By Gino Ravaioli, Chairman of the DCC Forum
The years that have followed the Brexit referendum have brought significant volatility for the pound. Before the vote in June 2016, which is widely viewed as a contributing factor to the currency’s drop in value, £1 was the equivalent of $1.50, but the impact of the uncertainty and longevity of negotiations since has caused it to tumble to just above $1.20. With formal agreements still to be finalised, it looks likely that the volatility is set to continue for some time to come.
The impact of a volatile currency
For those in the UK who have been going abroad during this period, the weaker pound has been more apparent with trips suddenly becoming more expensive than originally planned. Whether it has been for work or pleasure, Brits travelling outside of the UK have borne the brunt of a volatile currency and the propensity to overspend as a result of confusion around exchange rates has increased.
This has meant a greater need for more careful planning and research into destinations, looking further afield to get better value for money, staying on home soil and a tightening of budgets on spending whilst away. Whilst this, combined with the broader uncertainty surrounding Brexit, has brought many challenges for those going abroad, there has been an unexpected upside; the opportunity to drive greater awareness of their payment options and choices when completing a transaction abroad.
Understanding the options
Even for those who might have previously ignored exchange rates or paid little attention to their spending when going abroad, the volatility of the pound has incentivised consumers understand more about the payment options to identify a route that may be more cost effective or enable them to budget more effectively. Fear of getting a bad rate when exchanging currency has meant people have been less inclined to exchange cash before trips more recently, driving the use of cards abroad. Despite this, consumer understanding of the choices available when using a card remains low.
The cardholder education
Cardholders will be presented with two options when completing a transaction – to pay in the local currency or their home currency. Opting to pay in home currency calculates the exchange rate at the point of purchase, including all fees which have to be clearly stated. It means that what the cardholder sees at point of purchase is what appears on their bank statement – all in a currency they are most familiar with. As a recent YouGov poll of UK consumers revealing, familiarity is important when completing a transaction. In fact, over three quarters (78%) of consumers said they like the familiarity and 79% like the convenience of paying in pounds. During periods of currency fluctuation, this option is particularly valuable in enabling budget tracking, clarity on spending and offering peace of mind that they aren’t going to face a nasty surprise if the pound suddenly drops further in value 24 hours after the transaction.
Alternatively, cardholders can opt to complete the transaction in the local currency. In doing so, additional fees applied by the card issuer and bank remain unknown at the point of payment, as is the exchange rate. This information will only be known when the transaction appears on the bank statement in the days that follow, which ultimately makes it more challenging to determine the cost of a purchase. Not only that, but with the current instability of the pound, it can also lead to significant overspending.
Whilst the discussions around Brexit continue, and no doubt lead to further ups and downs for the pound, the opportunity it has created in driving further education to consumers in how they complete their payments abroad is invaluable. Whatever the next 12 months brings, it is important that consumers seek to understanding their choices when it comes to payment, so that they feel confident and empowered to make the decision that is right for them.