How do foreign exchange transactions work on credit cards?

When you purchase something in say British Pounds, using your US Issued (Dollar) card, the transaction on the FX part is handled as follows, the route is always:

Client -to- Merchant -to- Acquiring Bank -to- VISA/MasterCard (Card Scheme) -to- Issuing Bank.

• The transaction amount that requires approval is presented in GBP
• The acquiring bank sends the amount in GBP to VISA (let us assume it is a VISA card)
• VISA send the amount in GBP to Issuing Bank in GBP
• Issuing Bank will take the amount in GBP and convert it to USD
• The FX Rate is provided by the Issuing Bank
• Issuing Bank will check if there is enough balance in the card.
• Issuing Bank will provide Authorization to the VISA, which in turn goes to the Acquiring Bank.
• Authorization is complete
• On the settlement date, (let us assume it is 2 days later), the FX rate on the day of settlement is applied. If the rate goes against the bank, the customer pays (as overdraft on debit card or beyond limit on credit card), if the rate goes in favor of the bank, the bank passes the applicable rate back to the customer (because by law they have to utilize the FX rate on the day of settlement).

If the card is being used in say Tanzania for Tanzania Shillings, then there is no direct way for your (issuing bank) to quote USD/TZS pair. To counter this all issuing banks, set a basket of currencies for which they will accept/quote. Mostly it is USD. VISA then manages FX pair rates for all other countries, based on USD.

VISA can then provide a rate for USD/TZS to the issuing bank. The issuing bank can also instruct VISA to always keep a margins of 3% on all FX authorizations, etc.

The settlement of FX is done as per the settlement of FX for any other transaction, except in this case VISA's settlement bank in the UK will settle with VISA's settlement bank in the US for the GBP/USD transaction.