Why Mastercard’s new merchant fees won’t improve your credit card rewards

A few readers got in touch this week after seeing press coverage of Mastercard’s plan to boost the fees paid by EU retailers when processing sales for UK residents. They thought it may improve their credit card rewards – but it won’t.

When the UK was in the EU, interchange fees on credit card transactions – effectively the part of the fee which goes to the card issuer – were capped at 0.3%.

With the UK now out of the EU, these rules no longer apply to purchases made outside the UK. This is ironic, because the UK Government was the driving force behind introducing interchange fee caps in the first place.

Mastercard has announced that, from 15th October 2021, it will increase the interchange fee on credit card transactions made by UK residents when they buy something ONLINE in the EU.

The rate will go from 0.3% to a whopping 1.5%. Fees on debit cards will jump from 0.2% to 1.15%.

This won’t lead to improved card rewards

The cap on interchange fees was the death knell for decent credit card rewards on Visa and Mastercard products in the UK.

Reward credit cards are generally carried by people who are financially stable. Interest rates are high – often 23% – and these cards are avoided by anyone who is not intending to repay their balance each month.

With little income from interest charges, interchange fees were the major source of income. When they were cut by 80%, there was little money left to fund rewards.

With few reward cardholders paying interest, there was very little money in the pot except the 3% fee on foreign currency payments. This has also been whittled down in recent years as customers have become more aware of both the charge and the fee-free alternatives.

However ….

The increase in interchange fees only applies to ONLINE transactions in the EU. How much credit card expenditure by UK residents goes to ONLINE transactions with companies in the EU? Probably very little.

The obvious targets – like airlines – will move quickly to ensure that payments made by UK residents are processed by a subsidiary based in the UK. This will save them 1.2% of your fare in commission, a substantial sum given the small profit margins in the aviation industry.

There is no chance that Mastercard can impose the same fees on IN-PERSON transactions in the EU. Visa and Mastercard have already given anti-trust undertakings to the EU that they will cap their fees on all purchases made in the EU, irrespective of where in the world the cardholder is based.

I am fairly sure that the very modest sums generated for card companies from online transactions with EU businesses will not move the needle in terms of rewards.

For clarity, credit card interchange fees are a bad thing. They increase costs for retailers which feeds into the prices they can charge. To quote a recent New York Times article:

“According to a 2010 policy paper by economists at the Federal Reserve Bank of Boston, the average cash-using household paid $149 over the course of a year to card-using households, while each card-using household received $1,133 from cash users, partially in the form of rewards. It remains a regressive transfer to this day.”

You can find out more on ft.com here (paywall).

PS. If you are not a regular Head for Points visitor, why not sign up for our FREE weekly or daily newsletters? They are full of the latest Avios, airline, hotel and credit card points news and will help you travel better. To join our 65,000 free subscribers, click the button below or visit this page of the site to find out more. Thank you.

Want to earn more points from credit cards? – April 2025 update

If you are looking to apply for a new credit card, here are our top recommendations based on the current sign-up bonuses.

In 2022, Barclaycard launched two exciting new Barclaycard Avios Mastercard cards with a bonus of up to 25,000 Avios. You can apply here.

You qualify for the bonus on these cards even if you have a British Airways American Express card:

Barclaycard Avios Plus Mastercard

Get 25,000 Avios for signing up and an upgrade voucher at £10,000 Read our full review

Barclaycard Avios Mastercard

Get 5,000 Avios for signing up and an upgrade voucher at £20,000 Read our full review

You can see our full directory of all UK cards which earn airline or hotel points here. Here are the best of the other deals currently available.

SPECIAL OFFER: Until 27th May 2025, the sign-up bonus on the ‘free for a year’ American Express Preferred Rewards Gold card is increased from 20,000 Membership Rewards points to 30,000 points. Points convert 1:1 into Avios (30,000 Avios!) and many other programmes. Some people may see even higher personalised offers. Click here to apply.

SPECIAL OFFER: Until 27th May 2025, the sign-up bonus on American Express Platinum is increased from 50,000 Membership Rewards points to a huge 80,000 points. Points convert 1:1 into Avios (80,000 Avios!) and many other programmes. Some people may see even higher personalised offers. Click here to apply.

American Express Preferred Rewards Gold

Your best beginner’s card – 30,000 points, FREE for a year & four airport lounge passes Read our full review

British Airways American Express Premium Plus

30,000 Avios and the famous annual 2-4-1 voucher Read our full review

The Platinum Card from American Express

80,000 bonus points and great travel benefits – for a large fee Read our full review

Virgin Atlantic Reward+ Mastercard

18,000 bonus points and 1.5 points for every £1 you spend Read our full review

Earning miles and points from small business cards

If you are a sole trader or run a small company, you may also want to check out these offers:

American Express Business Platinum

50,000 points when you sign-up and an annual £200 Amex Travel credit Read our full review

American Express Business Gold

20,000 points sign-up bonus and FREE for a year Read our full review

Capital on Tap Pro Visa

10,500 points (=10,500 Avios) plus good benefits Read our full review

Capital on Tap Visa

NO annual fee, NO FX fees and points worth 1 Avios per £1 Read our full review

British Airways American Express Accelerating Business

30,000 Avios sign-up bonus – plus annual bonuses of up to 30,000 Avios Read our full review