I've long heard Brits scoffing at the use of the word buffalo for the the American Buffalo when it is actually a species of Bison. Here's a brief investigation into the matter.
Firstly, the entry from the American Heritage Dictionary has a remarkably informative history of the word, buffalo:
When most Americans hear the word buffalo, they probably think of the American bison. In fact, buffalo originally referred to the water buffalo (an animal that was introduced to western Europe from Asia in late antiquity) and other large bovid animals of Eurasia and Africa. The history of buffalo begins with the Greek word boubalos, "antelope." The Romans borrowed this word as būbalus, "antelope." In his work on natural history, however, the Roman author Pliny the Elder notes that the common people used būbalus to refer to the urus, the huge wild ox (now extinct) that once roamed northern Europe, and Pliny considered this to be a mistake.
Eventually the Latin word, in its Late Latin form būfalus, became the name for the water buffalo when it was introduced to Europe. Būfalus developed into buffalo in Italian and búfalo in Portuguese and Spanish, and then English borrowed buffalo, with the sense "any of various species of large bovine animals," from one or more of these languages.
How did the word buffalo come to be the popular name for the American bison? When the English first began to visit and settle in North America, it is likely that most of them had never seen the European bison, or wisent, the closest relative of the American bison. The wisent had mostly vanished from western Europe in the Middle Ages, the victim of hunting and deforestation. The English were probably much more familiar with domestic water buffalo, and they may even have heard of the urus, and so when they encountered the American bison, many of them called it by the name of the largest bovine animal they had known before, the buffalo. Already in 1625, English writers were using buffalo to describe the bison of America.
Setting aside the historical fact that the Brits are at "fault" here, it appears that when American Buffaloes were called Buffaloes, there really was no alternate term for the settlers to use. Wikipedia's page on the American Bison notes that buffalo predates the world bison:
Though the name "Bison" might be considered to be more scientifically correct[by whom?], as a result of standard usage the name "Buffalo" is also considered correct and is listed in many dictionaries as an acceptable name for American Buffalo or bison. In reference to this animal, the term "buffalo", dates to 1635 in North American usage when the term was first recorded for the American mammal. It thus has a much longer history than the term "bison", which was first recorded in 1774.
To summarise, not only did the word buffalo come into the language before the word bison did, it was also used to refer to the American species earlier as there really was no other word available.