Settlement shines a light on hidden fees

Like an early Christmas present, the notices -- 38 million of them -- started appearing in mailboxes at the end of November. If you sign, date and return the form, you’ll get $25 or more, depending on how much foreign travel you did from Feb. 1, 1996, to Nov. 8, 2006.

The notices are in response to a proposed settlement of a lawsuit with Visa, MasterCard and Diners Club over foreign transaction fees. The lawsuit claims the fees were poorly disclosed and that credit card companies colluded in fixing the fees. The credit card companies deny any wrongdoing but have chosen to “settle this case to avoid the inconvenience, expense and uncertainty of litigation,” according to the official website for the settlement ( www.ccfsettlement.com).

Foreign transaction fees on credit card purchases and ATM and debit cards vary by card issuer, but they generally are 1% to 3% of the transaction. Here’s how they work:

Let’s say you’re paying 500 British pounds for a stay in a London hotel and charging it on your Visa card. Using a published inter-bank exchange rate for that day (we’ll say $2 to 1 pound), Visa converts the 500 pounds into $1,000 and tacks on a 1% fee for its effort.

Then the credit card issuer (Chase, for example) adds 2% on top of that, making your $1,000 hotel stay $1,030.

Though seemingly a small amount, the fees add up for the credit card companies: The 1% currency exchange fees gave Visa International $424 million in revenue in 2004, one of the years covered in the lawsuit. That was nearly 30% of its revenue that year, according to the Nilson Report, a credit card industry newsletter published in Carpinteria.

Foreign transaction fees are seldom as clear cut or in rounded numbers as the example above, so they can be more difficult to understand on a credit card statement. That hotel stay in London probably totaled 487 pounds and the exchange rate can stretch to tenths of cents -- $2.012, for example, rather than a simple $2. Adding 3% to that calculation yields $1,009.24, still about $30 but not as clearly so.

“The fee was hidden,” said Thomas F. Schrag, co-lead counsel in the case. “It was impossible to discern from your bill before this lawsuit.”

Now it is easier to tell from looking at your credit card statement what those fee charges are. Knowing what you should expect isn’t always as easy.

“Call your bank and know the terms and conditions,” said Luke Ronsse of Victoria, Canada, who runs a website called TravelFinances.com. “It’s such a customizable thing, and it changes regularly.”

So regularly, in fact, that when I received a notice with my Citibank statement that the bank was adding a 2% foreign transaction fee to ATM withdrawals, I didn’t realize it was a reduction from the 3% imposed at the end of 2006.

“For consumers, [the lawsuit is] going to create competition over this fee,” Schrag said. “As consumers get savvy to this [they will] just switch to a card that doesn’t charge the fee.”

TravelFinances.com can help you find such a card. On its home page, click on the “directory” tab at the top. On the left side of that page is a list of credit cards and conversion fees. It’s an excellent place to start comparison shopping, but it’s still a good idea to check with the credit card issuer to make sure that you have its most current information.

There are questions, meanwhile, about whether the settlement is the best deal for consumers. Of the $336 million settlement -- less than the fees Visa charged in just one of the years in question -- $23 million goes to court costs. The lawyers are asking for 27.5% of the rest plus up to $5 million in costs, totaling about $91 million, leaving consumers $222 million. (The lawyers are also being paid $35.5 million on top of that, which does not reduce the settlement amount.)

Consumers may be lucky to see $25, much less anything approaching the $3.8 billion that lawyers estimate consumers were charged in the 11 years covered by the suit. And don’t expect a check in the mail any time soon. The judge must still approve the settlement and won’t review the case until March 31.

“If the reaction of the class is favorable, that leans toward approving the settlement,” Schrag said.

And even then it can take as much as eight months after approval, assuming someone doesn’t successfully mount an objection to the case, which could add a year or more.

So that early Christmas present might end up being for Christmas 2009. But hurry because you have until May 30 to return your claim form.

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