For those companies that want to expand their global business, including those that exist in the physical world, as well as those that do business solely on the Internet, currency conversion issues have long presented problems. Simply put, foreign consumers conducting business with U.S. companies often don’t know exactly how much they are paying for goods or services until they get their credit card bills – often a month or more later.

New tools and services that enable “dynamic” currency conversion – allowing the merchants to present at the time of purchase the actual price a consumer will pay – are expected to expand business opportunities, as well as improve customer relationships. And possibly even more important for merchants and their acquirers, these services can provide additional revenue opportunities.

“I’ve been in this business for 30 years and this is the first time I’ve seen this kind of new revenue potential for merchant acquirers,” says Paul Noblett, president of Noblett & Associates, a Fort Lauderdale, Fla.-base firm that consults on currency conversion issues. “There is a huge new revenue source potential that is available for merchants and their acquirers. Rather than let the card issuers get all of the markup, the merchant side gets to participate in some of the revenue.”

Phil Kumnick, senior vice president of Global Processing Solutions for Tempe, Ariz.-based Vital Processing Services, agrees that currency conversion represents an important new profit potential for merchant acquirers. “This is going to be a hot topic for merchants and acquirers in 2003,” Kumnick says. “We first started seeing the appearance of dynamic currency conversion by non-web merchants in 2002 and it is catching on quickly. We are encouraging our customers to look very closely at this service.”

In the physical world today, the inability to convert currency right at the point of sale has been most problematic for travel and entertainment businesses. American hotels, restaurants, rental companies and other businesses that cater heavily to foreign travelers typically are quoting the price of their goods and services in U.S. dollars. How much customers with credit cards will actually pay in their currency is subject to future conversion rate changes and additional fees that are placed on the transaction by the credit card associations and card issuers.

Meanwhile, on the Internet, many U.S. companies can only sell to consumers whose cards are issued by U.S. banks. Those that do sell outside the United States are often still listing prices in U.S. dollars or listing prices that are based on foreign currency conversion rates that are not always current.

Both situations confuse buyers. “People prefer to purchase things in their own currency,” says Tal Yuval, CEO of E4X, a New York-based currency conversion company that works with payments processors and acquirers. “They want to know how much something costs and not have to wait until they get their credit card statements to find out.”

What many of the new “dynamic currency” programs do is convert the cost of goods or services from U.S. dollars to the currency used by the purchaser, based on current rates. Then the system determines what it believes the cost will be at the time of settlement based on currency shift expectations. An additional service fee (typically 1 percent or 2 percent) is then applied. This service fee covers the cost of making the conversion and the risk associated with currency fluctuations. A final price then shows up right on the point-of-sale terminal and the customer is guaranteed that is the price that will show up on his or her credit card statement.

Despite all the attention that goes to Internet sales, many payments experts say the biggest potential for dynamic currency conversion is in the physical world. And B2B transactions often lead the list.

“Everyone is talking about the Web, but Web sales today are less than 10 percent of total foreign sales,” Noblett says. “There is a much bigger opportunity that exists today in the physical world – it’s probably 10 times as big.”

Noblett anticipates that merchants located in airports or other locations with high volumes of foreign travelers will have special POS terminals that consumers can use to check prices of goods before purchasing them.

Another special customer service feature related to dynamic currency conversion is that foreign business travelers can submit their expense reports immediately using receipts. “Right now, most foreign business travelers have to wait until they get their final credit card bill until they can submit their travel expense forms,” says Chuck Fillinger, vice president of Strategic Marketing Services. “That can cause a big delay. It is very helpful to them if they can use their receipts and know that will be the amount they’ll actually be required to pay.”

In addition to serving the needs of consumers, dynamic currency conversion programs can benefit merchant acquirers. Not only can such tools increase the customer base for U.S. companies – increasing the number of transactions acquirers handle – but the programs also can provide additional revenue. Currently, Visa or MasterCard and the card issuing bank convert transactions quoted in U.S. dollars. Then, an additional charge, typically between 2 percent and 4 percent of the purchase price, is tacked on to the sale, with the card association getting about 1 percent and the card issuer getting the remainder, payments experts say. But if the merchant converts the transaction immediately at the point of sale, the merchant can tack on a few percentage points and the merchant and its acquirer share that revenue. Because the transaction was processed in the purchaser’s currency, the issuer and card association fees are not applied. The result is that the merchant and the acquirer get any fee revenue, not the issuers.

Vital’s Kumnick says most merchants should be able to price the service in a way that is cost beneficial to the customer and still generate additional funds for the merchant and its acquirer.

“Let’s say a European traveler was paying for a rental car and the bill was $198,” he says. “Using dynamic conversion, the rental car company could offer them the ability to pay in Euros. The Euro price quoted might actually be equivalent to $201. But a savvy business traveler is going to recognize that the Euro rate is still less than what he is going to pay if he pays in dollars (with a 3 percent added fee, the customer would pay the equivalent of about $204) and he has the ability to know right there exactly how much the bill is.”

Merchant acquirers wishing to offer currency conversion to their travel and entertainment and Web-based merchants can typically provide the service two ways. One way is to get the service through their transaction processor.

Vital offers acquirers the ability to convert payments through its processing unit and will also work with other service providers specified by the acquirer or merchant. First Data Merchant Services primarily uses the services of two subsidiaries of its parent First Data Corp. – OmniPay and FEXCO – to provide currency management and guaranteed pricing.

By not using an outside service company to convert the payments, merchants and acquirers can keep any fee revenue to themselves and not have to share it with a currency conversion company. But dynamic currency conversion firms argue not only are they experienced in converting currency, they assume any risk associated with a major shift in rates between the time the price is quoted and settlement is finalized.

A number of currency conversion companies are also forming partnerships with acquirers and payments processors to offer their services to merchants. Irvine, Calif.-based Payment Partners, which specializes in noncredit card payment, is currently working with Nova, Paymentech and Cybersource.

E4X currently has a relationship with Paymentech and is talking to other processors and payments companies. Planet Payment initially sold directly to large retailers, but realized it could reach a greater number of merchants through relationships with acquirers. It currently is working with First Horizon, a major player in the hotel business, and is talking to others.

Lauri Giesen is a Libertyville, Ill.-based freelance writer who specializes in financial services and technology. She is the former editor of Financial Service Online magazine, Bank Network News newsletter and POS News newsletter.

Copyright 2003 The Electronic Transaction Association