By: Steve Pedersen, Head of North American Corporate Card Products, BMO Financial Group
You’ve probably noticed there’s an awful lot of regulatory action for card payments going on in Europe right now. I often say Europe can be an incubator for what’s on the horizon for North America, which means it’s worth paying attention to the new card rules, even if your company is not physically located in Europe. Even if the changes don’t come to North America, this doesn’t mean the rules won’t impact businesses in the region, because they already are, especially if your company does business in Europe.
Multinational companies with card programs in Europe are being forced to operate in different ways, and organizations outside of the European Union could be paying more in travel expenses for employees who don’t understand the new fee landscape. This new regulatory environment is creating a fundamental shift for the entire corporate card industry, driven in part by higher fee structures and diminishing rebates.
The scope of the new rules that fall under the Payment Service Directive (PSD2) is broad, and several noteworthy updates that are already impacting corporates in North America should be top-of-mind for every organization. Here’s how to adapt proactively.
Dynamic currency conversion: You’re paying more for that Italian coffee than you realize.
Anyone travelling abroad deals with currency conversions, but many don’t realize they could be spending more money than necessary. This variance depends on the foreign exchange method used.
There are three ways to convert currency when travelling abroad: Get cash at the currency exchange, pay with a card and let Mastercard or Visa do the conversion, or let the retailer convert the currency at the point of sale, applying dynamic currency conversion (DCC). Many travelers – even those who are experienced – pick the DDC method because it’s more convenient. What they don’t realize is, while convenient, it’s also much more expensive and fees can reach as high as 10 percent, making it the worst choice of the three.
This scenario can play out a dozen times each trip. Assume you’re Canadian, travelling to London to meet a customer. As dinner ends, the waiter asks if you’d like to charge your credit card (corporate or personal) in pounds or Canadian dollars. It sounds simple, but here’s what’s not seen: The restaurant uses its own exchange rate, which can vary from restaurant to restaurant and is more expensive than what banks offer, thus adding an extra charge on top of your bill. The same is true for hotels and other frequently visited establishments. If you consider that in many cases half of all travel costs can be attributed to expenses outside of a flight, such as hotels, restaurants and cabs, the use of dynamic currency conversion can increase the cost of travel by five percent, and most people don’t even realize it. While DCC is extremely prevalent in Europe, its use has grown in popularity across the world, including the U.S.
For the business traveler, the best exchange method is to use a corporate card and pay in the local currency for all goods and services. Although card companies also charge conversion fees, this surcharge is almost always more favorable than DCC, or what currency exchanges offer.
The takeaway for North American organizations: centralize the expense process and direct travelling employees to use their corporate cards and pay in the local currency. This may mean educating staff that DCC exists and how to avoid the extra charges. Updating travel policies with the DCC guideline is also effective, and can be included as a reminder if a corporate agent books travel.
“Honor all cards?” Not anymore, except with a surcharge!
The past assumption that vendors will “honor all cards” is disappearing. Merchants in Europe now have the right to refuse to accept a premium card, or to levy a surcharge for its use. While surcharging is the norm, there are occasions when a retailer will not accept a credit card.
How do you protect your employees and reduce these fees?
First, ensure everyone is aware of these fees so they are not surprised. Companies that negotiate corporate rates with hotels can get an agreement where surcharges are waived or greatly discounted. For the few situations in which a card is not accepted, it’s important to ensure your business travelers have an alternative form of payment. Travelers should be aware of the unique elements of the country in which they are travelling. For example, while cash can be a very good backup, countries like Sweden and Denmark are embracing a digital-only payment system for purchases of all sizes; a few exceptions may be found in major tourist areas. This means that a retailer may not accept cash.
While the new surcharges can be a surprise, nothing is worse than finding yourself without the ability to pay when you are travelling. Companies may also need to review their travel policies because this shift in payment acceptance can impose a new need for more flexibility. Some travel and expense policies are stricter than others and insist on using corporate cards for reimbursements. It’s wise to permit expense reports that include receipts from a personal card, or a note in the report explaining the situation. Clearly explaining these types of exceptions in travel policies will help avoid the social friction of multiple emails and delayed reimbursements.
Global card programs are changing – that is the reality. Canada, especially, is looking at the new rules in Europe and contemplating some changes of its own, including drops in interchange rates and rebates – and the U.S. likely isn’t far behind. As regulatory changes continue to unfold, companies everywhere must recognize the market shifts, understand what is going on in different jurisdictions and how updates could affect them, and realize that hard-and-fast rules to card program policies or payments may not pay off.