How You Can Benefit From The Capital One Settlement
By Beth Pinsker Gladstone
NEW YORK, July 18 (Reuters) - The Capital One Financial settlement with U.S. regulators over deceptive marketing of credit card "add-on products" means a lot to all consumers, not just Capital One customers, according to consumer advocates.
This is the first enforcement action by the Consumer Finance Protection Bureau, which is about to hit its first anniversary. Ed Mierzwinski, consumer program director of advocacy group U.S. PIRG, says it's significant to the future of the agency that this first move was against a big company over a pernicious practice.
"This is a big event for a young agency," he said. "They brought their first action against one of the biggest, most politically active firms, and that will send a clear message that violations of the law will not be tolerated."
Capital One agreed to pay $150 million to reimburse more than 2 million customers who bought aggressively marketed payment protection and credit monitoring services; customers will get a credit on their accounts or a check in the mail.
What does the CFPB action mean for Capital One customers and everyone else?
1. Stronger warnings for consumers about add-on services
The settlement should show consumers that they need to beware of pitches they hear from credit card issuers, especially when activating a card.
The CFPB says Capital One violated regulations that prohibit call-center vendors from engaging in deceptive tactics to sell the company's credit card add-on products, specifically payment protection plans and credit-monitoring services.
First of all, Mierzwinski said, "Consumers should know that credit protection and monitoring are the worst add-on products you can buy."
Travis Plunkett, legislative director of the Consumer Federation of America, is no kinder, referring to these services as "junk products."
The CFPB also issued a warning to consumers on what to watch out for with these products, primarily that you should be wary of any pitch when you are activating a new credit card. ()
Ryan Schneider, president of Capital One's card business, said, "We are accountable for the actions that vendors take on our behalf. These marketing calls were inconsistent with the explicit instructions we provided to agents for how these products should be sold." ()
2. Customers will get no-hassle refunds.
Capital One is responsible, with oversight, for determining who is entitled to refunds and will either credit current accounts or mail out checks.
The CFPB emphasizes that ease for consumers is its main concern: "It's been important to make sure that the refunds were managed in a way that was convenient to consumers. Consumers are not required to take any action."
The agency says customers will be reimbursed according to how much they spent, and the settlement is just an estimate of how much it will cost.
An additional $60 million goes into the Civil Penalty Fund, which was created under the Dodd-Frank financial reform law as a reserve to reimburse victims and for consumer education and financial literacy programs.
3. Others might benefit directly, too.
"This settlement is not unique and I expect there to be more activity," CFPB director Richard Cordray said at a press conference on Wednesday.
Plunkett said the deceptive practices that got Capital One in trouble are widespread in the industry. "This is a shot across the bow of all companies selling junk financial products and misleading consumers about them - that they better be more careful. It has direct effect and a hugely significant effect on the whole financial services industry," he said.
While Capital One is the only company currently not allowed to market these add-on credit card products at all - they have to get a plan approved by the CFPB before they can resume - Mierzwinski expects other credit card issuers to stop selling them.
"It would be stupid to continue to market this kind of product," he said.
But Brian Riley, who worked at JPMorgan Chase & Co, Citigroup Inc and First Union/Wachovia (now Wells Fargo & Co ) for many years and is now senior research director for the CEB Tower Group, said such practices may be too complicated to unravel because they are already baked into the revenue models for the next three years.
"You can't just unplug it if you're a publicly traded company," he said, adding that some banks may "self-confess" to the CFPB and take their lumps.
4. Other shoes will drop.
Both the CFPB and the Office of the Comptroller of the Currency (OCC), which partnered on the action against Capital One, have web-based complaint systems where consumers can enter information. The CFPB says it will follow up with any Capital One customers who feel they didn't get a refund when they were due one, and also for customers of other banks who feel they've been duped.
The CFPB is currently collecting consumer complaints on a number of other topics and following up on them, including student loans, other credit card complaints and credit report errors. (see)
While future enforcement actions are rarely telegraphed in advance, Plunkett hopes that next on the agenda are mortgage services abuses and payday lending practices. And he has high hopes for what is to come.
"They probably have a lot of things they are investigating, and it's a good sign that they didn't pick an obscure corner of the marketplace to get started," he said.
How does Capital One Calculate its Credit Card Currency Exchange Rate?
Typically, when you use an american credit card to buy a product in a different currency, the credit card company will charge you a 2-3% fee right away – called the foreign transaction fee – before it converts the currency according to the latest exchange rate. If you travel a lot, the foreign transaction fees can add up very quickly. Fortunately, there are a number of credit cards, including all Capital One cards, that charge NO foreign transaction fees. For a list of these cards, use this post from Nerd Wallet . If you are reading my post, however, I’ll assume you already know about the no transaction fee credit cards, and are interested in some more in depth questions like: How does the credit card company determine their currency exchange rate, and can the credit card company use the exchange rate to charge hidden fees?
The best way to answer these questions is to use an actual credit card transaction with my Capital One Visa card as an example. I will provide copies of my receipt and credit card statement of one transaction in Part 1. In Part 2, I’ll answer questions about the currency exchange.
I am a proud owner of a Capital One Visa card precisley because of its no foreign transaction fee. I have taken the liberty of posting photos of 1. my actual paper receipt, 2. a screenshot of my credit card Statement, and 3. a screenshot of my transaction list from Capital One’s website. All of these documents contain information about a customs tax transaction that I made in Hannover, Germany on February 1st, 2013.
1. Actual paper receipt: Below is a photo copy of my receipt (Quittung) from the Customs Office (Hauptzollamt) in Hannover, Germany. The important information here is the Total (Summe) I paid, which was 37.80 Euros, and the date (Einzahlungstag), which was 01.02.2013. Please note that the date on this receipt is in DD.MM.YYYY format, which is typical in Germany.
2. Screenshot from my Captial One Credit Card Statement: When I paid 37.80 Euro for the custom tax, I used my Capital One credit card where I have an account in the United States. Since my account is in US Dollars, the transaction had to be converted from EUR to USD before it showed up on my statement. Below is a screenshot of a small part of my February Credit Card Statement (my account number is blacked out) where it lists the transaction “Nebenzollzahlstelle HannoHannover” and the exchange rate used. You can see that my 37.80 Euro transaction became a 51.84 US dollar transaction once the exchange rate was applied.
3. Screenshot from my transactions list on Capital One’s website: Below is a screenshot of my transactions list that you can find by logging into your Capital One online account. The transactions listed here are exactly the same as the transactions that show up in your monthly credit card statement, with one notable difference. In the online transaction viewer, you can click the “+” button next to the transaction date and it will show you both the Transaction date, and the Posting date. In my example, it shows that while the transaction actually occurred on February 1st, the transaction did not post until February 2nd. This is an important distinction because Capital One (and most credit card companies) calculate the exchange rate based on the date of the posted transaction.
How does Capital One determine its currency exchange rate? The answer is pretty simple actually. Capital One uses the exact exchange rate that is posted on the Visa Corporate Exchange Rates webpage (Link updated 11/2014). This is based on my conversations with Capital One customer service, other credit card message boards like here, and – most importantly – checking the data for myself. Below are two screen shots of Visa’s webpage (the input screen on top and the output screen on the bottom) that show Visa’s exchange rate for February 2nd, 2013.
You should take note two things. First, is that I set the the bank foreign transaction fee to 0%. Second, is that Visa’s exchange rate is the inverse exchange rate of what was provided on my credit card statement. The exchange rate on my credit card statement was in USD to EUR, whereas the Visa exchange rate is given in EUR to USD. In order to compare apples to apples, I converted Capital One’s exchange rate to a EUR to USD rate. This is done simply by taking the inverse: 1 / 0.72916667 = 1.371429. In the end, the exchange rates do not match exactly – Capital One has an exchange rate that is .005% (five thousandths of one percent) higher. The difference, however, is negligible, since both exchange rates result in a final cost of $51.84 after rounding.
Does Capital One hide extra fees in its exchange rate? No, not that I can tell. A lot of people are skeptical when they hear Capital One say “No Foreign Transaction Fees!” They think that maybe Capital One makes up for the 0% transaction fee by having a higher currency exchange rate than other cards that are Visa sponsored. In fact, you might look at the extra .005% that is added in my example above and say “Aha! thats how they get you!” But that would that be really silly for Capital One, who makes entire advertising campaigns on “No Fees.” If they were going to try and recoup the money they lost by having a 0% foreign transaction fee, wouldn’t they increase your exchange rate by a lot more that .005%? After all, other banks charge up to 3% foreign transaction fees.
After reviewing a few of my other credit card transactions, I found that the difference between Visa’s exchange rate and Capital One’s exchange rate varied for every transaction. Capital One does not up-charge .005% for every transaction, in fact, sometimes the Capital One exchange rate is lower than Visa’s. I’ve compared three of my transactions below, two of which were posted on the same date. Interestingly, Capital One listed two different exchange rates for the two transactions that were posted on the same day. I won’t post screenshots of my statements and receipts like the first example for the sake of brevity – you’ll just have to take my word for it.
Why the variation in Capital One Exchange Rates? The difference in exchange rates appears to be the result of Capital One trying to avoid having to deal with tenths or hundreths of a cent. Allow me to explain. In transaction 2, when you multiply 409.60 Euros by 1.307666 (Capital One’s inverse exchange rate), you get $535.6199997. When rounding up at a precision of 6 decimal places, you end up with $535.620000 exactly. As shown in the screenshot below, all of Capital One’s currency exchanges result in perfectly whole numbers (no fractional cents) when you round and use a precision of 6 decimal places.
I assume that this means that Capital One uses 6 decimal points for all of their banking transactions. If they used Visa’s exact exchange rate instead and rounded with a precision of 6 decimal places, they would have charged me $535.616307. Since I am only going to pay Capital One exactly $535.62, they would in effect be losing $0.003693 ($535.620000 – $535.616307) for that transaction. When you think about the millions of transactions that they process every year, that small amount could end up being pretty big – just ask the characters in the movie Office Space. For me, as the credit card holder, the slight difference from Visa’s currency exchange rate doesn’t matter because I always end up paying the correct amount and don’t have to worry about fractional cents.
In the end, the important thing to know is that Capital One really does just use the exact exchange rate posted by Visa. This is also supported by the nerd wallet study, which shows that while foreign transaction fees can vary among credit card companies, the exchange rates don’t. Now that you know exactly how Capital One does it, you are probably curious how Visa comes up with their rates and how they compare with other methods of currency exchange. These questions are tackled in the next post How does Visa Calculate its Currency Exchange Rate?