CC Co's May Be Forced to Return Fee

This article comes from the NY Times website and is in the 2/11 edition of the Times. It's of special interest if you have done any traveling abroad and have used a Visa or Mastercard to charge purchases. The URL for the article is http://www.nytimes.com/2003/02/11/b...9200&en=654116a47ef2d91b&ei=5004&partner=UNTD

I have reposted the article for the benefit of those who aren't members of the NY Times website.

John

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February 11, 2003
Credit Card Companies May Be Forced to Return Fees
By JENNIFER BAYOT

Visa International and MasterCard International may have to pay back $500 million in fees they collected from people who used their cards abroad, according to a tentative ruling by a California judge.

The card networks should have insisted that their member banks disclose more openly the fees for currency conversion, according to the preliminary decision, which is under seal in state court but was confirmed by lawyers on both sides.

The surcharges are now mentioned in the cardholder agreements that accompany new cards. The preliminary ruling would require the charges to appear on applications, solicitations and monthly bills as well.

"You'll get more disclosure, and then you'll get more competition," said Patrick J. Coughlin, a partner at Milberg Weiss Bershad Hynes & Lerach, which represented the plaintiff. "That's really what you don't get without the disclosure."

Judge Ronald M. Sabraw is expected to review responses to the initial ruling and make a final decision in a few weeks.

The judgment could influence another lawsuit against Visa and MasterCard, lawyers said. That case, in federal court in New York, also attacks conversion fees, but names the nation's largest banks among the defendants and is a class-action lawsuit â?? meaning that repayments to cardholders could reach to the billions.

The preliminary ruling in California found nothing wrong with the conversion fees themselves, nor did it find any violation of the federal Truth in Lending Act, lawyers said. Only a California statute on deceptive practices applied.

"The judge just missed the mark completely with the aspect of the decision that relates to deceptive practices," said Noah J. Hanft, general counsel for MasterCard.

MasterCard said that it had recommended for years that its member banks disclose the currency conversion process. But the final decision rested with the banks and their federal regulators, the network said.

"Bank disclosure is regulated at the federal level," said Sharon Gamsin, a spokeswoman for MasterCard. "Judge Sabraw is trying to take authority that rightly belongs to federal agencies that regulate bank disclosure."

Visa said in a statement that it was disappointed with the preliminary ruling in the case, Adam A. Schwartz v. Visa International, Visa International Service Association, Visa U.S.A. and MasterCard International.

"The court decision flies in the face of common sense," said Stephen C. Theoharis, senior vice president of Visa U.S.A. "Visa pioneered today's currency conversion system that protects consumers from exorbitant rates when traveling abroad. The decision is fundamentally flawed, has no basis in fact or law, and we will appeal."

Although the preliminary decision was made in a state court, it would apply to all Visa cardholders because Visa International's headquarters are in Foster City, Calif. MasterCard, which is based in Purchase, N.Y., would be required to give refunds only to California customers.

Though Judge Sabraw did not specify the amount the card networks should pay, Mr. Coughlin said the $500 million figure represented five years of conversion fees, starting in 1996. MasterCard would be responsible for only 10 percent to 20 percent of that payment. Visa and MasterCard declined to comment on the costs. That figure may even be conservative, considering that Visa and MasterCard earned $756 million last year from conversion fees, according to the Nilson Report, which tracks the payment industry.

For each overseas transaction on a card, Visa and MasterCard charge their member banks, like Citibank or MBNA, an exchange rate plus a 1 percent transaction fee.

These banks pass the surcharges on to their cardholders, but few disclose them beyond the initial cardholder agreement. Most monthly statements list only a purchase price that includes the fees.

In addition, many issuers, including First USA and Bank of America, collect an additional commission of 2 percent to 4 percent.

A traveler who spends $1,000 in Paris would be charged at least $10 by Visa or MasterCard. Seven out of 10 cardholders would have to pay an additional $20 that had been tacked on by their banks.

Some banks, including Chase, a unit of J. P. Morgan Chase, list conversion charges separately on their bills. Should the California decision stand, more monthly bills may look like Chase's.

Even with the surcharges, credit cards are often the best deal for shopping abroad, beating almost all exchange counters.

David Robertson, publisher of the Nilson Report, questioned whether the additional disclosure suggested by the court would add to consumers' costs. "The Visa and MasterCard system is tremendously efficient and cost effective," he said. "I think asking any card issuer or merchant to provide information about the currency conversion each and every time it occurs is onerous from a technological standpoint. It's expensive to implement."

Visa and MasterCard emphasized how easy they make it for people to buy goods and services when they travel. "This is the best game in town," Mr. Hanft said. "This is the most consumer-friendly payment process out there in terms of buying things overseas."

The federal case, pending in the Southern District of New York, challenges Visa and MasterCard's conversion systems, contending that they are anticompetitive. How much the California case would apply is unclear. The federal lawsuit is largely an antitrust claim; the California case was not.

Still, "a lot of the factual predicates are the same," said Edward Millstein, a lawyer at Berger & Montague, the Philadelphia law firm serving as co-lead counsel for the cardholders in the case.

A separate class-action lawsuit against Visa U.S.A. and MasterCard accuses them of anticompetitive behavior. That case, pending in federal court in Brooklyn, was brought by retailers and involves debit cards.

Lloyd Constantine, lead counsel for the retailers in that case, said the tentative California decision demonstrated that "there is a continuing practice by Visa and MasterCard of failing to disclose the real costs of transactions they impose on consumers and merchants.`

Copyright 2003 The New York Times Company