Why the EU is planning to take away your Visa and MasterCard reward cards

This is a guest post, written by Andrew Seftel (although the sensationalist headline is mine!) to whom I am grateful.  You may recognise his name from the comments pages of Head for Points.  His background makes him the ideal person to explain why the potentially dull subject of credit card interchange fees will lead to big changes in how you earn your miles over the next few years.  Over to Andrew …. 

There’s a change coming through the credit card industry that will make it harder to earn miles using cards: card issuers will get less revenue from each purchase you make. This is what funds the rewards you earn, which means that it’ll be harder to earn using cards.

Despite the size of this change, there has been very little discussion about it in the usual places (although some of HFP’s more City-minded readers might have spotted an article on this very topic on the front page of the FT two weeks ago). Here’s a quick briefing on what’s happening.

Credit cards

A primer on interchange

Every time you make a purchase on a debit or credit card, the merchant is charged a cut of the transaction. Some of this will be a charge from the merchant’s bank, the rest will be an ‘interchange’ fee of about 0.7-1.2%, set by Visa or MasterCard that is mostly paid to the card issuer. This payment helps to cover the costs of issuing a card (e.g. physical cards, statements, fraud) and is the reason why credit card companies are happy to have you even if you don’t pay any interest or fees. Crucially for HFP readers, card issuers realised that they could give some of this cut back to consumers, for example, as cashback or points. This has led to the situation that we currently enjoy: being able to earn large amounts of cash, miles and points by using the right credit cards.

What’s changing?

For almost as long as this arrangement has been in place, merchants have hated it! They see it as an unnecessary tax on their revenues, dictated to them by an oligopoly of card networks. Various entities have spent the past couple decades in courtrooms and regulatory commissions battling Visa and MasterCard (although not American Express) and their fees. This slow and complicated tango of proposals and appeals looks finally to be drawing to a conclusion. In the UK, it looks like card interchange will be capped at 0.3%. Regulators will be hoping that the savings from these reduced fees will be passed onto consumers.

What does this mean for me?

  • Card issuers have been anticipating these changes for a while. As a result, new reward card products have become less lucrative over the past few years. Expect that Visa / MasterCard offerings will continue to become less numerous and less generous.
  • Existing cards should be unaffected for the time being, but at some point the issuer will start losing money on every purchase and consider devaluing on-going earnings. Think carefully about closing good card accounts (e.g. BMI cards). You probably won’t be able to get an equivalent replacement.
  • The HFP demographic (who I presume generally pays off their cards in full every month) will become much less profitable for card issuers. In addition to lower rewards rates, sign-up bonuses will probably become less generous and we may also see annual fees becoming more commonplace. Alternatively, more strings may be attached, such as having a particular current account to be eligible for a card.
  • Commercial cards look safe for the time being. Cards targeted at small businesses may be a bright spot for the self-employed.

But I mostly spend on Amex anyway!

If you’ve given rewards cards even the most cursory glance, you’ll have seen that cards on the American Express network offer the best rewards. This is because merchants pay a higher fee to accept the card, giving them more margin to share with the cardholder. You might therefore think that this isn’t such a big deal, but you’re not completely safe:

  • Not everywhere takes Amex, so you’ll be getting less back at those places
  • Only a few companies issue Amex cards, so having other issuers with good offers gives you more introductory bonuses to exploit
  • From a merchant’s point of view, these changes will make Amex even more expensive to accept (relative to Mastercard and Visa), so Amex acceptance might get worse
  • Amex might unilaterally reduce fees to bolster acceptance or avert regulatory action, leading to less rich reward programmes
  • Amex cards issued by other companies (e.g. MBNA, Lloyds) are affected by the cap, so they will probably have their rewards cut at some point. This will likely affect the competitiveness of rewards offers in the long-term.

Enjoy it while it lasts

The idea of a ‘game changing’ shift in the loyalty rewards landscape is one that is bandied about all too often. This one is indeed bigger than a closing loophole or a program devaluation. It’s not all bad news though: American Express and commercial cards probably aren’t going to be directly affected.

Taking the big-picture view, cutting interchange may be a generally good thing if these savings are passed onto consumers, rather than being retained by merchants or their banks (although HFP readers will probably still be worse off). Nevertheless, as long as there remain sweet spots and loopholes somewhere, there will still be lucrative opportunities to travel the world and stay in incredible places.

Andrew Seftel works as an analyst within the credit card industry. You can contact him on Twitter @andrewseftel
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Comments

  1. Sinizter says:

    No savings will be passed on to the customer. The companies now charging 4% premium to accept credit card payments will continue to line their pocket at the expense of customers.

    More EU cuckoo land logic at play. Much like the much bandied about lowering of car insurance premiums recently.

    In my opinion.

    • Paul Abdelmessih says:

      Agree. A representative of the British Retail Consortium was on BBC the other day claiming it would lead to lower prices. No it won’t. Retailers will see consumers are willing to pay the current price and take the drop in fees as additional revenue.

      • Well, it will lead to lower prices if the products aren’t selling well.

  2. The Lady says:

    Is there a specific date in mind – I suppose it’s dependent on some sort of legislation, but even some guide as to anticipated timelines would help understand the urgency of this.

    • Andrew (@andrewseftel) says:

      Nothing specific just yet. The proposals are still in draft and will need to be passed by parliament (and, I think, then passed into UK law). That said, voluntary compliance could perhaps come earlier. 2015/16 is a sensible timeframe.

  3. James67 says:

    Thanks for this informative post. I wish it was April Fools Day but alas not. Why have the merchants targeted mastercard and visa and ignored the relatively more expensive amex? Is it just down to relative volume of transactions? Is it true that we may in future be able to apply for credit cards and other financial services anyplace in the EU? In theory bigger marketplace should mean bigger incentives such as in USA but I much doubt it. It is possible introduction of more annual fees could sustain at least the signup bonuses. I fear amex may simply be forced to follow suit with lower fees too or risk losing merchant business. I dpubt consumers will see any benefit of reduced charges being passed on to them.

    • sandgrounder says:

      Amex are slightly different as they issue the cards and also manage the payment network, they ‘double dip’. This gives them two slices of the pie so they may be able to still give better benefits if they cut fees (although this is changing as more banks issue the cards under licence). Amex is much smaller than the big two in Europe, it’s not seen as imposing a ‘tax on consumers’ as they claim they are, but I think they will come for Amex eventually.

      • Andrew (@andrewseftel) says:

        Correct. Looking at the draft proposal (published after the post was written), cards issued by third parties on the Amex network (e.g. MBNA) will be included in the cap (now proposed as 0.3%). This is bad news for the UK reward customer.

      • callum says:

        Surely the interchange cap still applies to Amex though – even if they can make up the shortfall by increasing merchant fees etc?

        I don’t understand how it could possibly be one law for Mastercard and Visa and another law for Amex?

  4. Great post Andrew – thank you!

    I can guarantee there will be zero consumer benefit in this – the merchant will simply keep the reduction! Maybe it’s time merchants started offering Avios directly? 😉

    On a side note – why is AmEx not included in all this? What makes them different to Visa/MC… not that I’m complaining of course…

  5. Agreed, it’s a good post, if not too positive for a Saturday morning.

    I suppose it’s too late to be writing to one’s MEP?
    http://www.europarl.org.uk/en/your_MEPs/List-MEPs-by-region.html

    • Andrew (@andrewseftel) says:

      Not too late at all. These proposals will still need parliamentary approval.

  6. Andy Lea (@andyandy) says:

    Andrew – excellent post thank you – very informative. Sounds like time is of the essence for us HFP folk. Andy

    Raffles – more “guest speakers” like Andrew please – this was just the ticket!

  7. Until recently I assumed that Mastercard charged an individual merchant the same % fee for all Mastercards. However the World Mastercard, issued by Coutts and Tesco amongst others, charges a higher fee to a merchant than an ordinary Mastercard does (and offers higher rewards). Where will these changes leave the World Mastercard? Presumably it’s finished (or issuers will have to issue Amex instead)?

    • Andrew (@andrewseftel) says:

      World Mastercard is pretty much dead in the water. I’ve updated the post to reflect updated guidance from the EU (published after I’d written the post) saying that third-party Amex cards (e.g. MBNA) will be covered by the cap as well, so I’m not really sure what options other issuers have.

  8. sandgrounder says:

    A bit more digging and it seems that the opinion of Amex is that it’s Global Network Services division would be covered by the legislation in it’s current form. That’s the end of the BMI Amex then I suppose!

    • Andrew (@andrewseftel) says:

      Indeed. Assuming that they’d anticipated this scenario (not everyone had – note that BarclayCard only recently acquired an Amex licence), the increased rewards rate might have been an attempt to burn through their (prepaid?) stack of DC points whilst they could still get some interchange for them.

  9. Mark Priest says:

    Interesting, and your right, there will be no savings passed on to the customer. I’m a merchant and I’ve had to cut my margins over and over again in the last few years so an extra .5% of my current fee’s is not going to make me reduce all my prices overnight, it might cover some of the other increases in costs over the last few years, energy, insurance, transport etc.

    Just like when they reduced VAT to 15%. We didn’t reduce our prices that year, but we didn’t put them up either.

    What makes me laugh is some of the Business Visa and Mastercards have higher fee’s than Amex but shops willingly accept them.

    • But if you take one V/MC, you have to take them all right?

      • Andrew (@andrewseftel) says:

        That’s correct, as far as I’m aware. It’s actually one of the points where I’m sympathetic to Merchants’ complaints about interchange – if they want to take the cheap Mastercard they have to take the expensive ones too.

  10. Did the author actually look at the files he linked for the interchange fee rate? The claim that it’s 0.7-1.2% is clearly wrong if you take the time to open the file. It’s 0.5% to 1.9% for credit cards.

    Visa Debit Cards starts as low as 0.15% + € 0.0015 for consumer credit cards and does not exceed 0.9% + € 0.0025 depending on what method of payment authorization is used.

    Visa Credit cards areas low as 0.5% for most transactions (CHIP&PIN) but can go up to 0.75% for Airlines.

    MasterCard is where the main challenge is because they not only have fees going up to 1.9%, they also charge higher fees for their premium level cards (like MasterCard World or World Signia) based on the assumption that having such a card leads to higher spending and hence retailers like those customers.

    A typical CHIP&PIN transactions on a prepaid MasterCard is 0.55%, on a standard card it’s 0.8% on world 1.3$ and a Signia 1.5%.

    So the big looser if a cap comes in is MasterCard network in which issuing banks would loose massive amounts of revenue, Visa would only loose 0.1% on a typical transaction.

    For Visa, yes there will be some consequences for the consumer and his miles or APR (because if visa issuing banks loose 0.1% they most likely are going to either put the APR up or increase the yearly fee). But for 0.1% it is unlikely that we see big changes to the miles that can be accrued because most likely the banks are going to the seller of the miles and renegotiate the terms there.

    For premium MasterCard there will be a major change and that is where we are most likely going to see major changes to the benefits, however let’s be realistic, one is not having a Coutts card for miles (which I don’t get), one has it because of the generous spending limit with 0% APR for a low fee of £350 a year. Will it hurt if that fee goes up to let’s say £500 to make up for lost revenue on the interchange fee, no.

    Now the question is where does these interchange fee rate are billed to the consumer?

    Airlines which have the highest interchange fee are already charging extra for the privilege of using a card and they are not going to lower their fee just because of a 0.1% lower fee.

    The fee that the merchant provider is paid for by the merchant settings the prices for his good accordingly (unless they are in the lucky position to charge extra for using credit cards) based on what they pay for their credit card processing provider. So unless a reduced interchange fee will lead to lower credit card processing cost (which it won’t) there will be no change to the end price for the consumer.

    Having the government set the rate that a merchant is paying to an issuing bank is wrong because it interferes with consumer and merchant choices. Nobody forces a retailer to accept MasterCard or Visa. They accept credit cards because of the fact that a person paying with credit card usually spends more than a person paying cash and they like people having premium cards even better because typically those spend even more. The 1.9% for the Coutts card is calculated in the mix they pay to their merchant provider just like the 0.15% for the Visa Debit Card.

    Nobody is forcing a bank to offer a MasterCard (which you can see from the fact that the majority of banks are offering the lower cost Visa Cards) but some bank decided they want to use those because World or World Signia is better than Visa platinum of Visa Signature or Visa Infinite.

    In the end this is down to choice and market forces setting the price for a service. Banks can always go elsewhere (i.e. Amex/Diners, create their own merchant network) or choose a different card brand (i.e. Visa).

    The impact on the standard consumer is going to be low, the impact on premium credit cards will be marginal higher.

  11. Andrew (@andrewseftel) says:

    Thanks for the positive comments. I’ll be going through them with follow-ups when I get a chance.

    One thing to note is that this article was written before the EU released their draft proposal this week. There’s a good FAQ here: http://europa.eu/rapid/press-release_MEMO-13-719_en.htm

  12. Farringdon says:

    Great post! Can you comment on the recent experience on the US with reforms on interchange fees and whether there is any read across to the UK.

    • Andrew (@andrewseftel) says:

      I’m not too familiar with what’s going on in the US, but I believe that recent changes were focused on debit cards. As far as I know, US issuers still get something like 1-3% per credit card transaction, much more than in the UK (which is why their cards are so much more generous).

  13. Right, there’s only one thing for it then – lets cane those 3V cards while we still can !!

  14. Andrew – I’ve briefly read a few parts of that linked FAQ…and I’m rather more confused now…

    EU FAQ says
    “around 60% of the EU population does not possess a credit card”
    Which leads me to wonder, what the issue is – as mentioned by Sven, there doesn’t appear to be a monopoly position here – merchants can choose which cards to accept.

    The other thing, I don’t get is why does there need to be a common policy across all European states? It’s clear from the documents that different states have cultural attitudes, economic situations and banks which have different retail – finance strategies (e.g. in some states it’s common to charge a current account fee, in others it’s uncommon).
    Different currencies across Europe will also mean card providers won’t be taken up by residents from other member states – so what will all this actually achieve?

    • callum says:

      Because that’s the whole point of the EU existing – making a common market. Same reason why mobile roaming charges are capped and are falling every year (in the near future I can see them being abolished full stop within the EU).

      Common policies don’t stop the different cultures you mentioned anyway – some banks in the UK have current account fees, that doesn’t remotely affect the free accounts. There is no reason why they can co-exist within a country but can’t within the EU.

    • The EU is meant to have only one currency… and apart from the GBP and SEK, none of the others matter, are effectively the euro, or are basket cases anyway.

  15. Volker says:

    Many years ago I had a credit card where I had to pay some interest on EVERY purchase amount – from the transaction date until I made a payment to my card account to clear my “debt”. I didn’t mind as to me that was just the obvious difference between a credit card and a debit card.
    Maybe this model will become more popular in the future and we can continue our daily hunt for generous rewards and miles.

    • Really? So you would actually spend extra money to buy miles with every transaction? A credit card is – up to 56 days interest free, purchase protection and sometimes insurance. This is different from paying a fixed percentage fee to the merchant when you have a spending target to meet or need some miles for a specific purpose.

      • Andrew (@andrewseftel) says:

        I don’t see why you couldn’t pay off new transactions mid-statement. You’d still owe a small amount of interest, but the value of the miles would outweigh it, especially if intro bonuses stick around.

  16. Clive J says:

    Good article thanks. It goes some way to explaining why the sign-up bonuses for Amex are generally better. It’s difficult to see how Amex could continue with an even greater disparity in these fees. Even if they don’t fall under similar legislation I imagine they would need to voluntarily reduce their fees if the Visa/MC ones are capped.