Currency Conversion

How Currency Conversion Works

When making cross-border transactions with your virtual credit card, currency conversion plays a key role in determining how much is ultimately charged to your card. Currency conversion occurs when you make a purchase in a foreign currency, and it’s converted into the currency your card is issued in, typically at the current exchange rate. However, due to differences in authorization and settlement times, fluctuations in the exchange rate can lead to discrepancies between the pre-authorization amount and the final amount charged. This is a common phenomenon in international transactions.

Currency Conversion Explained

Whenever you use your virtual card to make a purchase in a foreign currency, the amount is converted into your card’s base currency, such as USD, EUR, or GBP. This conversion happens based on the exchange rate at the time of the transaction.

Exchange Rate:

• The exchange rate is the value at which one currency is exchanged for another. It fluctuates constantly based on global market conditions. When you make a purchase in a foreign currency, the exchange rate at that moment determines how much your card is charged in your local currency.

Real-Time Conversion:

• Most virtual card systems automatically handle the conversion in real time when the transaction is processed. You don’t need to worry about calculating the conversion yourself—your platform manages it.

Authorization vs. Settlement: Understanding the Timing Difference

In cross-border transactions, there’s often a delay between the time the transaction is authorized (when you make the purchase) and the time it is settled (when the final charge is processed by the merchant and deducted from your card). This delay, combined with fluctuating exchange rates, can cause differences between the pre-authorization amount and the final amount you’re charged.

Authorization Time:

• When you make a purchase, the transaction is authorized at the current exchange rate. This is the rate applied at the time of the initial purchase, and a hold is placed on your card for the estimated amount in your local currency.

Settlement Time:

• The final settlement of the transaction usually happens a few days later, after the merchant processes the payment. Depending on the payment processor and merchant, this can take anywhere from 1 to 5 business days, or even longer in some cases.

Exchange Rate Fluctuations:

• Since exchange rates fluctuate continuously, the rate at the time of settlement may differ from the rate at the time of authorization. This difference in exchange rates means that the final amount charged to your card might be higher or lower than the initial pre-authorization amount.

Resulting Discrepancies:

• It’s common to notice a small difference between the pre-authorization amount (the estimated charge at the time of the transaction) and the final amount (the settled charge). This difference is due to exchange rate fluctuations between the authorization and settlement times, and is a normal part of international transactions.

Why Currency Conversion Discrepancies Occur

The main reason for discrepancies between the pre-authorization amount and the final settled amount lies in the timing of the currency conversion. Since exchange rates change frequently, even small fluctuations during the delay between authorization and settlement can affect the final charge.

Typical Scenarios:

• If the exchange rate strengthens between authorization and settlement, you might be charged less than the initial pre-authorization amount.

• Conversely, if the exchange rate weakens, you may end up paying more than the pre-authorized amount.

Commonly Affected Transactions:

• These discrepancies are most common in cross-border transactions where there’s a delay between when you make the purchase and when the merchant processes the payment (e.g., hotel bookings, car rentals, or online orders from international vendors).

How to Manage Currency Conversion Variations

While exchange rate fluctuations are a normal part of international transactions, there are steps you can take to manage these variations and minimize the impact on your final charge:

Be Aware of Exchange Rate Changes:

• Keep in mind that the exchange rate applied at the time of authorization may not be the same as the rate applied at settlement. This is especially important for large purchases where exchange rate fluctuations can have a more noticeable impact.

Use Real-Time Exchange Rate Tools:

• If you want to have a better sense of the conversion, you can use real-time exchange rate tools to estimate how much your transaction will cost in your local currency. Keep in mind that actual rates may vary slightly depending on the platform and payment processor.

Track the Settlement Time:

• Be mindful of the time between authorization and settlement, especially for transactions with international merchants. The longer the delay, the greater the likelihood of exchange rate fluctuations affecting the final charge.

Review Your Transaction History:

• After the transaction settles, check your card’s Transaction History to see the final amount charged. Compare it to the pre-authorization amount to understand the effect of exchange rate changes.

Currency Conversion Fees

In addition to exchange rate fluctuations, some virtual card products may include currency conversion fees when processing cross-border transactions. These fees are charged to cover the cost of converting one currency to another.

Currency Conversion Fee:

• The currency conversion fee is typically a small percentage of the transaction amount (e.g., 1-3%). This fee is added to the final settled amount and is separate from the exchange rate applied during the transaction.

Foreign Transaction Fee:

• In some cases, a foreign transaction fee may also apply for purchases made in a currency other than your card’s base currency.

Review Fee Structure:

• Check the fee structure of your virtual card to understand if any currency conversion or foreign transaction fees apply. Some card products are designed for international use and may waive these fees, while others may charge a small percentage on each cross-border transaction.

Handling Exchange Rate Discrepancies: What to Expect

Since exchange rate fluctuations are beyond the control of the platform or the merchant, these discrepancies are a normal part of cross-border transactions. Here’s what you can expect:

Small Fluctuations:

• In most cases, the difference between the pre-authorization and final settled amount will be minor. However, it’s important to understand that any change in exchange rates during the settlement period can affect the final amount charged to your card.

No Need for Concern:

• A small difference between the authorized and final charge does not indicate an error or issue with the transaction. It’s a common occurrence in international payments, especially when dealing with multiple currencies.

Tracking Discrepancies:

• If you’re tracking your expenses, it’s helpful to keep a record of the pre-authorization amount and compare it with the final settled charge. Any minor discrepancies are likely due to exchange rate changes during the transaction process.

Frequently Asked Questions (FAQs)

Why is the final charge different from the pre-authorized amount?

• The difference is due to exchange rate fluctuations between the time of authorization (when you made the purchase) and the time of settlement (when the merchant processed the payment). This is common in cross-border transactions.

How can I minimize the impact of exchange rate changes?

• While you can’t control exchange rate fluctuations, you can monitor exchange rates before making large purchases and be mindful of the settlement time, which may affect the final amount charged.

Will I be notified of the final settled amount?

• Yes, once the transaction is fully settled, the final amount will appear in your Transaction History. You will also receive a notification if you’ve enabled transaction alerts on your account.

By understanding how currency conversion and exchange rate fluctuations work, you can better manage your international purchases and minimize confusion regarding discrepancies between pre-authorization and settlement amounts.