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

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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

British Airways BA American Express Amex credit cards

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.

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.

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Comments (98)

This article is closed to new comments. Feel free to ask your question in the HfP forums.

  • Genghis says:
    25 Mar25 March 05:53

    Great analysis Raffles. Very good article

  • JamesLHR says:
    25 Mar25 March 05:57

    Curious what would happen if we exited the EU, would these fee caps disappear?

    These caps hold nothing but increased margins for the retailers, the purchasing public have not seen a change in the cost of goods!

    • Pete says:
      25 Mar25 March 06:35

      But this is incidental evidence surely? By limiting the fees, in a way, it has the potential to create a more level playing field between larger businesses and smaller ones in the current state of play.
      Moreover, unlike most other competitive environments, the VISA/MC/Amex one is a bit different, because unless there is global coordination that results in all businesses being able to take all payment types [for example, a world where there are 20 payment types such as VISA/MC/Amex/Diners, but in which there are regulations that ensure all 20 payment types are accepted globally] then the ideal solution is one universal payment type that is universally accepted. It is a situation where coordination trumps competition, and the current state of play is one of near monopolistic capitalism guised as competition… 🙂

      • RIccati says:
        25 Mar25 March 09:03

        This Econ Philosophy 101 does not pay attention to the fact that for the small business, the cost of taking credit cards will NOT change.

        They will keep paying the same percentage they pay on Visa/MC credit card payments.

        The large retailers will pay less but will not lower prices. It will probably allow them to have more slack/waste… can’t really perfectly optimise the operation with scale of Tesco/Waitrose.

      • AndyL says:
        25 Mar25 March 10:22

        Pete – could you repeat what you are saying in layman’s language please as I am sure you are making very valid points however I am lost as to the main thrust of your argument (but genuinely want to understand your points) Thanks.

      • nick says:
        25 Mar25 March 14:19

        It actually favours large retailers over small. I think the cap only applies to merchants on interchange plus plus, which is the big boys. The smaller retailers will be on fixed percentage deals, and the cap doesn’t apply to them.

        That was the case under the visa commitments, not sure if it is the same under the regs.

    • Andrew says:
      25 Mar25 March 06:36

      I agree that prices won’t come down. One benefit you might see is Amex being accepted in more places though

      • Geoff says:
        25 Mar25 March 07:42

        Is that true? The article says that Gold and Platinum are exempt, so surely subject to the 3% fee. Wouldn’t that mean retailers wouldn’t want me paying with it?

        • Rob says:
          25 Mar25 March 08:48

          Only retailers with an ‘interchange plus’ fee deal, which means big chains.

      • JamesW says:
        25 Mar25 March 15:09

        I expect more places will take it, yes. Which mullers the business case for these cards which will act as a mastercard / visa and be backed off to an Amex such as the new Curve.

    • steve says:
      25 Mar25 March 09:34

      Its not really about Europe, its actually more about general freedom. IF a retailer is prepared to pay 0.3% 3% or 33% to get my business that let them. Its Their business decision. Its also my decision to pay an annual fee to get a 2 for 1 BA voucher (if i can find availability to use it). That is IT. Freedom of choice.

  • James67 says:
    25 Mar25 March 06:10

    Thanks Rob, a very informative post. Do you think that going forward we might see PRG- and amex platinum-like cards issyed directly by mastercard and visa?

    • RIccati says:
      25 Mar25 March 09:09

      No, unlike AMEX. Visa and Mastercard consortiums are owned/governed by the participating banks too.

      Mastercard has a premium product (Worldcard) which seems to have lost it’s ‘premium’.

      • Zander says:
        25 Mar25 March 11:40

        The MC World card isn’t a premium product and hasn’t been for some time, it was replaced by the World Elite which is okay but I’ve found Visa Infinite to be a much better product depending on bank.

  • Hingeless says:
    25 Mar25 March 06:23

    Will this also apply to the diamond club MBNA card, we still have the one with 2.5 avios per £

  • Steve says:
    25 Mar25 March 06:28

    Just booked a holiday villa with a mandatory 2% additional charge for purchasing with any credit card. The reality – at least for the moment – is that the rewards schemes are dying off , but the savings the retailers are supposed to be getting are not passed on. Looks like retailers are cashing in.

    • Paul says:
      25 Mar25 March 07:31

      As the owner of a retailer I can tell you that retailers are not ‘cashing in’, it’s a brutal environment out there and any reduction I have seen in c/c fees has been passed on to the customer to improve competitive position.

      • Alan says:
        25 Mar25 March 07:37

        Also despite the changes in interchange rates, much of this is swallowed up by the payment processor that still charges the retailer the same fees they did previously!

        • Talay says:
          25 Mar25 March 08:26

          Very true. I have yesterday received a letter from Elavon which purports to show me discounted fees due to legislation changes but in reality, the only reduction is in some commercial card fees and yet the basic credit card fees haven’t been reduced from what we negotiation, though I accept we have a very good deal.

        • nick says:
          25 Mar25 March 14:25

          That is just not possible. The cap applies to merchants who are on I++. Their invoice breaks out the interchange, scheme fee and merchant service charge separately. The acquiring bank has to pass it on, it’s mechanical.

          If the merchant is not on I++ and is charged a flat percentage, the cap doesn’t apply so there is no saving to be passed on or not.

          • Alan says:
            25 Mar25 March 22:26

            Your 2nd para is exactly the point I made – many small businesses are on fixed rates that are unlikely to change despite a fall in interchange rates.

          • nick says:
            26 Mar26 March 00:06

            The fixed rate cannot change, because there is no reduction in the interchange on those arrangements. That’s not the acquiring bank’s fault, it is just how the rules work.

            The idea that the acquiring bank is somehow profiting from the this by not passing on an interchange saving is just not possible.

          • Alan says:
            26 Mar26 March 07:24

            OK interesting, I’d thought the payment processor was benefiting from the interchange difference and pocketing the difference by still charging the same fee to the retailer.

          • RIccati says:
            26 Mar26 March 08:08

            Yes, Alan, the payment processor benefits not the acquiring bank.

            The processor can be the bank’s subsidiary company or a third party like Worldpay.

      • Oyster says:
        25 Mar25 March 08:44

        The big retailers are not cutting prices to reflect actual CC fees, so perhaps it’s more of a case of the big retailers stealing from the little ones. Bless the EU protecting big business.

        • Rob says:
          25 Mar25 March 08:46

          A business has 100s of costs, you don’t change your prices whenever one moves.

    • Susan says:
      25 Mar25 March 08:31

      As a small operator this is costing us quite a lot money – we dropped the 4% credit card fee (which just covered our CC costs) due to all the publicity about “rip-off” fee charges . More people are now paying by cc but the overall volume hasn’t changed – previously they would have paid with cash, debit card or bank transfer. We’ve seen little change in the charges from the processors / banks – it’s still c. 3.5% even with “charity rates”. If someone is cashing in it’s definitely not us.

      • RIccati says:
        25 Mar25 March 09:12

        4% cost to accept a credit card payment?

        A lot of small businesses simply don’t look for the best deal/don’t shop around/negotiate.

        If Squareup does UK payments (e.g., accept payments in pounds), the fee is 2.75% including AMEX

        Card reader is 49 USD… plus ApplePay, magnetic stripe reader, manual key-in possible.

        • Susan says:
          25 Mar25 March 11:02

          Easy to blame the small business but we actually did shop around. The cost is a combination of Worldpay’s own fees and our bank which charges several percent to receive payments from WP. We tried negotiating and got very short shrift.

          • Will says:
            25 Mar25 March 13:54

            You didn’t do a very good job then. I take very few cc payments and my world pay cc rate is 1.6% on personal visa/master cards when using chip and pin.Zero fees for depositing into my bank.

            I take less than £2k per month through my merchant account.

            Using world pay and 123 send for the terminal.

            The new PayPal Card reader is probably a better solution for ultra low revenue in person card payments.

          • JamesW says:
            25 Mar25 March 15:00

            Can you help Susan out with who she should contact, exmples to cite and the arguments to make ? Sounds like she could do with some helpful assistance for the charity she is working for.

  • Rob says:
    25 Mar25 March 06:29

    Whilst I am not a Brexit campaigner (still very undecided) I am definitely fed up with the EU “protecting” me by making my life harder! I already need to pay for two sports packages, pay for software that used to come with the operating system and pay more for my phone bill so some people can spend hours on the phone from the beach in Spain. Now I will lose a major points earning opportunity!

    Please stop protecting me, I can’t afford much more.

    • Alan says:
      25 Mar25 March 07:44

      OT but interesting to hear of undecided folk, the majority I know are clearly against leaving but that just shows the ‘bubble effect’ i guess! (the majority in the scientific and medical fields are against leaving as are the majority of those in Scotland – http://www.telegraph.co.uk/news/newstopics/eureferendum/12086589/EU-referendum-Who-in-Britain-wants-to-leave-and-who-wants-to-remain.html)

    • RIccati says:
      25 Mar25 March 09:17

      Unfortunately, the shocks to the pound, trade and employment will be so much that points, as valuable as they are, will be the least of our problems.

      There were studies on how to let Greece go and the conclusion is that EU was not designed for the countries to exit — there are no provisions, a lot of legal uncertainty and cost.

      It is supposed to be one-way, irrevocable change.

      • Bobstrr says:
        25 Mar25 March 09:36

        You seem to be confusing the EU and the Eurozone

        • RIccati says:
          25 Mar25 March 09:59

          Not at all. No confusion.

          There is shock to the pound sterling after each pro-exit survey results. There will be stronger shock (depreciation in pound vs major currencies) if the public votes to exit.

          If you are implying that it is the Eurozone that suffers… things go in the opposite direction which also does not help the pound.

          Euro seems on the appreciating path, now that ECB said it won’t be lowering rates/adding to monetary easing after this ‘final’ addition in March (asset purchases up from 60 to 80bln).

      • steve says:
        25 Mar25 March 09:39

        Really?? I doubt very much that anything would happen, apart from a stronger GBP. The world has a myriad of free trade agreements. You dont have to be part of a “club” to join. Our biggest problem would be all the returning EXPATS from the Costas, because it will get bitchy.

        • RIccati says:
          25 Mar25 March 10:07

          We are not talking hypotheticals.

          Every time the survey with pro-exit results is out, the pound sterling drops. It has been this way since Oct/Nov.

          EU and its member countries already made it clear that the current trade agreements and relationships (with the UK) will not be continued automatically.

          UK would cease being a party to EU-wide treaties and will leave the Customs Union.

          There is no ‘myriad free-trade agreements’ — they are actually painful and slow to negotiate and implement — look at the Pacific one. Instead, there is WTO which arbitrates disputes about tariffs and levies. With the economic slowdown, the world is going away from tree trade and everyone closes markets up and favours protection measures.

          • DV says:
            25 Mar25 March 10:31

            Free trade agreements are not painfully slow to agree and implement outside the EU. Countries make them all the time. It’s only in the deeply protectionist EU that they take years to negotiate. The EU is hardly going to cut off one of Germany and Italy’s major markets for its manufactured goods, is it? It’s mysterious how other countries and their currencies survive outside the EU (which is lurching from one distorter to another) isn’t it?

          • RIccati says:
            25 Mar25 March 15:26

            “Free trade agreements are not painfully slow to agree and implement outside the EU. Countries make them all the time.”

            Huh. From Wikipedia

            Trans-Pacific Partnership (TPP) is a trade agreement among twelve Pacific Rim countries signed on 4 February 2016 in Auckland, New Zealand, after seven years of negotiations, which has not entered into force. The 30 chapters of the TPP Agreement…

          • Will says:
            25 Mar25 March 13:59

            It does drop, but where also getting worse economic data and forecasts as time goes on so its trend will be downward.

            What I really want explaining is why GBP would weaken if we left the EU. Is it speculative (ie driven by perception) or is there a solid reason why people will want to sell lots of GBP’s and fewer will want to buy them?

          • RIccati says:
            25 Mar25 March 15:30

            Shock to the system.

            Uncertainty if UK financial services will be able to provide safe custody for the capital.

          • JamesW says:
            25 Mar25 March 15:02

            A great many of our trade agreements with European countries are bilateral and not linked in anyway to membership of the EU.

          • RIccati says:
            25 Mar25 March 15:35

            Aren’t they superseded by the EU-wide agreements and the Customs Union?

            According to the Union rules, all EU countries must exercise the single schedule of tariffs and negotiate altogether.

            So, the past bilateral agreements are unlikely to work. If there is an exit, the UK will have to negotiate tariffs with EU as a whole, most likely via the WTO.

        • pr99 says:
          25 Mar25 March 16:13

          Free trade agreements are not common and take ages to negotiate. I think you are thinking about Double Taxation Agreements.

  • andijs2000 says:
    25 Mar25 March 06:39

    I fear this is the thin end of the wedge and a day looms when a decent long haul free flight in a premium class will take years to earn 🙁

  • SouthernEM says:
    25 Mar25 March 06:43

    RE: NatWest with Your Points
    I thought this scheme ended. I’m sure I received a letter to so.

    • harry says:
      25 Mar25 March 06:56

      yep – finished

    • JamesW says:
      25 Mar25 March 15:06

      Long gone. My Father had their black card and he used to get several hundred pounds of redemptions out of mypoints every year. He was fuming as it massively cut the value he got from the card with no attempt from Natwest to recognise that loss or mitigate it in anyway. They didn’t reduce the annual fee either – jokers !

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