Holidaymakers paying by card are being hit with hideous exchange rates because some card machines allow foreign shops, hotels and restaurants to rip off customers by switching the currency AFTER they've entered their PIN, a MoneySavingExpert.com investigation reveals.

In one case, a £781 transaction ended up costing £826. This is about retailers charging people in pounds behind their back, despite customers having asked to pay in local currency after being given the choice.

Spending on a top overseas credit card is one of the best ways to pay if you do so in the local currency. But whichever card you use, paying in sterling is usually more expensive as the rate is set by the local bank and can be awful. Businesses sometimes get a cut of the mark-up – some may be ignorant of the problem but the system also allows unscrupulous firms to profit this way.

The little-known flaw emerged after we started investigating why many travellers have ended up being charged in pounds despite explicitly asking to pay in euros. Since we first published that story earlier this summer, we've seen lots more examples.

How does the rip-off happen?

Even if you see the local currency quoted before you enter your PIN, the decision on which currency to use may be made on the card machine afterwards. This can catch you out if you hand the device back after entering your PIN, which many people do.

Industry leaders such as Mastercard confirm it is possible for retailers to choose and therefore change the currency to pounds after a PIN has been entered. Not every payment terminal allows this to happen, and of course most retailers do not cheat their customers. But it is important you know the risk and can protect yourself from it.

The worst example of this 'dynamic currency conversion' we've seen is an 18% mark-up, where £160 of euros cost a whopping £190.

Martin Lewis
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'One bill cost £826 rather than £781'

Since starting to look into this last month we've been deluged with stories from MoneySavers who've been caught out – with some saying they've seen card machines that allow retailers to select the currency after a PIN has been entered.

  • Malcolm, who paid for a Dublin hotel room, said: "My 50% of the bill was €889 and euros showed on the PIN machine. On the way back to the airport I noticed we'd both been charged in pounds. This cost us each £45 more than it should have done – €889 was converted to £826 rather than the real exchange rate of £781."
  • Kirsty, who used her card in a shop in Majorca, said: "When entering my PIN the amount displayed on the card machine was €42. However, it wasn't until after I had returned home that I noticed they had in fact done the currency transaction themselves. This ended up costing me £41.39 when in fact it should have only been £37.89 based on the exchange rate I got my euros for."
  • Derek B, who paid for a hotel in Lanzarote, said: "A waiter passed me the terminal with a display that showed euros as the currency. I input my PIN and then he showed me the next screen that came up on the terminal which gave the option of charging in euros or sterling AFTER I had entered my PIN."
  • Phillip, who used his card in Spain, said: "In the UK you see the amount in pounds, enter your PIN and the machine then tells you to hand it back to the retailer. We deduced that we had automatically done the same in the restaurant, but the waiter had then entered to pay in pounds despite our request to pay in euros. We now hold on to the machine after entering the PIN to check and choose to pay in euros ourselves."

Dynamic currency conversion is marketed as a way of customers being able to see what they will pay in their currency. But if you've a specialist travel credit card for overseas spending, it's always worse to pay in pounds as the conversion means you won't get the near-perfect exchange rate you should get.

If you've a non-specialist card that charges a 3%-ish fee, it's less clear-cut, as it depends just how bad the exchange rate you get abroad is. But mark-ups often eclipse the charges on even the worst card to use abroad – so it's still usually much safer to pay in local currency.

Confirmation of the 'flaw' from Mastercard and others

We approached a number of firms that provide payment terminals and dynamic currency conversion software that operates on these payment terminals to ask about this issue. None was willing to give us a clear enough overview of how the process works. However, a document produced by card scheme Mastercard explaining to shops and restaurants how to implement dynamic currency conversion reveals this is a known problem within the industry.

Mastercard's Dynamic Currency Conversion Compliance Guide, published online and last updated last year, has a page devoted to the issue. It reports a complaint from a cardholder wrongly charged in pounds at a Barcelona restaurant – the cardholder said the choice of currency came after they'd entered their PIN, and the waiter refused to reverse the transaction and process the charge in euros.

The Mastercard document says:"This particular complaint was reported to us by the cardholder, but is also a typical example of one of the issues we encounter whilst doing our merchant audits. In this instance, the choice of currency conversion was offered on the terminal, but this was done after the PIN had been entered and the option was not conveyed to the cardholder.

"Obviously, this is not the right procedure and is not compliant with the applicable legislation and Mastercard rules... The cardholder's PIN provides confirmation and approval of the transaction that is about to take place and should therefore always be the last step in the transaction."

The document later adds: "Automatic DCC is when a merchant conducts DCC and submits authorization or pre-authorization without informing or seeking cardholder consent. Automatic DCC is strictly forbidden under the applicable legislation and Mastercard rules. A merchant or terminal should always provide a choice to the cardholder."

Other industry experts also acknowledge that some terminals may be set up to allow the currency to be changed.

Jennifer Conneely, board member of the Dynamic Currency Conversion Forum, an industry body that promotes the best practice of dynamic currency conversion, confirmed that payment terminals can be manipulated. She said it's "technically possible" a currency choice could be changed after a customer has entered their PIN – though it would be "against all card scheme rules".

Avoid holiday rip-offs by ALWAYS keeping hold of the card machine AFTER entering your PIN
When paying on a card abroad, you're often asked if you want the transaction to be in pounds or the local currency

'Hang on to the payment terminal'

MoneySavingExpert.com managing editor Guy Anker, who was himself twice charged in the wrong currency on a recent holiday to Greece, said: "Sadly, we've been inundated with stories of shops and restaurants ripping off unwary travellers, so the key point here is to be careful using your card abroad.

"Hang on to the payment terminal or keep an eye on it after entering your PIN until the transaction goes through to check you're actually charged in the right currency – and always check your receipt straightaway, so you can immediately complain if you're overcharged.

"It's outrageous that customers who've done their bit in making sure they pay the cheapest way can simply have their currency choice overruled – and there's a real risk this hidden charge is catching out thousands of holidaymakers without them ever realising it."

How to make sure you aren't caught out

Explain clearly that you want to pay in the local currency, and follow the steps on the terminal carefully – they are not all the same and the wording can sometimes be confusing. Once you've entered your PIN:

  • Hold on to the terminal. Keep hold of it after you've entered your PIN – even if it feels a bit awkward as you'd normally hand it back. If you can't, at least keep an eye on it till the transaction goes through. That way you ensure you can select the local currency if there is the option at this point.
  • Always check your receipt. If you've been asked whether you want to pay in euros or pounds and opted to pay in euros, make sure that's how you've actually been charged.
  • If you find you've been charged in pounds, query it immediately. It's easiest to get this sorted straightaway. The UK Cards Association says you should ask for the transaction to be voided, not refunded. Then start the transaction again.
  • If the retailer refuses, or you only discover you've been wrongly charged later, contact your bank or card issuer. It will then take it up with the retailer's bank overseas, and may start a chargeback. (See our Chargeback guide for more info on how this works.)

What are the rules?

European law states the currency that customers are charged in must be agreed before the transaction, and if currency conversion is offered the customer must know all charges and the exchange rate beforehand too.

Mastercard and Visa, which facilitate the majority of consumer global payments, also say a customer must always give permission for a company to bill them in their own home currency rather than local currency. This means any business, wherever in the world you are paying, should not be overriding or changing your choice after you enter your PIN.

Mastercard and Visa say the onus is on the retailer's bank to enforce these rules, as it is the bank that is providing the access to the Mastercard and Visa networks. So if, for example, a restaurant or shop overrides the customer's choice, it would be the responsibility of that company's bank to make it stick to the Mastercard and Visa rules.

Mastercard says it has a dynamic currency compliance team which can step in, in such cases, to contact the company's bank, and in turn ask the bank to retrain employees from the retailer that is breaking the rules.

A spokesperson said: "Mastercard's direct relationship is with the acquiring bank. Where a retailer/business does not follow our DCC rules it is the acquirer [bank] who in turn is responsible for ensuring the business follows Mastercard's rules. If the terminal is at fault the acquirer is also responsible for ensuring any service provider they use for their DCC service fixes the noncompliance problem."

A Visa spokesperson told us: "Dynamic currency conversion transactions are allowed only when the merchant gets express permission from the customer before the transaction is authorised... Transaction amounts, applicable exchange and fees, [a] statement that [the] merchant provided currency exchange and proof of choice must be included in the transaction receipt."