Credit Card Issuers Face $Millions In Refunds

When you use your bank credit card to purchase a new hat at Harrods in London, the international banking system manages to pay Harrods in pounds and charge you for the purchase in dollars. When we received a new bank card, most of us received a little booklet that explained, among other things, the various charges for using the card, including the extra costs of using the card outside of the U.S. How many of us (a) read the booklet and (b) know where it is now?

The issue is not trivial. At the present time, Visa and MasterCard are faced with the possibility that they may have to refund to consumers an estimated $500 million in penalties for not adequately disclosing to consumers the currency-conversion charges levied by the bank issuing the card. Judge Ronald Sabraw of a California state court has issued a preliminary decision siding with the plaintiffs against Visa International, Visa USA, Inc., and MasterCard International. While this suit relates only to cardholders in California, it could easily be copied in other states.

What are these fees? First, Visa and MasterCard charge a wholesale currency-conversion fee plus one percent to the bank that issued the card. In turn, those banks pass along those charges to the cardholders that made the overseas purchases. A number of banks tack on additional charges of one to two percentage points, according to the article by Jennifer Bayot in the New York Times. In addition to the currency-conversion fee, "many issuers, including First USA Bank of America, collect an additional commission of 1 percent to 4 percent." The judge believed that the banks provided their cardholders with inadequate disclosure of these fees. Many banks do not provide a breakdown of these extra charges, but Chase, a unit of J.P. Morgan Chase, Inc., lists conversion charges separately on the bills." Banks may have been making inadequate disclosures, but consumers should not be unduly alarmed: given the costs of converting dollars to foreign currencies when traveling overseas, using a bank credit card instead of cash (in the foreign currency) is probably still less costly.