The Government turns the screw even further on your reward credit cards

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I have written extensively about the new European Union regulations on credit card interchange fees which came into effect last week.

This article covers the key information.

You could (note, could) have summarised the situation as follows:

  • The EU is capping the interchange fee (roughly equivalent to the fee charged to shops) on credit card transactions at 0.3%.  Historically this has been around 0.8% for Visa and MasterCard transactions.
  • Debit card transactions are capped at 0.2%
  • Only Visa and MasterCard are impacted
  • American Express is NOT impacted directly.  Additionally – and this is important for our niche – Amex cards issued by MBNA, Lloyds and Barclays are not impacted until 2019.

We have already seen the some major changes in the market:

Could it get any worse?  It just has.

Credit cards

On 8th December, the Payment Systems Regulator (PSR) – the part of the Financial Conduct Authority which oversees the implementation of this law – made an announcement.  You can read it here.

American Express cards issued by MBNA, Lloyds and Barclays will NOT get a three year grace period.  With immediate effect, the interchange fee on these cards must be cut to 0.3%.

This has come about because the PSR has decided to impose a clause in the rules which exempts any card company with a market share of above 3% from the grace period.  American Express has a UK market share of above 3%.

This is, admittedly, just a temporary ban until 31st March when a final ruling will be issued.  It is difficult to imagine how the final ruling will be any different, however.

What does this mean for loyalty credit cards?

What it appears to mean is the end of the American Express / Visa or American Express / MasterCard double pack.

As Amex cards issued by third parties are now restricted to the same 0.3% fee as Visa and MasterCard, it is pointless to continue issuing them.

Unless the final ruling in March sees a dramatic turn around, we will presumably see the removal of American Express cards from the BMI, Lufthansa, Lloyds Avios, TSB Avios, Etihad, Emirates, Virgin etc credit card ‘double packs’.  This will mean that only the low-paying Visa or MasterCard option will remain.

This ruling has no impact on American Express cards issued directly by Amex

For clarity, Amex cards issued by Amex itself are not, and will never be, impacted by these EU rules.

This means that the British Airways, Starwood, Nectar, Gold, Platinum, Platinum Cashback, Green, Harrods etc cards will continue as they are.

Don’t count your chickens too soon, though.  With Visa and MasterCard charge cut to 0.3% from 0.8%, shops are less likely to want to pay the typical Amex charge of 1%+.  If Amex is forced to cut its fees to retain key contracts, this will be passed on in the form of lower rewards.

The squeeze on your rewards credit card just got tighter, I’m afraid.

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  1. Why is Amex issued Amex exempt but Barclays issued Amex is not?

    • Andrew (@andrewseftel) says:

      The regulation doesn’t apply to ‘two party’ card schemes where the retailer deals directly with the issuer.

      • AMEX is three party.

        ‘three party payment card schemes’ (cardholder − acquiring and issuing scheme − merchant) and
        ‘four party payment card schemes’ (cardholder − issuing bank − acquiring bank − merchant).

        • I agree that, when I read the original press release, that is what I thought too. However, when you dig into the full document, it is clear that it is only talking about four party schemes run by three party operators.

          Amex-issued cards are exempt because Amex runs the whole process. This clamp down i meant to restrict the profits of the intermediaries who are running an oligopoly.

  2. Gblb1030 says:

    great post. I do hate the interchange fees being sucked away. when does AMex exempt status go away?

    • Amex-issued Amex cards remain exempt, permanently.

      • SoloFlyer says:

        I wouldnt be surprised to see the likes of Virgin Atlantic and some other companies rushing to Amex if MBNA cuts the earning rates.

        • With the BA’s attitude, and all the BA Amex card cancellations, there is a strategic decision to be made about a tie up with Virgin. It is the smaller clientele but a profitable one (Virgin flies to the US and Caribbean).

          With £150 fee, £3000 spent and a meagre 25000 bonus, BA Premier AMEX is very much unattractive. There is 2-4-1 but for Asia there are Qatar fares, Etihad redemptions and Turkish sales. For NA there are ex-Dublin and generally ex-EU fares on American.

  3. Are you sure about AMEX issued ones will be exempted? From the PSR website, it states that

    “Therefore, our provisional conclusion is that American Express and any payment service providers participating in the American Express scheme must comply with the interchange fee caps on UK domestic transactions until 31 March 2016.”

    Seems it covers both AMEX own ones and Barclays/MBNA ones?

  4. Gutted about the probable impact on the bmi/diamondclub cards 🙁

  5. Had a quick look through but couldn’t see anything on this. I have the Lloyds Avios rewards; does this ruling mean Lloyds can change T&Cs on my earnings now? Or does it only apply to new customers?

  6. Why has this whole ruling come in, in the first place?

    Isn’t it clear that the end customer (us consumers spending on their cards) are not going to see any reduction in prices…?! It’s just madness.

    • You will see reductions in prices. Simple economic theory says that lower costs will eventually bring down prices. If existing businesses decide to pocket the saving to fatten their profit margins, new entrants will come into the market because they see extra-large profits being made. These new entrants create price competition and prices come down.

      • I’m no economist but that sounds absurd to me. How much are shops going to benefit by really – maybe 0.2% on card transactions, so probably not much more than 0.1% in total? Even if the drop is passed on in full it’s well under 1%. So new players are going to jump in to take advantage of the “extra large” profits of a small fraction of 1%?

        • Not on one event obviously. But, over time, if profit margins widen new entrants are attracted – common sense as well as theory!

          In reality, stuff like the big hike in minimum wages will swallow up savings from small stuff like this.

          • But this IS one event?

            I don’t think it’s common sense that if profit margins widen by well under 1% new players enter at all – quite the opposite in fact.

            As I said, I’m no economist so can’t say under economic theory you’re wrong, but it most definitely is not common sense!

    • It’s not really anything to do with the customer- I don’t think anybody is even pretending that it’s the case. Basically, merchants are fed up with paying (what they consider to be) high payment processing charges, in particular because the interchange element of that cost is set by VISA/MC. They have no viable alternative but to take payment via those schemes, so they are going after the schemes themselves on competition grounds. Mastercard is being sued; VISA didn’t want any trouble so voluntarily committed to reducing its fees even before the EU legislation comes in to place.

    • Why?
      There are people in Brussels whose job is to make regulations. So they make regulations, whether they are needed or not. Then there are people in this country whose job is to ‘enhance’ European regulations so they do.

  7. Cape2Cairo says:

    Rudimentary knowledge of economics will tell you that reducing the monopoly rent earned by an oligopolistic cartel (this is what we are talking about here) can only be a good thing for the final consumer, as well as for the intermediary businesses along the way.

    I would not worry about the difference going to payment card processors: competition has already increased with new entrants from the app space rapidly taking over from the extortionate incumbents who served the industry in the past. As in other space (including airlines), new entrants will ensure that competition works and the ultimate benefit accrues to consumers.

    As in the transport, energy, and telecoms space, the EU is an extremely benign influence for higher cross-border competition leading to increased consumer benefit. Fee transparency and limits to the abuse of market power are good policy measures for the aggregate European population, even if they mean those of us who are better off get fewer Avios off of a card transaction.

    • Which year of your Economics degree are you studying?

    • Competition leads to winners, winners leads to monopoly, monopoly leads to competition… you get the idea. It’s cyclical!

  8. Points collecting aside for a moment, it’s better for the population as a whole to just pay lower fees, and eventually (over years) the consumer will see the lower fees.

    One interesting point will be if a retailer takes a lloyds/mbna issues amex, presumably they’ll be charged at the standard Amex rate (my merchant account charges 1.9% for all Amex regardless of who issues it) but lloyds will only be able to apply to 0.3% interchange fee, so someone will be making a mint on these cards as the middle man.

    • As mentioned above, that is the case for merchants on a fixed rate deal but not for the bigger merchants who pay on an Interchange Plus deal. They simply pay the interchange, scheme fee and a small margin on top to cover the costs of the payment processor. They will see an immediate, significant reduction in their charges. The merchants on fixed rate deals will, of course, have the ability to renegotiate based on the lower interchange rates too.

  9. Looking at the card machines on the small shop counters they seem to belong to the banks who also issue the cards.

  10. OT but credit card related: I had coffee yesterday at my local cafe and checked beforehand to see if they were taking part in the Amex Small Shop promotion – they were. I went to pay the bill with my BA card and the lady insisted she didn’t take Amex. I told her that she was listed on the Amex site as taking part. She said she had received a pack from Amex but she never sign up for it. Anyway we tried my card and it went through ok and I showed her the instant email giving me my £5 credit. She has been open for a couple of years and never knew her card machine took Amex – she reckoned whoever she got the card machine from must have signed her up for Amex – how is it possible to have a business and not know you take Amex – are there other business out there like that?! I was obviously the first person to pay for anything in her cafe with Amex!

    • Our local post office shut and has been temporarily replaced with a porta-cabin… one of the people in there insists that they don’t take AMEX despite it working on every occasion that I have insisted on trying! I think it might be a case of the business owner telling staff they don’t wish to take amex rather than the functionality not being there?

      We had breakfast at a cafe listed on the map last weekend, went to pay and there was a “cash only” sign up… fortunately a quick call to AMEX sorted out the statement credit!

      • We went into a new pet shop in town last weekend and asked if they took Amex to which they said yes. All 3 of my cards rejected but they insisted they took it and had the sign in the window. I called Amex from the shop and they said they were registered under their two other shops but this new shop was not registered. She agreed to credit the £5 to my account and I paid with my Virgin Visa – credit came through the next day! I genuinely don’t think the cafe owner knows about Amex. She is now interested in my Airmiles stories of how we are now booking Business Class flights for our holidays. I told her to look online at HfP so hopefully another customer for Rob.

      • My local PO on two occasions now has declined amex on their machines but strangely allows first time MC. Is there a way from behind the counter that they can push a button to decline a payment or was it a genuine error with the terminal?

        • I don’t think they can deny it – but if it is a franchise or a sub Post Office, as opposed to a main one, it is only very loosely controlled by the PO and I imagine the owners have a lot of leeway. After all, why would they care if they were a main PO? The fee isn’t coming out of the staffs pockets.

    • I’ve been in several Spars where I was the first Amex user 🙂

      I had to educate the staff in how to tap the Amex icon etc on the till even though it has a message ‘not set up’ etc.

    • A business that I do some freelance work for run a chain of retail shops. Some of which had Amex enabled on their card terminals and others didn’t. Every few months the head office would send a note to say ‘don’t accept Amex even if you know it goes through your terminal!’. None of the shops had Amex POS materials so it was clearly not intentional. Eventually they managed to remove Amex acceptance from the terminals across the estate. I should imagine that there are many small businesses that unintentionally accept Amex.

    • Ludicrous says:

      I used to work for a restaurant that accepted AMEX when I first started working there, they changed the payment supplier and the new machines didn’t accept it (they changed the company on the promise of cheaper processing fees).

      In the end, they owner decided to go back to the original company and as no one had really complained when we told them that we couldn’t accept them, we were told to continue to tell customers that we couldn’t accept it, to save on the fees and apparently it took longer to receive the money for the Amex transactions,

      The restaurant is still listed on the shop small website this year, so it would be interesting to see if they’ve had to tell people no or not.

  11. One thing the Government (PSR/FCA/BOE) have just one is to create the monopoly of AMEX-issued cards on points and remove the competitive, consumer-beneficial products such as Lloyds Avios with no FX fee.

    AMEX can continue charging FX fee and if one would like to earn some kind of rewards they will HAVE TO pay the FX fee, even within Europe — the common payment area (for euro but).

    • ankomonkey says:

      You’ve gotta hope Amex don’t start charging a fee for all of their cards, knowing people will have to use them if they want decent rewards.

      • It’s a possibility, for AMEX to start charging increased fees, and the timing is ripe for it — a lot of people cancelled BA Premier and Platinum Charge this year (devaluation, withdrawal of airline status benefit).

        But I would like to return to the Lloyds Avios product and how beneficial to consumer it is. Given that

        For the sake of merchants paying 10p or so less on an average transaction in payment costs, with an uncertain prospective for the effect to trickle down to consumers (see the economic 101 theorising above), a significant demographic will have no choice but to pay a WHOPPING 3% fee on their spending abroad — the other fee-free credit cards (Halifax Clarity, Post Office) are actually hard to get in terms of credit scoring.

        • I doubt Halifax Clarity is any harder to get than the Lloyds Reward card. And there are debit cards with no fee.

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