By now I have developed the same reaction to the word “fintech” as I have to the word “PATRIOT” written in all caps. Profound suspicion.
There would be social value to innovators breaking the monopoly powers and pricing of “legacy” banks and dealers. That value was fintech’s unique selling proposition: providing more choice, transparency and functionality at a lower price.
Instead, we have Robinhood, which took years to admit the specific arrangements through which it collected hidden kickbacks from market makers, aka “payment for order flow”.
And we also have Euronet, which, despite the name is a hustling Kansas company. Euronet has a number of business lines in the global “payments space”, but it seems that the biggest contributor to the company’s profits is a supercharge on its ATM transactions called “Dynamic Currency Conversion”.
The DCC is a charge with no value or added service attached. You are most likely to have paid a DCC, without really knowing it, when you had just stepped off a long flight to Athens from Stockholm, London or Moscow, and had the archaic instinct to get some euro notes to cover the cash costs on your holiday.
Or, even better from Euronet’s point of view, if you were a bit drunk at a nightclub in Mykonos. You might not, then, be thinking clearly enough to carefully work through pages of confusing graphics about your choices on exchange rates, and just want the whole thing done.
After all, the Euronet ATM is just like the ATMs attached to your bank at home, right?
In the words of MEP Ollie Ludvigsson during a European Parliament debate in February 2019: “Consumers need to gain better knowledge about dynamic currency conversion and how expensive it really is. This can be a surcharge of 8-14 per cent. It is a nuisance that tricks consumers into large sums each year.”
Euronet’s disclosures about DCC charges’ contributions to profits are somewhat convoluted, but they could be up to 40 per cent of the company’s total profits.
Euronet and others defending DCC can argue that the consumers in front of its strategically placed ATMs can click on a button (probably a forbiddingly red coloured one) that allows them to go through to a page where they just pay the more modest interchange fee with the more consumer-favourable exchange rate offered by their card’s issuing bank.
The graphically tricky choice consumers see, late at night with several retsinas to help their thinking, seems to suggest that if they cancel the DCC “offer”, they will be cashless.
While the Mastercard network has allowed DCC charges on its cards for years, Visa only allowed non-European cards to be charged DCCs within Europe in 2019. This was an immediate earnings boost for Euronet, as foreigners with more money than sense flooded the continent that summer.
Now European parliamentarians and officials may not know what a pharmaceutical raw material factory actually looks like on the inside, but they do know beaches in Mykonos and drinking in foreign nightclubs. However, their 2019 regulation covering DCC charges was, in the end, easy to design around.
Euronet’s fans were encouraged by the apparent weaknesses of the 2019 regulations, and in Kansas and sell side pitches they said the “reg overhang” was gone. The stock continued a climb, which had started at $20 in 2013, and continued to a peak of $160 in 2019, correcting a bit, then plunging when Covid chopped international travel. But since vaccines were announced in November the shares are up by more than 50 per cent. Euronet has become a “travel recovery stock”, to use a Robinhood-customer depth of analysis.
Unfortunately, the traders do not see the analogy to European mobile phone roaming fees. The European Parliament is scheduled to revisit DCCs and related regulations in 2022, when, precedent tells us, limits or caps will be placed on money-for-nothing deals.
That would have a disproportionate impact on Euronet’s profitability, since it will still have high fixed costs, maintenance and rent to pay. Then there is the growing threat to Euronet’s top line of the increasing proportion of contactless, cashless payments.
A Euronet spokesperson in Kansas said the company was in a “quiet period” and could not reply to these points. In a risk-on, pro-fintech environment, that might be good enough, for a time.