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Commerce Commission Prosecutes Credit Card Issuers - CardWatch Comments
10 Nov 2004 16:17
By CardWatch
The Commerce Commission has announced that it will prosecute a number of credit card issuers in relation to the disclosure of international currency conversion fees. This decision came as a result of an extensive investigation of the industry following complaints of misleading practices to the Banking Ombudsman.
The currency conversion fees charged for using credit cards overseas are becoming increasingly relevant as New Zealanders are not only keen international travellers, but also offshore transactions via the Internet are increasing.
FundSource CardWatch has found, despite the Commerce Commission’s assertion that currency conversion fees can add up to 2.5 per cent, that cardholders may actually be charged as much as 3.05% extra for using their credit card in this situation.
CardWatch recently undertook a review of currency conversion fees and how they are charged. This study raised concerns regarding the level of disclosure and its impact on the ability of the consumer to make an informed decision.
We believe that there are three key issues relating to the currency conversion charges:
1. The “double-charging” of currency conversion fees in some instances
Double charging occurs when transactions are made in a currency other than NZ or US dollars. This is because VISA and MasterCard will firstly convert purchase price into US dollars with a charge of approximately 1.0%. The issuers will then convert to NZ dollars, with an additional charge that ranges from 0.75% to 1.95%. These charges are incorporated into the exchange rate charged on the day. If you make purchases in US dollars, the first charge does not apply.
While being charged twice for the same transaction is concerning and could be viewed as unfair, we believe that the bigger issue is the failure of credit card issuers to disclose this information fully. This is a structural issue within the credit card industry. CardWatch believes that this method of converting foreign currency transactions to NZ dollars needs to be addressed, and it is our understanding that the method is being reviewed.
2. The failure of issuers to fully disclose these fees.
There appears to be a lack of disclosure on the part of a number of the credit card issuers, mainly with regard to the underlying fees charged by MasterCard and VISA.
Because the full information regarding costs, including the exchange rates used on the day, is not freely available, it is difficult for customers to compare the costs of using a credit card with other means of obtaining foreign currency. For example, many cardholders would not realise that it is significantly cheaper for them to withdraw cash using their normal eftpos card from overseas ATMs, which can be done.
The failure of the issuers to disclose the charges is demonstrated in the rates provided by in the NZ Herald article on November 10th, 2004, where only the TSB rate includes the charge by the scheme provider (VISA), and the others consist only of the fee charged by the issuer (i.e. the bank).
We believe that not only should the fees charged by the banks and scheme providers be disclosed and explained, but where there is a foreign currency transaction the components of the fees should be separately disclosed, rather than simply a converted NZD amount.
3. Are the currency conversion charges excessive?
Whether the fees are excessive is a difficult question to answer from an external perspective with no information regarding the relevant costs involved. However, given the variance in fees charged between issuers it seems apparent that this may not be a cost recovery exercise as claimed by the issuers, but a scheme that potentially generates profit for many of the issuers.
While the issuers may claim that the fees are a charge for convenience and mitigation of risk, it seems this claim is not justified. Our reasoning is based on two pieces of evidence: firstly, the fees charged for withdrawing cash using a debit card are typically much lower than for credit cards, although the service is essentially the same; and secondly, there is such a large difference in charges between the issuers, and the larger issuers often charge more than the smaller issuers despite the fact that their size and the volume of transactions would most likely result in lower costs.
Using debit cards may attract lower currency conversion rates, no charge to a scheme provider, and no interest charged on cash withdrawals. For example, using one eftpos card overseas attracts a fee of only 0.25% to the bank in addition to the $5 ATM charge. This is potentially a significant difference in costs and is strategy that FundSource recommends to overseas travellers.
How can consumers check the relevant fees and charges?
Following our study of currency conversion charges in recent months, CardWatch posted the full currency conversion fees, including scheme provider fees, on our website at. There are also tips on using credit cards effectively, with one article in particular that addresses some of the costs of using a credit card overseas and offers tips for travellers.
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