BNPL revolutionised consumer credit because merchants were willing to absorb the costs of credit to drive higher basket values and conversion rates. Though less discussed in the media, a similar shift is quietly underway in the FX space.

Last month, Uber introduced a new currency localisation service for riders. The concept is simple: when a British tourist arrives in New York, they want to see their ride prices in GBP, not USD. Uber’s policy change now means that they will charge a 1.5% markup for this service – something that will inevitably spark some backlash and advice on how to avoid it. However, research conducted by PSE indicates that credit card issuers in the UK are currently marking up FX rates by an average of 2.94%. In comparison, Uber’s offer seems like a much better deal.

So, why now?

In the past, if merchants wanted to capture a share of the FX margin, they used Dynamic Currency Conversion (DCC) at the checkout. However, DCC involves regulatory hurdles, consumer opt-in challenges (with adoption often under 20%), and sharing the margin with the acquirer and FX specialists. More recently, Multi-Currency Pricing (MCP) has gained traction. This allows for currency localisation across the entire online journey, not just at the checkout, and has become more feasible due to the rise of digital shopping, cross-border purchasing, and better content management platforms. Airbnb has recognised the importance of localising the currency offer some while ago and has one of the most mature offers in this space..

Among digital merchants and PSPs in this space, the enthusiasm for currency localisation is palpable. According to a recent survey by PSE, nearly two-thirds of the very large digital merchants we spoke to already offer currency localisation, with many others planning to invest in the near future.

Why do merchants offer this?

Currency localisation serves as a powerful revenue driver for merchants for two primary reasons:

1. Direct FX Markup: Merchants can adjust FX rates as they see fit. Interestingly, almost half of the digital merchants we surveyed don’t markup FX rates at all, offering this service for free because they understand the wider benefits.
2. Increased Conversion: Consumers prefer to see prices in their preferred currency, which often leads to higher conversion rates. We’ve seen uplifts of 5-10% in conversions, a critical gain for merchants where even small improvements in performance make all the difference. It turns out the old adage of “selling more beats the cost of payments” applies equally to FX.

Operational Hurdles in Rolling Out MCP:

However, implementing MCP isn’t without its challenges:

1. End-to-End Journey: Localising the buyer journey means adjusting product listings and prices from the moment the consumer lands on a site, not just at checkout. This requires coordination with various platforms, especially Content Management Systems (CMS), and engagement with multiple stakeholders.
2. FX Risk: International card transactions typically take 3 days to clear, which is a long time in the world of FX. Many clients mitigate this risk by securing a 48-72 hour rate guarantee from their FX suppliers. Allowing rates to float can be risky, especially in certain regions, so careful management of this issue is crucial.
3. Supplier Constraints: While global banks offer excellent FX services, they often lack the infrastructure to handle things like refunds or internal reporting, meaning merchants have to build their own operational processes to address these gaps.
4. Currency Coverage: To succeed in MCP, merchants need to offer a broad range of currencies. According to our survey, most clients offering MCP support between 30 and 50 currencies, this includes some challenging currencies due to their volatility or exchange control issues. This is a complex task that requires considerable investment.

Should issuers be worried?

Yes, issuers should be paying attention. Since the regulation of interchange fees in Europe, FX revenue has become a key profit driver for card issuers. But, like BNPL, if consumers can access a lower-cost or free FX service from merchants, why would they pay their card issuer for the same? Though rolling out MCP is complex, the incentives for merchants are strong, and we’re likely to see more companies like Uber make similar moves soon.