It’s a head-scratching moment for all Brits abroad. A waiter or shop assistant hands you a payment terminal with the bill. One button lets you pay in GBP…another selects the local currency. The same happens at every ATM you seem to visit for a cash withdrawl.

Our gut tells us one option will save us money and the other will cost more – but which is which?

DCC (Dynamic Currency Conversion) is a service provided by banks, shops, restaurants and hotels all over the world. It allows them to offer foreign visitors the chance to settle a bill in their own currency as well as the merchant’s local one.

The advantage for the consumer is twofold. It lets you see a transaction value in pounds and pence rather than having to convert a local currency amount in your head.

It also shows the ‘true’ cost: the number you see on the terminal is the same you’ll see on your bank account or credit card statement.

Unfortunately, this piece of mind comes at a cost. DCC allows local businesses to use their own currency rate to exchange your pounds. This is almost always worse than the one you’d be charged had you chosen to pay in local currency.

How much worse? Several studies have pointed to markups of 5-10% but there are examples of some merchants charging as much as 30% on top of the standard rate!

Bank charges

Some travellers pay in pounds because they think they’ll avoid the fees charged by their bank and credit companies for using their cards abroad.

Unfortunately, these charges are for foreign purchases, not currency exchanges so they’re actually only adding to the cost of the transaction. In fact, the card fee will be even higher than expected because the DCC increases the purchase value in sterling.

All merchants must offer you the chance to pay in the local currency. Remember to check the payment terminal and make sure you’re not choosing ‘Pay in GBP’ or similar. If that’s the only option offered, hand the terminal back and ask them to change it to the local currency.

Check the receipt and make sure there’s no mention of sterling anywhere on it. If you refuse DCC at the point of sale but the charge appears on your statement with an inflated exchange rate, you should dispute it with your card issuer.

Change in regulation

Thankfully, regulators are aware of the problem and rolling up their sleeves.

The European Commission recently proposed full disclosure on DCC. Merchants would need to clearly show the total cost of paying with each currency to help consumers make informed decisions.

Global networks like Mastercard and Visa are considering similar measures for businesses looking to mark up payments made on their charge cards.

However, while these initiatives might improve transparency they’re unlikely to change the fact that it’ll always work out cheaper to pay in local currency.

Wherever you are, whatever you’re paying for, remember this simple rule. Say no to ‘GBP’ and yes to ‘local’.

Chris Spalding is head of product development at Caxton FX