Explainer: FX mechanisms in card payments

Edgar, Dunn & Company's Davide Villa, Manager, and Tue To, Head of Advanced Payments and Fintech for North America, break down cross-border FX mechanisms in card payments.

When a cardholder taps their card at a terminal in a foreign country, or checks out on an international website, most people assume the currency conversion just... happens. Somewhere in the background, dollars become euros, and a rate gets applied. What is less well understood, even among payments professionals, is that the question of ‘who’ applies that rate, ‘when’, and ‘at what margin’ has become one of the more commercially significant questions in cross-border payments. Increasingly, the answer is not the card network.

This explainer maps the landscape of cross-border FX mechanisms in card payments: what they are, how they work, and what their growing prevalence means for cardholders, merchants, issuers, and the broader payments ecosystem.

How a cross-border card payment works

When a cardholder pays a foreign merchant, four parties must coordinate before the funds settle. The cardholder presents a card denominated in their home currency. The merchant operates in their local currency and wants to be paid in that currency. Between them sit the acquiring bank, which processes the transaction on the merchant's behalf, and the issuing bank, which holds the cardholder's account. The card network (Visa, Mastercard, and others) connects the acquirer and issuer and provides the rails upon which the authorisation and settlement messages travel on.

The sequence is straightforward. The merchant's POS or checkout sends the transaction amount, in the merchant's local currency, through the acquirer to the network. The network routes it to the issuer, which checks the cardholder's account and approves or declines. If approved, the network performs the currency conversion, converting the merchant's local-currency amount into the cardholder's home-currency amount using a rate the network sets. The issuer posts the converted amount to the cardholder's account, and a few days later the acquirer is paid out in the merchant's local currency.

That is the default flow for cross-border card payments. The variations the rest of this explainer describes, Dynamic Currency Conversion (DCC), Multi-Currency Pricing (MCP), wallet and PSP internal FX, all change which party performs the conversion, when in the sequence it happens, and at what rate.

The FX rate that the consumer pays

‘Mid-market’ is the wholesale rate banks use to trade currencies with each other. The rate a consumer pays on a cross-border card transaction is almost never the mid-market rate. It is the mid-market rate plus some margin added by the parties involved in moving money.

In the default flow described previously, the card network applies a spread of roughly 1% to 2% above mid-market when it performs the conversion. The issuing bank then typically adds a foreign transaction fee of 1% to 3% on top. This is a separate charge from the FX spread and is set by the bank, not the network. Some premium card products waive it, but many do not. The combined cost to the cardholder is usually somewhere between 2% and 5% above mid-market, even before any of the mechanisms described in later sections come into play.

When DCC or MCP enters the picture, the spread the consumer pays is set by a different party – the acquirer and DCC provider at the point of sale – and is generally larger than the network's spread. The issuer's foreign transaction fee may or may not still apply, depending on how the transaction is presented to the issuer. The result is that the total FX cost on a cross-border transaction depends on which party performed the conversion.

Dynamic Currency Conversion (DCC)

DCC allows a cardholder making a cross-border purchase to pay in their home currency rather than the local currency of the merchant. The conversion happens in real time, at the point of sale or ATM, and the rate (including a markup over the mid-market rate) is set by the DCC provider (provided via the acquirer to the POS).

When a foreign card is detected at a terminal, the system identifies the cardholder's home currency (through BIN tables) and is presented with a choice: pay in the local currency and let their bank handle the conversion or accept the DCC rate and pay in their home currency. If they accept, the transaction is authorised and settled directly in the cardholder's currency. The merchant receives their local currency; the FX margin is typically shared between the acquirer, the DCC provider, and the merchant.

For cardholders, DCC offers certainty – they know exactly what they will be charged in their home currency before they approve the transaction. For merchants and acquirers, it is a revenue opportunity: DCC markups are typically in the range of 3% to 6% above the mid-market rate, and in high-traffic tourist merchant categories like airports, hotels, restaurants, and luxury retail, the aggregate revenue is significant.

Multi-Currency Pricing (MCP)

MCP allows an ecommerce merchant to display prices and accept payment in a consumer's home currency at an online checkout, rather than the merchant's local currency. Unlike DCC, the conversion happens before the consumer reaches the payment step, so the prices are shown in the consumer's currency throughout the entire shopping experience.

The merchant or their PSP detects the consumer's location, typically via IP address, browser language, account settings, or by offering a drop-down menu, and automatically displays prices converted into the consumer's local currency. The FX rate is pre-set by the merchant or the PSP, with a markup applied. When the consumer pays, the transaction is authorised in the converted currency. The PSP executes the conversion and settles with the merchant in the merchant's local currency, or, if the merchant has the treasury setup to handle FX in-house, in the original transaction currency.

For merchants, MCP addresses a real commercial problem: consumers abandon carts at higher rates when prices are displayed in an unfamiliar currency. Showing prices in local currency improves conversion rates and reduces friction. It also gives merchants control over their FX pricing. For PSPs, MCP is a service they can charge for, typically by retaining a portion of the FX spread.

Why merchants need to pay attention to this now

DCC and MCP have been around for a long time, and most merchants have a decent understanding of these mechanisms. What is changing is the set of players that own the FX conversion across different mechanisms, and the technology underneath it.

Digital wallets and super apps are the most visible shift. Many wallets, such as Revolut, Wise, PayPal, Alipay, WeChat Pay, and others, are operating their own multi-currency accounts and run their own internal FX engines. When a consumer funds a wallet from one currency and spends in another, the wallet performs the conversion, typically at a lower spread than a traditional bank but still with a margin.

Fintechs and PSPs are extending the same logic to the merchant side. Companies like Adyen, Stripe, Worldpay, and a growing set of FX specialists offer merchants the ability to price, accept, and settle in multiple currencies without ever touching the network's FX rails. The conversion happens inside the PSP's own systems, at a rate the PSP sets, with the spread captured by the PSP rather than the network. For a large cross-border merchant with a sophisticated understanding of treasury and with a strategy in place, this is increasingly the default rather than the exception.

Stablecoins are developing fast and have the potential to displace a lot of international payments volume, which are still small relative to card payments.

For merchants, the implication is that the FX mechanism embedded in the payment stack influences the actual cost of acceptance of cross-border transactions. If your PSP is applying MCP or handling FX conversion internally, you may be paying for that service through a spread embedded in the settlement rate rather than as an explicit line item. Understanding the mechanism, and how the economics are shared between you and your provider, is an important consideration in payment cost optimisation for all the stakeholders in the ecosystem.

This article is part of The Paypers’ Explainers section. To access other educational materials from this section, click here. If you have suggestions about other topics that could be included in this section, we invite you to write to us at editor@thepaypers.com.

Want to keep exploring? Check out these other explainers:

About Davide Villa

Davide is a Manager based in EDC’s San Francisco office. He has more than 7 years of strategy consulting experience within payments and financial service clients across the North American, Asian, European, and African markets. Davide’s expertise spans across multiple EDC practices with a focus on the Retailer, Acquiring, Issuing, M&A, and Advanced Payment practices.

About Tue To

Tue To, based in San Francisco, is the Head of Advanced Payments and Fintech for North America at Edgar, Dunn & Company. She has over 15 years of experience in economic and strategy consulting, assisting clients worldwide in optimising their payment operations, identifying new business opportunities, and implementing innovation solutions to drive growth and profitability through a combination of strategic thinking and practical insights. Tue’s expertise spans various areas, including payment processing, card networks, mobile payments, international remittances, and emerging technologies.

About Edgar, Dunn & Company

Edgar, Dunn & Company (EDC) is an independent global payments consultancy. The company is widely regarded as a trusted adviser, providing a full range of strategy consulting services, expertise, and market insights. EDC’s expertise includes M&A due diligence, legal and regulatory support across the payment ecosystem, fintech, mobile payments, digitalisation of retail and corporate payments, and financial services.

Explainer: understanding cross-border FX mechanisms in card payments