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American Express loses its final appeal – it must cut its interchange fees

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The end could be approaching, medium term, for the free British Airways American Express credit card after American Express finally lost a key European Union ruling yesterday.

The decision means that the implicit interchange fee on the British Airways, Starwood, Nectar, Costco and Harrods American Express cards must be capped at 0.3%.  American Express Gold, Platinum, Business Gold and Business Platinum will remain uncapped.

In effect, although this is not strictly how it works, for Visa and Mastercard products the interchange fee is the bulk of the fee charged to a retailer for accepting a payment card and represents the cut taken for the use of the Visa and Mastercard processing networks.  Other fees cover terminal rental and incidental costs involved in accepting cards.

American Express Green card

We first wrote about this last July when the EU’s Advocate General published his guidance to the European Court of Justice.  He advised the ECJ to find against Amex, and yesterday the ECJ agreed.

You can read the European Court of Justice ruling here.

It doesn’t take a genius to realise that the free British Airways American Express is a dead duck long term with 0.3% implicit interchange fees, given that Amex will be paying BA something close to 1p per Avios for the points.  Interest income, terminal rental and FX fees from foreign usage are unlikely to fill the gap, especially with 2-4-1 vouchers to fund as well.

Given that the BA Amex cards have billings of over £1 billion per month, however, it is a problem that both BA and Amex will need to solve before the current contract expires.

Background

Let’s step back a bit.

In 2016, the EU capped the interchange fees charged by Visa and Mastercard at a maximum of 0.3% for personal credit cards and 0.2% for personal debit cards.  Fees were previously 0.75% and above.

It claimed, arguably correctly, that the two companies were exploiting their oligopoly on payment processing by charging disproportionate fees, especially as all of the risk was taken by the retailer (in case of charge backs) and the card issuer (in case of bad debts).

In theory, American Express should have nothing to do with this.  Amex is vertically integrated and there is no intermediary sitting between the retailer and Amex who is adding additional fees.  A retailer was free to either work with Amex, paying the fees they requested, or not.

The EU law is badly worded, however. It states (and this is a massive simplification on my part) that personal cards which involve four parties – for Visa, this is the customer, the retailer, the payment processer and the card issuer – must have their interchange fees capped.

American Express Gold and Platinum charge cards, and Platinum cashback cards, clearly only have three parties involved in the process – the customer, the retailer and Amex.  No problem there.  These cards are not and will not be capped.

However, the court has found that, as drafted, an Amex-issued card with a co-brand partner means that there is a fourth person in the relationship.  The BA Amex involves British Airways, American Express, the retailer and the customer.  And if a card has four parties involved, it MUST have its implicit interchange fee (although no-one is clear how this should be calculated as part of Amex’s overall fees) capped at 0.3%.

This was the question put to the Advocate General:

“The referring court asks the Court of Justice to clarify whether, in those circumstances, the activities of a three party scheme can be treated as those of a four party scheme, for the purposes of the Regulation in all cases (in other words, it is sufficient that there is a co-branding partner or agent) or only if a co-branding partner or agent is a payment service provider which issues the cards.”

The latter bit – “only if a co-branding partner or agent is a payment service provider which issues the cards” – is what happens when MBNA issues an American Express card.  No-one is doubting that these cards should have their interchange fees capped.

Surely, though, there is a huge difference between MBNA licensing the Amex brand in order to issue a credit card and American Express using the BA brand to sell its own cards?  As the original Advocate General ruling admitted:

“[the co-brand partner would] merely provide the three party scheme with access to their customer base”

And:

“Amex and the United Kingdom Government submit that, if the co-branding partner or agent confines its activity to the distribution of cards, technical payment services or simply the processing and retention of data, it does not act as an issuer, so that arrangements for the extension of three party schemes are not covered by Articles 1(5) and 2(18) of the Regulation, which means that they cannot be considered to be the same as four party schemes.”

What is more complex is that American Express doesn’t even charge interchange fees because there is no intermediary.  There are no interchange fees to cap.  Instead, it has to cap its general fee charged to retailers.  This will presumably need to be set at a level similar to the total fees now charged to retailers for accepting Visa or Mastercard.

To give an example of how this comes down to interpretation of the exact wording of the law:

“In their submission, Articles 1(5) and 2(18) of the Regulation refer to three party schemes which ‘issue [cards] with a co-branding partner’ and which ‘issue [cards] through an agent’. They [Amex et al] contend that the terms ‘with’ and ‘through’ show that the co-branding partner or agent must be involved in the issuing of the card, to which end they rely on the connection between those provisions and other provisions of the Regulation.”

Amex lost:

“In short, Articles 1(5) and 2(18) of the Regulation must be interpreted as meaning that a three party payment card scheme issuing card-based payment instruments with a co-branding partner or through an agent must be classified as a four party payment card scheme, regardless of whether or not the partner or agent is involved in the issuing of cards and/or the acceptance of payments.”

BA Premium Plus American Express card BAPP

What does this mean for the British Airways American Express and other co-brand Amex cards?

We can’t be sure.  I asked Amex for a statement yesterday and they said:

“We are currently reviewing the Court’s judgements.  We can, however, confirm that we have been preparing for this ruling and are committed to continuing to offer best-in-class products and services that deliver value for customers and co-brand partners. American Express Card Members can continue to use their cards as normal”.

In the short term nothing changes, because the existing contracts will continue to run.  Unless there are a lot of people paying interest, it is likely that American Express will now be swallowing losses on every transaction on the free British Airways American Express.

The British Airways Premium Plus card, with its £195 fee, looks secure.  I can see how the economics of that card continue to make sense in a world of 0.3% implied interchange fees.

The Nectar Amex looks in trouble, given its low annual fee and 0.5% cashback rate.  The Starwood Amex will reach the end of its natural life next January when SPG and Marriott Rewards merges – it isn’t clear if Amex will continue with a card beyond that.

Amex has a strategic problem in the UK

With its fees on co-brand cards capped at the same level as personal Visa and Mastercard products, there should no reason for shops not to accept it.  Amex acceptance could become universal.  This is a great opportunity if the company chooses to embrace it.

Except ….. for that to happen, Amex would have to slash the rate on the Gold and Platinum charge cards and Platinum cashback cards too, even though it doesn’t have to.  Shops won’t welcome Amex with open arms if they know that they will still get legged over if the cardholder pulls out a Preferred Rewards Gold instead of a British Airways Amex.

Shops have this problem with Visa and Mastercard too, to be fair.  They still pay full interchange fees on cards issued outside the EU and on business Visa and Mastercards.  In theory shops will be allowed to refuse cards which charge higher fees but it is very unlikely that they will.  It would require terminals to display the fee after a card is swiped and for the retailer to then decide on the spot whether to continue or refuse the transaction.

What happens next?

Good question.  In two weeks, I am speaking at a major Co-Brand Credit Cards conference in London where we will discussing these issues in more detail.  I will hopefully be able to bring you some more news – or at least speculation – after that.

You can read the full European Court of Justice judgement on the American Express co-brand interchange fee case here.


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Comments (121)

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

  • Michael C says:

    Guys, between BA Amex Corporate and Corporate Plus, is there anything justifying the 50/225 GBP price difference apart from the 1/1.5 Avios accrual rate? Cheers!

  • Jonathan says:

    Surely if an airmile/point becomes harder (more expensive) to earn, then a revaluation or reversal of recent devaluations must follow?

    • TGLoyalty says:

      It’s only harder to earn in the EU. The USA gives away points like sweets

  • Klaus-Peter Istvan Dudas says:

    How are the MasterCard world elite cards exempt from the cap?

  • JamesB says:

    “What happens next?”
    My guess is lower fee across all amex cards for the merchants while the cardholders get American-style annual fees across all cards, further reduced UK-style sign up bonuses, tighter rules on churning, more attractive referral opportunities, and gold/platinum benefits that could move either way. I could live with such if the current cross-family referrals from platinum continues and the cost-benefit of platinum remains reasonable. Nevertheless, time to make hah while the sun is still shining.

    • Polly says:

      Agree, we could def live with the current plat advantage. Good that cross referral has come back. It was quite restrictive last couple of years, and annoying at the best of times. Let’s see how it impacts.

    • Alex W says:

      So at the moment can I refer myself from my own Plat to a SPG card for myself? If that’s the case I will definitely be keeping the plat instead of cancelling it.

      • JamesB says:

        Risky, after some initial reports of success there were a few reports suggesting people never got the bonus when self-referring.

        • Lev441 says:

          I did it last week for the ba premium plus Amex and received the points.

        • Polly says:

          Lev, brave of you, l wouldn’t risk it. Getting my oh to refer me for my card change this week. Hope we get the MRs.

        • lev441 says:

          @polly – I got a little worried after the points took a fair few days to post after i received the card… but wanted to check it out!
          Spent £10k within the first week, just waiting for voucher to hit account and avios to go over to BAEC before cancelling.. Think it’s my new record!

        • Jan says:

          lev441 – did you cancel your BA Premium Amex card?
          I was just on chat with Amex, representative, stating I wanted to cancel my BA Premium Amex and start using the free card instead. I wanted to confirm that I wont lose my 2-4-1 redemption voucher. The reply was (exact copy from chat):
          “Companion voucher bookings must be made using the British Airways Card they were earned with. This is set in the Terms & Conditions on the companion voucher. Once the card is closed, you will not be able to use the Companion Voucher”.

          I do remember Rob saying that the call center might tell that to people, but still makes me hesitate cancelling the card before using the voucher.. Any thoughts on this?

        • JamesB says:

          @Lev, I put my dad off it this week, he probably could have had 18k from his plat for his SP G. I got 9000 instead, best keep my mouth shut.

        • Genghis says:

          @Jan. you won’t lose the voucher.

        • Lev441 says:

          @jan – as genghis said, you don’t loose the voucher, it stays in your account. I think this is just off the script on chat/at the call centre.

        • Lev441 says:

          @JamesB – his loss, your gain 😉

      • simon says:

        Did this last week. 18k MR points and the SPG 10k bonus when i spend £1k.

      • Steve says:

        I’m confused about this – how does one refer from Platinum to SPG? The referral links I generate only seem to offer Plat/Gold – what am I missing?

        • Polly says:

          You go further, next link where it says, see other cards, then you will see the spg.

        • Steve says:

          Thanks!

        • RussellH says:

          This is not working for me anymore (it used to).

          The referal link from my SPG Amex no longer has an “Other Cards” link, just two separate links to the Application form for SPG.
          From my partner’s PRG Amex, the “Other Cards” link now only offers the Green and the Platinum Amex cards. I had been planning to apply for a free BA Amex in a couple of weeks using her PRG link, but it is looking at present as though I shall have use the much less generous link from her free BA Amex.

        • Optimus Prime says:

          @RussellH – I have the same problem as you unless I open the referral link a Chrome incognito window. In this case I do see all the Amex credit and charge cards.

        • JamesB says:

          @Russell/Optimus, just checked and it is still working fine for me. Maybe something to do with numbef of referals already made or just an error so probably worth a call.

    • Andrew says:

      I’d guess we’ll see all of the co branded amexes discontinued with them concentrating on the charge cards. These could offer BA 2for1s if you agree to spend a certain amount and auto convert your MR points to avios for a year.

      • Cate says:

        Not sure that would be a broad enough incentive to justify a charge card IMO. Not everyone wants to be tied to one airline or earning preference.

  • Polly says:

    If BA Amex nets them around 1 billion a month in sales they can probably afford to fund the ba 241 voucher. It’s depends how many have enough avios to use it for an F redemption LH. As that’s a huge whack of avios to be funding free…ie. our current one to KUL at 280000 avios. Interesting to see the follow up. In the meantime we all keep going at this hobby until we know any different.
    Plus just as much am sure is spent on the gold, spg and plat. And they don’t have so much to pay out on the 1st 2 cards.

    • Genghis says:

      £1bn through the cards is prob £3m in revenue + cards fees + interest income etc for Amex pcm

      • JamesB says:

        I’m sure their business is very sound despite the changes. They are running an expensive TV advertising campaign, and the travel money, insurance, hotel changes we have seen n the last year or so are all likely aimed at weeding out less profitable or loss making elements.

    • JamesB says:

      OT @Polly, a reader left a comment for you and other James on new Qatar deals to Asia last night. Not sure if you would have picked it up with time difference so if not you can have a look. Enjoy Bali.

      • Polly says:

        Thanks James, will have a look now..v kind of,you..P

      • Polly says:

        James, l can’t find that article.. help! Is it an extra one from Rob?

        • Polly says:

          Thanks James, found it. Going to play around with dates now. I know others will look too.
          It’s called Inside Flyer, if anyone interested. Good prices from HEL.

    • Bagoly says:

      Does anybody know whether Amex pay BA when the voucher is used (in which case probably based on the number of avios doubled up), or when it is issued (in which case on some estimated average usage).

    • Lumma says:

      I think you’re wrong about just as much being spent on the other AMEX cards. I work in a mid-range restaurant and just from what I see when customers pay, if you ignore the debit card payments from the big banks, the British Airways cards are by far the most common method of payment by a huge margin, followed by the Lloyd’s avios card. I can go days or even weeks without seeing a Platinum, Gold or Green Amex. Even last night was the first time I encountered the Amex rewards credit card, which would presumably be the readymade replacement for the average free BA cardholder.

  • Tariq says:

    So by extension, is a co-brand Visa/Mastercard classed as a 5 party scheme and therefore exempt?

  • Bob says:

    What about the Lloyds Amex is an end in site for that one?

    • JamesB says:

      Yes, because amex have withdrawn their license from third paries. Anybidies guess when it will be pulled though. they are probably seeing out the existing contract.

  • Rob says:

    “Our freedom of choice in a competitive society rests on the fact that, if one person refuses to satisfy our wishes, we can turn to another. But if we face a monopolist we are at his absolute mercy.”

     Friedrich Hayek, The Road to Serfdom

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