Major blow to the BA Amex as FCA imposes 0.3% interchange fee cap

The Payment Systems Regulator, an arm of the Financial Conduct Authority, yesterday issued its final view on whether the British Airways American Express cards, amongst others, are already caught by the new 0.3% cap on credit card interchange fees.  The answer, it seems, is yes.

In simple terms, the original plan was this:

So-called ‘four party card schemes’, where an intermediary – ie Visa or MasterCard – sits between the retailer and the card issuer were to face a 0.3% cap on interchange fees

So-called ‘three party card schemes’, where there is no intermediary – ie American Express – would be permanently exempt, except …..

So-called ‘three party card schemes’ where the card is co-branded (eg the BA Amex, SPG Amex) or issued by another party under licence (eg the Lloyds Avios Amex) would be exempt until late 2018

There was a fly in the ointment.  In the third scenario above, the transitional exemption only applied if American Express could show that it had a UK market share of under 3%.  It has failed to do so.

As this guidance issued yesterday confirms, American Express must set an interchange fee on its co-branded and licensed cards of no more than 0.3% until March 2017.  Should its market share drop below 3%, the position will be reassessed from March 2017 – although the exemption will end, regardless, in December 2018.

The bottom line is that American Express will see a substantial reduction in the income it receives from retailers when you pay with a co-branded or licensed Amex card.

BA Amex - NEW

What will change?

In the short term, nothing.  American Express has a contract to operate the British Airways card and will presumably continue to do so under the agreed terms unless there are suitable break clauses in place.  The contract was only renewed in the last 18 months or so.

It is noticeable that the credit card reward schemes to cut their benefits so far are generally those NOT operating under a third party licence.  I am thinking of HSBC Premier, Tesco Clubcard MasterCard and NatWest with Your Points.  None of these schemes involves a third-party branding partner.

The only co-branded cards I can think off which have cut their benefits are the House of Fraser card, the Debenhams card (both issued by the same group) and Capital One Vauxhall card, which was closed entirely.

Once these co-brand contracts come up for renegotiation, of course, you can be fairly sure that there will be some major changes in the benefits offered.  These are likely to involve lower rewards for your day-to-day spending but improved benefits such as status perks, 241 vouchers etc.

One thing remains clear.  The big travel brands want to keep their logos in your wallet and the card issuers want to keep the (generally affluent) group of people who hold airline and hotel credit cards.  Exactly how this will be done will unfold over the next couple of years.

The end result may not be entirely bad.  In the USA, for example, IHG Rewards Club has a $49 annual fee credit card which gives you a free night every year – with no need to spend anything!  That would be a hugely attractive product if it was launched here even if the earning rate on the card was lower than we see now.

The other outcome is that American Express is likely to put huge marketing efforts behind Preferred Rewards Gold and Platinum.  These cards remain permanently exempt from the interchange fee caps and will be considerably more lucrative for the company going forward – and Amex will be heavily motivated to create a benefits package which attracts and retains customers.

(Want to earn more miles and points from credit cards?  Click here to visit our dedicated airline and hotel travel credit cards page or use the ‘Credit Cards Update’ link in the menu bar at the top of the page.)

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Comments

  1. RIccati says:

    By the way, specific to this issue (interchange fees) people might not realise that even if UK exits EU, the regulation on this and a myriad of matters will still be mirrored or as EU bureaucrats of 1970es call it “harmonised”.

    For example, if an average EU country charges VAT at 20% then the UK will also be charging circa 20%.

    If the interchange fees are capped in the bloc, then most likely they will be capped in the UK whether it is a full member or ‘an associate with agreements’ like Norway.

    • Yep, on the moment of exit all EU laws that were incorporated in to UK law will still be UK law until repealed.

    • This is another good reason to leave.

      • RIccati says:

        Have to look at this more closely.

        Inside/outside of the EU, the UK might not be in a position to exercise a significantly different policy in the number of areas and matters, economic, social, healthcare, etc.

  2. I would have thought this will actually hit BA. The value of Avios will have to reduce when being bought in bulk by the credit card issuers…. BA either sell less Avios since credit cards will earn less points or BA reduce pricing to keep some kind of incentive in place.

  3. OT anyone know why taxes on Avios.com would be vastly different to BA.com? I am looking at HND-LHR one way, and BA.com is £63 while Avios.com is £213!

  4. OT
    Has anyone yet received the 1000 Virgin miles for registering for auto conversion at Tesco (Feb/Mar 16)?

  5. Roberto says:

    OT had an email from curve today ensuring that they had my details correct and stating that ” Curve starts shipping at the end of March. We’ll be automatically dividing cards into batches and shipping over a four week period. We’ll email you again when your card is sent, and we won’t take any payment until then. ”

    Be nice if it turned up before my supercard switches off..

    • Genghis says:

      Yes. I got that too but email also said I had to add a payment card in the curve app before my curve card will be shipped.

      • Roberto says:

        I did not get asked for this extra task but added one based on your comment. Thanks.

      • I got that email, my wife just got an email from curve but I think I’ll add a payment card to her app.

      • Scallder says:

        Got this email too – however they seem to have already taken the payment for the card from my Amex!

      • I got that one too – had to add my card !

    • I’ve had to cancel mine as I’ve closed the card that they had for payment (I’d been expecting them to take the cash straight away) and the only way they can take new card details is via the app and I don’t have iOS.

    • Indeed. It translates as:

      “Yes we told you the new cards would ship in March, however that was just a bit of blether. The reality is, we’re mucking about behind the scenes and the reality is you’ll be lucky to receive it by early May.”

  6. Very interesting. Some retailers have saved literally millions from Interchange Caps. One big benefit to the industry has been a huge simplification of the fee structure, as prior to the EU regs there were many different fees and fee types in each market, now at the 0.3/0.2% on consumer cards this makes life a lot easier for anyone involved. As has been said the reductions will flow automatically to those on interchange++ pricing (fully transparent), however those on blended (fixed %) rates will have to negotiate a full or partial discount to gain a reduction in their fees – there is a chance in the future though that regulators will require all merchants to be offered interchange++ though.

    • The truth is that interchange ++ fees are not offered across the board, just as fixed debit card fees are still being offered today !

      • Aeronaut says:

        Things can change. Particularly if retailers aren’t benefitting (especially smaller ones). None of this is set in stone.

  7. OT. Had an email from curve today saying: “Curve starts shipping at the end of March. We’ll be automatically dividing cards into batches and shipping over a four week period. We’ll email you again when your card is sent, and we won’t take any payment until then.

    We just need you to check your order details and let us know if any changes need to be made. No need to contact us if everything looks good.”

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