Using Credit Cards While Traveling: Local Currency vs. Dynamic Currency Conversion

Using credit cards to pay while traveling can be an expensive habit. Every time you make a payment in a currency other than the one which denominates your credit card account (Swiss francs or euro, for example), you may get hit with a number of costs. The foreign transaction fee charged by the issuer is the most obvious of these. While there are Swiss credit cards which do not have a foreign transaction fee, the vast majority do. Depending on the card you use, the foreign transaction fee may be equivalent to up to 2.5% of the transacted amount.

Additionally, you pay a markup on foreign exchange rates which, depending on the going exchange rate used by the card’s issuer, can be more than 3% of the transacted amount. Markups on the interbank rate (the real exchange rate) vary between card issuers and can change on an ongoing basis. Issuers generally calculate charges based on the exchange rate applicable one or more days after the transaction is performed, rather than on the exact date of the transaction.

Using credit cards to perform cash withdrawals abroad is almost always a bad financial move. This incurs additional hefty cash withdrawal fees and possibly external bank fees. Among the exceptions to this rule are smartphone banks, some of which even allow free cash withdrawals abroad.

Paying with your credit card in Swiss francs

An increasing number of shops, hotels and restaurants outside of Switzerland now offer the option of charging your credit card in Swiss francs rather than in the local currency. This is made possible by dynamic currency conversion (DCC). DCC is a currency conversion method used by many merchants (brick and mortar and online) and by ATM operators which lets customers choose to have their card charged in the currency which denominates their credit card account (Swiss francs, for example) rather than in the local currency.

The advantage of DCC is that the full cost of a transaction – including fees – is automatically calculated in real time and shown in the currency denominating the card account. Cardholders can see the amount which will be charged in a currency which is familiar to them. If you have a standard Swiss credit card which is denominated by Swiss francs, you will see how much you will pay in Swiss francs before you confirm the transaction.

The disadvantage of DCC is that you pay a currency conversion fee when you use this service. Currency conversion fees can be as high as the equivalent of 3% of the transacted amount. Fees may be even higher than that in some cases. While having your card charged in Swiss francs instead of in foreign currency is convenient because you do not have to calculate exchange rates yourself, using DCC for transactions is often more expensive than paying in the local currency.

Dynamic currency conversion as a business model

When you use a Swiss credit card to pay in the local currency when traveling, the currency is converted at the card issuer’s exchange rate. Card issuers like Cembra Money Bank, Cornèrcard, Swisscard AECS, UBS and Viseca profit on currency exchange markups and foreign transaction fees.

When you use DCC, on the other hand, the merchant and merchant acquirer profit off the transaction instead of the card issuer. The merchant acquirer (for instance SIX Payment Services) handles DCC currency conversions – often with services provided by a third-party DCC service provider – and pays commissions to merchants when customers pay using DCC.

So your Swiss credit card issuer benefits when you pay in foreign currency and foreign acquirers and merchants benefit when you pay using DCC.

Example:

Suppose you want to pay the equivalent of 1000 Swiss francs for a purchase in a country that uses euros using your Swiss credit card. In this example, we will imagine that your card’s issuer uses an exchange rate of 1.10 Swiss francs to the euro, while the interbank rate is 1.09 Swiss francs to the euro.

Payment in foreign currency processed by the card issuer:

Purchase in euros: EUR 1000.
Real value in CHF at the interbank exchange rate: CHF 1090
Amount in CHF at the issuer’s exchange rate: CHF 1100
Total transaction in CHF including 1.75% foreign transaction fee: CHF 1119.25
Total cost of transaction: CHF 1119.25 - CHF 1090 = CHF 29.25

Payment in Swiss francs using DCC processed by the acquirer:

Purchase in euros: EUR 1000
Real value in CHF at the interbank exchange rate: CHF 1090
Amount in CHF including the 3.5% currency conversion fee: CHF 1128.15
Total cost of transaction: CHF 1128.15 - CHF 1090 = CHF 38.15
0.5% commission paid to merchant: CHF 5.45 (equivalent in EUR)
Acquirer’s share of currency conversion fee: CHF 32.70 (equivalent in EUR)

Important: If your card issuer charges foreign transaction fees based on where the merchant is domiciled, you will pay both your card’s foreign transaction fee and the dynamic currency conversion fee!

Local currency or credit card currency?

Depending on your card’s foreign transaction fees and the currency conversion fees charged by individual acquirers, using dynamic currency conversion can in some cases be more expensive than paying in the local, foreign currency. However, each dynamic currency conversion service provider sets its own currency conversion fee, each credit card has its own foreign transaction fee which may also be changed from time to time, and the currency exchange rates used by card issuers change on an ongoing basis. There is no practical way to compare the full price you would pay using a DCC rate with the full price you would pay by paying in foreign currency.

However, if your credit card has a relatively low foreign transaction fee, then you will normally spend substantially less on fees and charges by choosing to pay in the local currency rather than using dynamic currency conversion.

As a rule of thumb, you should pay in the local currency rather than in Swiss francs (or whichever currency denominates your credit card). If you have a Swiss credit card denominated by Swiss francs, do not choose to pay in Swiss francs when this is offered by merchants. The same applies when you make purchases from foreign merchants online (on Amazon.de, for example). If you travel outside of Switzerland often or regularly make purchases from foreign merchants, make sure to use a credit card which has a low foreign transaction fee and favorable exchange rates. You can find the most affordable credit cards for foreign currency transactions based on foreign transaction fees and CHF to EUR exchange rates using the moneyland.ch credit card comparison. When you select the “Abroad-only user” profile, cards with the lowest foreign currency transaction costs appear at the top of the list.

Beware of foreign transaction fees

Most Swiss credit card companies charge foreign transaction fees based on the location of the merchant rather than the currency in which the purchase is transacted. When you charge a purchase from a non-Swiss merchant to your card you pay a foreign transaction fee – even if your card is charged in Swiss francs! 

In this case, using dynamic currency conversion will always be more expensive than paying in the merchant's local currency because you pay both the dynamic currency conversion fee and your card’s foreign transaction fee.

Guidelines from Visa and Mastercard

Payment network operators Visa and Mastercard have published guidelines for dynamic currency conversion service providers and merchants. These guidelines encourage merchants to reveal the final DCC price to customers and to give customers the choice between paying in local currency or using DCC before performing transactions. However, these are simply guidelines which are difficult to implement across the many merchants which accept Visa and Mastercard credit cards.

Important: Do not let merchants convince you that paying using DCC is the best or cheapest option. Merchants who do this are primarily interested in earning DCC commissions. Unless you are sure that DCC would work out cheaper, you have every right to pay in the local currency.

Tips for frequent travelers and online shoppers

If you make a lot of purchases in foreign currencies, you may be better off getting a credit card or prepaid card denominated by the foreign currency. Some Swiss issuers offer credit cards denominated by the euro or U.S. dollar, for example. You can find these cards by selecting the desired currency as a filter on the results page of the credit card comparison. When you use a euro-denominated card to pay for purchases from merchants in countries which use the euro, for example, you do not pay a foreign transaction fee. If you settle the bill of your foreign currency credit card in Swiss francs, the markup on the currency exchange will still apply, but you avoid the foreign transaction fee and/or the currency conversion fee. Neobanks often also use significantly cheaper exchange rates than traditional providers.

More on this topic:
Interactive Swiss credit card comparison
Credit card foreign transaction fees explained