isa and MasterCard International will have to refund millions of dollars in foreign currency exchange fees to cardholders, California State Superior Court Judge Ronald Sabraw ruled. In a final decision on the matter issued Tuesday, April 8, 2003 in Oakland, the court found the associations violated California's unfair-competition law for not properly disclosing currency-conversion fees charged on purchases priced in foreign currencies and made with Visa- and MasterCard-branded credit cards.

In addition, American Express announced it is being accused of similar charges regarding its currency-conversion policies in a lawsuit filed in late March.

The California court declared that Visa and MasterCard must revise their policies and require that member banks disclose fees charged for exchanging foreign currency in cardholder agreements, applications, solicitations and monthly billing statements. Visa and MasterCard charge an exchange rate plus 1% to their member banks. The banks pass that charge on to cardholders, and many of the banks add on additional fees of their own, ranging from 2% to 4%.

Typically, cardholders have not seen a breakdown of exchange fees on their monthly credit card statements - rather, they see a comparison of the amount owed in foreign currency and that figure converted into local currency. Fees charged by banks were disclosed only in the agreements the cardholders received in the mail with a new card.

Because Visa's headquarters are in Foster City, Calif., and are under the court's jurisdiction, Visa must refund money to all of its cardholders nationwide; Purchase, N.Y.-based MasterCard only is required to reimburse cardholders that live in California.

In a 125-page ruling, Sabraw said Visa had collected $817 million from U.S. cardholders making purchases in foreign countries from 1996 through March 30, 2002, the New York Times reported. He also said that MasterCard collected approximately $195 million in fees nationwide from February 1996 through December 31, 2000.

An attorney for the plaintiffs estimated the associations would have to pay as much as $800 million in restitution - Visa about $740 million and MasterCard about $60 million -representing conversion fees from 1996 and a significant amount more than the $500 million previously expected ("Visa, MasterCard Might Have to Pay $500 Million Refund," The Green Sheet, February 24, 2003, issue 03:02:02).

A MasterCard official challenged the $800 million figure, stating that Sabraw did not specify an amount for restitution in his decision.

In a preliminary ruling issued in February, Sabraw sided with the plaintiffs' claim that the associations hid their standard fee from cardholders and that they should have required their card issuers to clearly divulge fees charged for currency conversion. The judge made his final decision after reviewing responses to his preliminary decision. The court ordered Visa and MasterCard to devise a plan for refunding cardholders' money by April 28, 2003; this plan will determine the final amount to be paid in damages by the two companies. This isn't the only deadline looming for the companies: April 28 is also when the trial involving Wal-Mart and four million other retailers is scheduled to begin.

Both Visa and MasterCard said they plan to appeal the judge's final decision.

"In saying that MasterCard must mandate that its members disclose the currency-conversion process to cardholders, Judge Sabraw is ignoring the fact that consumers naturally understand that commercial suppliers of goods and services impose a markup over their costs," MasterCard's General Counsel, Noah Hanft, said in a statement.

Hanft used the unlikely example of retailers posting signs in stores that read "price of this shirt to you, $40; cost to us, $20."

Many expect the case and judge's ruling to spark similar lawsuits. In Ottawa, Canada, a finance critic for the New Democratic Party (NDP) recently claimed that MasterCard and Visa could owe Canadian consumers more than $100 million in refunds because of a similar practice of not properly disclosing fees for using cards abroad, the Toronto Star reported.

And New York-based American Express Co. said it is being sued in a California state court for allegedly failing to disclose fees related to purchases made in a foreign currency by its cardholders dating to 1999.

American Express charges a 2% conversion fee and, like Visa and MasterCard, it discloses its charges and policies for currency conversion in an initial cardholder agreement mailed with the credit card. Cardholders' monthly statements do not break out additional charges for currency exchange.

The lawsuit against American Express was filed by Environmental Law Foundation, et al, the same firm that represented the plaintiffs in the MasterCard/Visa suit; it is seeking class-action status for the lawsuit. This plaintiff's claim appears similar to the recent charges against the associations. American Express disclosed the lawsuit in an 8-K filing with the U.S. Securities and Exchange Commission and said it believes it has "meritorious defenses" against the suit.