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

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• Sven says:

  27 Jul27 July 11:21

  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.

• Farringdon says:

  27 Jul27 July 13:39

  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:

    28 Jul28 July 10:32

    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).

• Steve says:

  27 Jul27 July 14:54

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

  • jonny says:

    27 Jul27 July 15:08

    I’m with you!

• Me says:

  27 Jul27 July 21:26

  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:

    27 Jul27 July 21:57

    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.

  • James says:

    28 Jul28 July 10:16

    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.

• Volker says:

  27 Jul27 July 23:41

  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.

  • James says:

    28 Jul28 July 10:18

    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:

      28 Jul28 July 10:27

      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.

• Andrew (@andrewseftel) says:

  28 Jul28 July 10:03

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

• Clive J says:

  28 Jul28 July 20:21

  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.

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