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Disputed foreign amounts on UK credit cards

I was wondering who takes the hit for movements in exchange rates when a UK card holder disputes a foreign transaction with their credit card issuer. Take the following example:

  1. On 02/09/2003, US merchant charges UK credit card with USD 250.00 without the UK card holder's authorisation.
  2. UK card holder sees charge of GBP 159.15 on credit card statement.
  3. UK card holder disputes payment with UK card issuer.
  4. UK card issuer contacts US merchant's bank to have amount charged back to US merchant.
  5. On 20/10/2003, UK card issuer applies refund of GBP 159.15 to statement.
  6. The GBP/USD rate has risen from 1.5708 on 02/09/2003 to 1.6798 on
20/10/2003, meaning that the GBP 159.15 refund equates to a charge-back to the merchant of USD 267.34.

Who suffers the loss for the extra USD 17.34, caused by the movement in the GBP/USD rate? I know from experience that the UK card holder does not take the hit in this type of scenario, although the UK card holder can lose out if a foreign merchant initiates a refund on a non-disputed transaction. The possible outcomes I see likely in the above example are:

A. The US merchant is charged back by USD 250.00 and the US merchant's bank suffers the loss. B. The US merchant is charged back by USD 250.00 and Visa/MasterCard suffers the loss. C. The US merchant is charged back by USD 250.00 and the UK card issuer suffers the loss. D. The US merchant is charged back by USD 267.34 and the US merchant suffers the loss.

I have deliberately left out the credit card commission that the merchant pays, just to keep it simple.

Reply to
Nicholas F Hodder
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Some customers will not dispute the exchange difference so will take the charge. If they got the difference refunded, the UK bank will take the charge and will consider it balanced by the gain they make when rates move the other way. It is quite possible that the UK bank had some financial instrument in place to cover themselves against rate fluctuations so they may not have actually lost on the transaction.

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Reply to
DP

On disputed transactions, the normal procedure is for the UK card issuer to credit back the GBP amount originally charged. So the card holder does not have the option of disputing or not disputing the foreign exchange difference.

As it is Visa or MasterCard (or other card network) who carry out the foreign exchange transaction rather than the card issuer, why would the UK bank (card issuer) have "some financial instrument in place to cover themselves"? I assume you are referring to FX options or forwards?

Reply to
Nicholas F Hodder

It's called prudence. A sensible organisation with exposure to currency fluctuations should cover themselves. This goes for all businesses, not just banks. There are those who don't of course.

Reply to
DP

As I explained, UK banks (card issuers) have no FX exposure, so why would they need to "cover themselves"?

Putting the banks aside, I have no doubt that Visa and MasterCard, who trade every day in the FX markets, use various non-spot FX products in order to mitigate their exposure.

Reply to
Nicholas F Hodder

If a bank with no exposure to currency fluctuations played with currency futures it would be as a speculation. A bank with exposure doing the same thing would be prudent.

Reply to
DP

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