Settlement
FX (foreign exchange)
Currency conversion applied to a cross-currency transaction, by the merchant, acquirer, or cardholder's bank.
In the card payments industry, FX refers to the mechanism and associated costs of converting funds when the transaction currency differs from the settlement currency. This conversion typically occurs at one of three stages: at the point of sale via Dynamic Currency Conversion (DCC), at the acquirer level during settlement to the merchant account, or by the issuing bank during the debit to the cardholder account. While retail FX rates are influenced by the interbank mid-market rate, payment schemes like Visa and Mastercard apply their own conversion rates which often include a margin or spread. For merchants, FX management involves navigating cross-border interchange caps under UK or EU regulations and understanding how settlement timing affects currency volatility risks. Where DCC is employed, merchants must adhere to strict transparency requirements under frameworks such as PSD2, ensuring the cardholder is presented with the exchange rate and any markups before the transaction is authorised.
Frequently asked
How do payment schemes determine the FX rate used for cross-border transactions?
Visa and Mastercard typically use wholesale market rates from the day the transaction is processed, which may differ from the rate on the date of purchase. These rates include a scheme-defined margin, and additional fees may be applied by the merchant's acquirer or the cardholder's issuing bank.
What are the regulatory requirements for offering DCC at the point of sale?
Under regulations such as PSD2 in the European Economic Area, merchants must show the total currency conversion charges as a percentage mark-up over the latest available euro foreign exchange reference rates issued by the European Central Bank. This information must be presented clearly on the payment terminal to allow the cardholder to make an informed choice between local and home currencies.
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