Lambert here: Thanks to reader Clive for providing another detailed explainer on the recent mysterious (and rescinded) credit card transaction in drachmas. For a fuller description of terms used in this article, please refer back to our earlier overview. (A “DDC,” as we shall see below, is a “Dynamic Currency Converter,” a service made available at some (not all) ATM terminals.)
By Clive, a payments system professional.
What are we to make of the recently reported news that a credit card user has seen the emergence of a “drachma” transaction on their credit card statement after they’ve made card payments at a Greek Merchant?
Perhaps understandably, the players in financial services industry are currently taking action to try and prepare their sub-systems for any reintroduction of the drachma in Greece, should Greece leave the Eurozone. There is not one, single, system. There are multiple sub-systems which adhere to a common standard or set of standards, but are owned and managed by different parties. The standards are already defined for the system as a whole and the sub-systems within it. These standards will not be loosened just to accommodate any return to the drachma for Greece.
The standards for how the card payments system must be operated are detailed and prescriptive. If they weren’t, the system would not be resilient and reliable. Robust systems rely on clearly defined standards and parties to that system actually implementing in accordance with the standards. Deviations from the standards required lead to system instability. In the UK alone, over six and a half billion transactions were made on debit cards in 2010 to a value of £299 billion ($463 billion) and there were a further two billion credit card purchases, totalling £111 billion ($172 billion) (“A Decade of Cards”). In recent years, the amount by value spent using cards has grown to the point where it now exceeds that spent in cash.
And that’s just the UK; the US and Europe are even larger by both volume and value. The system simply cannot be allowed to fail or operate without a six-sigma level of accuracy.
Naturally, there are standards in force in the card payments system detailing how the currency in which the transaction is denominated must be made clear to all parties – the Cardholder, the Merchant, the Merchant Services Provider and the Card Issuer. The one from MasterCard concerning what must be given by the Merchant to the Cardholder is here (Security Rules and Procedures Merchant Edition) but Visa, American Express and all the other Card Networks also have similar, if not identical, requirements:
3.11.2 POS Terminal Receipt Contents
Each copy of a POS Terminal receipt shall satisfy all requirements of applicable law, and shall contain the following information:
• Transaction amount in the original Transaction currency
This is entirely warranted. There can be no room whatsoever for ambiguity in a card payment transaction. Everyone involved must know exactly what they are paying and what they will be receiving. You can’t have a situation where at some time after the event, any of the participants in the transaction shows up and claims that, for example, they thought they were paying in US dollars but they ended up paying in euros.
For the possible reintroduction of the drachma, all the parties in the card payments system will know roughly how to change their sub-systems because they know what the current standards they have to implement are and they can make some educated guesses for where parameters have not yet been defined. Many are currently making plans, both in isolation and, as far as is possible, in co-operations with their regulators, to accommodate any adoption of the drachma. There are limits though to how much cooperation is possible because no-one in the financial services industry wants to appear they are pre-empting (and as a result influencing) the political decisions about any Greek exit from the Eurozone.
The industry is walking a tightrope. And unless and until the card payments system standards for how a drachma is to be processed in transactions are agreed and issued, no individual party’s sub-system can be safely changed because it would have to make some assumptions about what the eventual system standards might be.
From the information in the Bloomberg story, it looks like one of the various parties in the transaction chain had inadvertently released some development code being worked on into the live production environment. It had to be either the Merchant Services Provider or the Card Issuer. My guess is that it was the Card Issuer, Citigroup. This is because the Cardholder’s statement got fixed a few days later to remove the word “drachma” and substitute it for the correct currency for the transaction, which was of course euro.
Banks are very reluctant to mess around with customers’ statements when there is an error caused by data that the bank has received from another party. Even if there’s a mistake in what a Merchant Services Provider has sent to the Card Issuer (like the wrong city quoted in the transaction location for example) that bad data usually stays on the Cardholder’s statement and the Cardholder, if they query it (“but I’ve never even been to Trenton!”), gets told to take it up with the Merchant. In the Bloomberg story, the reporter did indeed go back to the Merchant, Hilton Hotels, who were at pains to confirm they had done the billing correctly, in euros.
But where the bank (Card Issuer) makes a blunder, they can quietly go in and tweak the statement to make the error go away. They can though only do such tweaking if it didn’t affect the transactions as posted to the account (i.e., the monetary amount). That’s impossible to finesse, the bank has to pass correcting entries and these would show up as credits / debits actually hitting the account.
So, a Citigroup screw up, most likely. All of which just goes to show how easy it is to make a bit of a mess when you start changing complex systems.
In the event of a dispute, the record keeping elements of the card payments system must be not only accurate, but consistent. Hilton Hotels, in the case of the Bloomberg story, was able to prove that they’d originated the transaction in euros and had issued a receipt (as required in the MasterCard Merchant specification which is industry-standard) to the Bloomberg reporter to that effect. Any party later on in the chain (such as Hilton’s Merchant Services Provider or the Card Issuer, Citigroup) which suddenly started quoting drachma would have to explain why they’d violated the original transaction currency definition in their processing.
Note too that, for this transaction, there never could be any ambiguity about what currency the transition was denominated in. The sovereign currency of Greece was the euro and the drachma shown on the Cardholder’s statement did not exist. When the euro was introduced, it was a binary event. The previous national currencies of the Eurozone members were replaced when the euro came into existence on the 1st of January 1999. The now obsolete currencies were locked into a fixed exchange rate with the euro and all electronic transactions were converted from the old currencies into euros at a fixed rate.
But as we have pointed out previously, any reintroduction of the drachma in Greece could not happen overnight. And the drachma would have to float on the currency market. We have argued it would take several months if not a year or longer to implement all the sub-system changes to change the entire card payments system to be able to transact in drachma consistently and infallibly. The Bloomberg story illustrates what happens when all sub-systems are not kept completely in sync or someone makes a change to a sub-system in advance of a published and agreed standard about how the change is to be made.
So how did Citigroup’s blooper come to be? How did development code get released into production? To understand one likely explanation, let’s look at Citigroup’s competitive environment in financial services.
In order to facilitate a phased transition from the euro to the drachma in Greece, some in the financial services industry (with cheerleading, it has to be said – and this is regrettable in my opinion – by some Syriza supporters) have suggested that a solution might be the wider adoption of EPoS terminals which are DCC (Dynamic Currency Converter) capable. Leaving aside for a moment the massive task of replacing all existing euro-only EPoS terminals in Greece with DCC-capable ones, DCC is really just a skimming operation disguising itself as a “service” to Cardholders.
Merchant Services Providers have been keen to step into any DCC sales opportunity presented by the reintroduction of the drachma. Here is a typical sales pitch from a Merchant Services Provider offering a DCC product (note this is a UK example and refers to GBP, or sterling, but the principles are the same for any DCC-capable EPoS product):
When customers pay with their MasterCard or Visa card, DCC (Dynamic Currency Converter) enables the terminal to automatically identify the payment card’s country of origin. The terminal then displays the sales amount in GBP, and subsequently shows it in the card holder’s domestic currency. For additional price transparency, the currency conversion rate can be viewed, enabling the customers to see all of the pertinent information at one glance within just seconds. Merchants will not incur any additional costs for offering this service and will receive their revenue in GBP, plus a percentage of the DCC-commission charged to the customer. No matter what line of business you are in – retail, hotel or restaurant – offering DCC will take your customer service to the next level and provide true value to your international clientele.
I have highlighted the (literally) money quote. There’s kickbacks at every stage of the transaction. The Merchant gets a cut of the currency conversion profit as does the Merchant Services Provider. With a combination of euros and drachma inevitably in circulation in Greece following a disorderly Greek exit from the Eurozone, Merchant Services Providers will be keen to offer products and services which “help” people through the chaos by being able to denominate card transactions in either drachma or euros.
So what is there not to like? Well, obviously higher costs for Cardholders who can get their pockets picked by both the Merchant and the Merchant Services Provider. Currency conversion rates are not difficult to calculate but it is difficult to work out without checking the Money Market Rate if both the rate and the spread you’re being offered (the difference between the “buying” and “selling” rates for the currencies involved) are reasonable, or profiteering. When any part of the financial services industry claims to be offering you a service for your convenience, it’s always best to check your wallet afterwards.
A less obvious consequence is also that the profit taking opportunity moves to different parties in the card transaction. If your account is in, say, US dollars and you make a payment on your card in, for example, euros, your Card Issuer gets to make the profit on the currency conversion if the Merchant uses a non-DCC-capable EPoS terminal. The EPoS terminal denominates the transaction in euros and the conversion into US dollars – and profit on the conversion – happens at your Card Issuer. But if a DCC-capable EPoS terminal is used and the terminal denominates the transaction in US dollars, the currency conversion happens at the Merchant/Merchant Services Provider and they get the profit.
You might well ask yourselves, then, why large Card Issuers like Citigroup could be pre-empting the publication of standards for accommodating the drachma in the card payments system and making its sub-system in the card payments system “drachma compatible” (sort-of). It couldn’t possibly be because the big Card Issuers don’t want quick-footed Merchant Services Providers exploiting any confused and anarchic reintroduction of the drachma for their own rent seeking, could it?
As if Greece doesn’t have enough to worry about, the risk of being caught in the crossfire of a financial services Godzilla vs. Mothra monster battle for new revenue earning opportunities from a disorderly Grexit can be added to the list.