Understanding MasterCard’s Avoidance of Compound Interest

Over the last couple of years, retail payments giant MasterCard has been dealing with a massive lawsuit that seems to be headed towards a settlement order in the United Kingdom. There are nearly 60 million plaintiffs in this class-action complaint that is being deliberated in a British Competition Appeal Tribunal, and the case could result in MasterCard being ordered to pay about $415 to each cardholder who was reportedly hit with additional charges over a period of 16 years.

How Does the Lawsuit Against MasterCard Affect Cardholders?

According to legal analysts who have been following this case, one of MasterCard’s most vigorous defenses has revolved around the compound interest being demanded by the plaintiffs as fair compensation. The credit card company spent two days in court pushing back against the plaintiff’s motion for compounding; the position taken by MasterCard is that British common law does not have clear provisions for applying compound interest in this particular demand. What the company proposes is a way to assess simple interest instead.

What is interesting about this case is the rationale applied by the plaintiffs, who believe they should be entitled to the benefit of compound interest as fair compensation. The grievance is centered on the interchange fees that payment processors charge to merchants; these fees, which are in turn passed onto consumers, can become inflated if the transaction is carried as a credit card balance. It should be noted that the annual percentage rate charged by credit cards is usually compounded on a daily basis, and this is why personal financial advisors will always tell you to pay off high credit card balances as soon as possible.

For MasterCard, the difference between compound and simple interest could translate into more than a billion dollars in payments owed to plaintiffs

Should MasterCard lose its argument against compound interest assessment in this case, the amount of each individual claim could increase exponentially, hence the reason why the company’s defense team has suggested simple interest as a more favorable manner of assessing penalties. This case certainly underscores the power of compound interest over a long period. For MasterCard, the difference between compound and simple interest could translate into more than a billion dollars in payments owed to plaintiffs. You always want to earn compound interest, but you should always try to avoid having to pay it.

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