n 2007, purchases in the United States by consumers using foreign MasterCard Worldwide and Visa International credit cards are projected to exceed $45 billion.

This is a potential $450 million revenue source for U.S. merchants who accept these transactions. Given this, "How can I help my merchants share in this revenue stream?" is an important question.

The answer is to understand dynamic currency conversion (DCC) and teach merchants how to use it. Before DCC's implementation, revenue captured through multicurrency transaction fees accrued entirely to financial institutions and card Associations. DCC enables merchants (and you as ISOs and merchant level salespeople) to share in this revenue stream.

What is it?

DCC is available to Visa and MasterCard networks only. Sometimes called customer preferred currency, it is a financial service that allows consumers to have transactions converted to their local currency when making credit card payments on purchases denominated in foreign currencies.

A rudimentary form of DCC was used in the Caribbean in the 1970s. In the 1980s, especially in the European payment zone, multinational corporations expressed significant interest in settling payments in a uniform currency. Automobile-rental agencies were the driving force behind this (no pun intended).

Since then, DCC has become more sophisticated. Essentially, it allows a merchant to capture approximately one-third of the fees charged to cardholders for transacting business in their native currency when the merchant's bank uses a different currency.

How does it work?

Here is an example: A U.S. resident traveling in Europe presents a credit card (Visa or MasterCard) as payment for a product priced in euros.

The POS device identifies that the card was issued in the United States, and the cashier inquires if the customer would like to make payment in U.S. dollars. If the card- holder says yes, the POS converts the euro amount to U.S. dollars. The conversion is based on a margined daily rate.

The receipt signed by the cardholder shows the U.S.-dollar amount, euro amount and exchange rate. DCC guarantees the exact euro amount will be credited to the merchant's account and the exact U.S.-dollar amount will be debited to the cardholder account.

MO/TO and Internet-based businesses increasingly offer DCC. In a practice known as back-office DCC, some cardholders may be unaware they are being charged in their home currency. However, the card Associations have outlawed back-office DCC and will impose serious penalties on merchants and acquiring banks using it.

What are DCC's benefits?

For cardholders, important advantages of DCC include the ability to enter expenses more easily (especially for business travelers), the transparency of charges made in foreign countries, and a comparable or less expensive fee than the rates charged by credit card companies for currency conversion.

In addition, some DCC providers guarantee better exchange rates than customers would get from their card providers. This makes DCC compelling for consumers, given their ability to see the exact rate of exchange during the POS transaction rather than on their statements later on.

DCC transaction requirements include:

• Cardholders must receive a printed receipt showing the transaction amount in both currencies.
• The exchange rate used must be stated on the receipt.
• Symbols for both currencies must be on the receipt.
• Cardholders must be asked if they want to use DCC.
• Merchants may not perform DCC without cardholder approval.
• DCC receipt totals must match totals on cardholder statements.

Are there implementation concerns?

Issues to understand when implementing DCC include refunds, chargebacks, express checkout, checkout adjustments, forfeited deposits, and pegged and controlled currencies. DCC refunds and chargebacks are handled similarly and can be configured at an acquirer or merchant level. Refunds may be converted at the wholesale exchange rate or marked up.

Association rules for express checkout purchases require mailing of cardholder statements. In addition, per Visa International rules, folios must include the converted amount, rate and currency. Late checkout adjustments need to be tied back to the original transaction rate and thus receive the same treatment regarding rate and currency.

Visa realizes DCC use is increasing. Therefore, effective April 2, 2006, it introduced a 1% international service assessment (ISA). The ISA is not a currency conversion fee but rather a charge to issuing banks when transactions use the global payment system. It is not a charge to cardholders.

The ISA is also charged to issuers on same-currency, cross-border transactions. Visa will no longer charge issuing banks a 1% multicurrency conversion fee for such transactions. It is important to note that issuing banks determine the cardholder pricing structure.

DCC relationships are being put in place among a number of providers, including Planet Payment, E4X Inc., Pure Commerce Pty. Ltd., Fexco and others.

It makes sense to offer merchants the opportunity to participate in DCC as a source of revenue enhancement.

Ross Federgreen is founder of CSRSI, The Payment Advisors, a leading electronic payment consultancy specifically focused on the merchant. He can be reached at 866-462-7774, ext. 23, or rfedergreen@csrsi.com