sterling.  This can lead to some nasty shocks when statements come through a few weeks later!

With Dynamic Currency Conversion (DCC), customers are given the option to pay in their home currency when transacting abroad.  They can either pay in the original pricing currency or amount, or in the billing currency of their own card.  Not all locations offer this to international shoppers and an offer to avail of DCC will only be made when the billing currency of the customer’s card is identified, and only if the retailer can accept that billing currency.  When the customer’s home currency is presented, the DCC exchange rate will contain an FX conversion margin –this is the DCC profit, which goes to the retailer and the acquirer (and sometimes to a specialist DCC provider as well).

For example, if a U.S. Visa cardholder is in Japan and decides to purchase a souvenir priced at 20yen   the retailer may offer the cardholder the option to pay in USD.  The retailer converts the transaction amount to USD.  The customer actively chooses DCC and agrees to pay the USD amount for the souvenir using the exchange rate provided by the retailer (which will include a % fee for the DCC service).

For the consumer, there is total transparency as they know exactly what they are paying at the time of purchase (instead of seeing this later on their credit card statement).  As they have a choice to use DCC or not, they have control over their finances and as a result greater peace of mind regarding transactions abroad.  It’s a simple and fast way for consumers to make their payments in the currency they know and understand.  So why is this valuable benefit so misunderstood?

Unfortunately there is a certain cohort of retailers / acquirers who exploit this service, charging high service fees which artificially inflate the true price of the goods (I have seen as much as 7% / 8% of the purchase price - or ATM value - in certain cases!)

In particular, airport services have been guilty of this leading to accusations of DCC as a money-making scheme and very customer unfriendly. As always with online and credit transaction, it’s up to us as customers to be vigilant and ensure we accept the terms and rates being offered.   Naturally it’s not something the card associations and card issuers are pushing as it moves profit from them – it redirects revenue earned from currency conversion margins and fees to retailers and acquirers / DCC transaction processors.

In a market where we are continually talking about customer-led services, this should be a great additional benefit for customers.  If the DCC rate is priced reasonably, it should be a straightforward and more economical decision for customers to select it with confidence. For an innovative and customer-centric DCC or acquiring company, there is a real opportunity for a customer friendly and ethical pricing solution, whilst still offering a profitable option for all involved.

In reality the benefits should appeal to customers and retailers alike. Some staff education is involved to properly position and ensure it is sold responsibly.  Customers need to feel comfortable with this service and be sold a fair deal.  For the retailer it means customer convenience at profitable margins.

Whilst the reputation of this service has been tarnished somewhat by some companies persisting on milking the margin, overall if it is positioned appropriately by retailers, and adheres to reasonable margins it should play a more meaningful role in purchasing abroad and be a much better customer proposition.

Mobile Wallets & Payments…so much choice but UK consumers slow to adopt and change!

Earlier this week I read that McDonald’s was trialing mobile payments in two of their stores in the US.  In effect, customers will be able to pay for their Happy Meals using just their mobile phone! I wonder was this intended when the term Digital Wallet was first conceived - a seamless, easy way to remove the need for a physical wallet by paying for everything using a mobile.

In the UK, there have certainly been advances towards a world where this McDonald’s example is the norm.

According to the UK Office of National Statistics, access to the Internet using a mobile phone more than doubled between 2010 and 2013, from 24% to 53% and so far in 2013, 72% of all adults have bought goods or services online. 

However, another survey, carried out in January by UK-based ICM Research showed that consumer awareness of mobile payment methods was high - 80% but only 8% of people were actually making contactless transactions.  ICM surveyed over 2,000 consumers in the UK and found that, despite smartphone penetration around 60%, only a third would 'definitely' or 'probably' use their mobile to make payments, use as event tickets or to collect vouchers.  Looking at just the smartphone owners' answers that figure rises to 46%.

So we know that consumers’ buying behaviour is perfectly suited to all the new technologies available but something isn’t resonating with them.

Let’s take a look at what’s out there.  PayPal and Google have already entered this market with their mobile offerings but adoption is still a long way from mainstream in both cases.  PayPal has a well-entrenched network especially with its eBay connection.  It has also been around for a long time and enjoys a larger user base.  According to Play, Google’s app store, Google Wallet has been downloaded fewer than 10 million times in the two years since its launch.

V.me, Visa Europe's answer to PayPal and Google Wallet, allows consumers to store details of several cards in their own digital wallet, which can then be used for mobile payments.  The service will be available in the UK from the end of 2013 and has already announced a deal with Dixons Retail allowing customers to purchases on the Currys and PC World websites using the V.me service.

Stripe, an online and mobile payments startup, recently launched operations in the UK.  It enables UK merchants and vendors to accept online payments, no PayPal required - effectively providing a rival service to PayPal and Visa.

Their service eliminates the need for UK businesses to go through time-consuming compliance and accounts set-ups to facilitate online payments. It can accept all major card types including Visa, MasterCard and American Express and the start-up has also launched multiple currencies to support its UK extension letting businesses charge in US dollars, British pound sterling and Euros.

Meanwhile a group of UK banks, including Barclays, RBS, Lloyds, HSBC and Santander have come together to launch Zapp, a new mobile phone payment app.  Unlike some existing apps, it’s not tied to one particular bank and it comes pre-installed rather than requiring a separate download.  Once a customer has logged into mobile banking app on their phone, according to Zapp, the transaction can be completed with a tap of the finger in as little as 12 seconds.

Also keen to move into the e- and m-commerce space, Facebook is planning to test a new mobile payment feature.  It will use payment details added by users to their Facebook account to automatically fill in forms when they make purchases on mobile applications. A clever move as this will help to convince advertisers of the effectiveness of its platform in driving revenue. 

To date, no third-party wallet provider has won large-scale adoption in the UK market and I suspect wont for a good while to come yet. With all these new collaborations and app releases, it will be interesting to see how well UK consumers embrace the mobile wallet in the months and years to come. Indeed it will also be interesting to see which of the many developments will actually ever recoup their start up costs!

Sources:

-http://www.icmresearch.com/2013-the-year-of-the-mobile-wallet

-UK National Statistics 2013

Where is the competition in the Irish credit card market?

I recently had cause to review the competitive offerings in the Irish card market and was left a little underwhelmed.  A few years ago there was a proliferation of credit card offers available to the Irish consumer however since then we have witnessed numerous players exit market leaving the competitive landscape less than competitive!

In 2011, MBNA, which would have typically had some of the best rates exited the Irish credit card market leaving just six issuers for consumers to chose from: PTSB, Ulster, BoI, Tesco, Dankse and AIB.  Of those, I suspect that at least two are very passive competitors.

The overall result is a distinct lack of competition and complete lack of innovation! The offerings are quite homogeneous, with interest rates being the main headlines from each market player.  I believe that there is huge scope in the Irish market for something new.  In the UK, there has always been healthy competition with balance transfer offers incentivising consumers to move between companies in search of the best deal as well as some very interesting loyalty reward options, driven by cardholder spend dynamics.

Here, credit card payments continue a downward trend –the number of credit card payments has dropped by 14% since 2008, and is still falling.  According to the Central Bank, in 2008, there were over 2.2m personal credit cards in circulation, this has reduced year-on-year and latest figures show just over 1.8m personal credit cards.  The Irish are uniquely disciplined with regards to credit card payments with many paying their full credit card each month.

Conversely, debit card use is growing, rising by an estimated 14% annually.  The rollout of Visa Debit may well have displaced some credit card usage over the past year or two however the lack of competition, and exit of some issuers, has had an adverse impact.

Over the next month of two, action in the credit card market will revolve around the annual surge in marketing and promotion to woo new third level students to sign up to their services.  Other than this, it would appear that credit card companies are primarily focused on selling to their existing customer base rather than competing against each other.  This is not helped by the ridiculous €30 Government Stamp Duty, which is levied annually, an obstacle to effective competition and switching in the market (but perhaps it suits the incumbents?)

Interestingly, customers are entitled to a refund of the €30 fee if they switch cards mid-year, this is not well understood and nobody seems to make the process easy.

So in reality, competition really only exists for some distinct market segments at certain times of the year, suitably discouraged by the stamp duty constraint. 

This is in marked contrast to the UK market and I believe that there is a significant gap, and opportunity, for a really innovative and compelling consumer proposition, something to shake up this market and create true competition.

Sources: Central Bank Statistics & Central Bank Report April 2013