A plan for a new fee on cross-border transactions is having an effect that MasterCard International may not have intended: encouraging merchants to sign up for currency conversion at the point of sale.
Last month MasterCard announced that beginning in October, merchant acquirers in this country will have to pay a new fee on any transaction between a merchant here and a holder of a card issued abroad.
Vendors of dynamic currency conversion services say the acquirers would probably pass the fee on to merchants. Now merchants are looking at dynamic conversion, which lets them convert their bills to the cardholder's currency, as a way to recoup the charges.
For example, Duggins King, the general manager of Terra Blues, a bar in New York frequented by tourists, said he signed up for dynamic currency conversion to cover the new cross-border fee.
For the cardholder, the appeal of dynamic conversion is simple. As Bevy Seger, who runs a bed and breakfast in New York, put it, "It is nice to let your customers know what they are spending in euros."
But merchants have been somewhat slow to sign up for the service. "The thing that stops merchants today is that there is technical work that needs to be done" on their computer systems to use the service, said Philip D. Beck, the chairman and chief executive of Planet Group Inc.
His Long Beach, N.Y., firm provides dynamic currency conversion services to Vital Processing Services, Fifth Third Bank Processing Solutions, and other merchant acquirers.
Beginning Oct. 1, U.S. merchant acquirers must pay MasterCard at least 10 basis points on each transaction acquired from cards issued outside the country. The fee is doubled if the transaction is not submitted in dollars.
The fee appears to be "a disincentive for merchants (and acquirers) to utilize dynamic currency conversion," wrote Robert Dodd, an analyst with Morgan Keegan & Co. Inc., in a research note Monday.
A spokeswoman for MasterCard referred this reporter to an April press release in which it said the fee was a recognition that "both sides of the transaction receive significant benefits through the MasterCard system."
MasterCard, of Purchase, N.Y., charges issuers a 1% fee, which is passed on to the cardholder, for converting a transaction from the merchant's currency to the cardholder's. Visa U.S.A. of San Francisco used to do so. Several lawsuits targeted those fees.
In addition to the acquirer fee, MasterCard will replace its issuer conversion fee in October with a charge to issuers of 80 basis points for all cross-border transactions on U.S.-issued cards. It will charge an additional 20 basis points to issuers for cross-border transactions where it must convert the currency.
In April, Visa U.S.A. replaced its 1% currency conversion fee with a 1% international service assessment fee on all cross-border transactions, charged to the issuer. Visa does not charge acquirers a fee for cross-border transactions.
Peggy Olson, the vice president of marketing at Vital, said that merchants using dynamic currency conversion still come out ahead, even with MasterCard's new fee.
"With Vital's dynamic currency conversion they are eligible to earn revenue of somewhere between 100 and 135 basis points on the transaction's value," she said. They will pay a 20 basis-point fee to MasterCard, Ms. Olson said, "so they will net 80 to 115 basis points."
In an interview, Mr. Dodd said MasterCard's new acquirer fees "should create awareness of how many transactions are cross-border. For better or for worse, most merchants didn't really know or didn't care if there was a cross-border transaction. They still got paid in U.S. dollars. The fact that there is a specific fee should create more awareness … [of] alternatives."
Planet Group is "gearing up a massive ad campaign saying complacency is not an option," said Thomas J. DeLuca, its senior vice president of corporate development. If merchants "do nothing, they will pay MasterCard 20 basis points where they paid nothing before."
