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

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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 here (paywall).

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Comments (56)

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

  • BuildBackBetter says:

    When travel starts, I may have to forget getting hotel benefits as half the members would be elites in each hotel chain.

    • Peter K says:

      Why? Defined benefits such as a free drink or free breakfast will still be there, even if everyone else will also be getting them.
      Non-guaranteed benefits though will very likely be less often handed out….assuming that travel goes back to the same level as before.

      The only reason they are being so free with elite status is because people aren’t travelling and they want to keep hold of those people who are.

    • Harry T says:

      There will be a lot of mid tier members, especially travellers from the US. However, higher status like Marriott Titanium will be rarer because you still have to do a significant amount of travel to attain it.

    • tom1 says:

      Going to be interesting for sure, to see how hotels pickup once travel restarts.

      In the UK… I imagine there will still be lots of families travelling on a budget in the UK, as well as workmen staying ‘in digs’ to keep Premier inn, Travelodge, HIE busy. Also added trips to see family you haven’t seen for ‘years’.

      At the top end, the luxury hotels I am sure will still be busy. As soon as travel is allowed, there is all that pent-up demand from those who can afford it.

      But I can’t help feeling the mid-range hotels, once filled with business travellers during the week, are the hotels that are going to be the last to fill up. I think work related travel will be the last to restart, and even when it does, the amount will be significantly lower than pre-covid. Crowne Plaza, Marriott, Hilton, Holiday Inn, etc etc.

      It also potentially means there will be less people travelling for leisure, using points earned through work trips.

      Thoughts? would be nice to talk about something other than Brexit and covid!

      • Harry T says:

        I think you’re on the right track. Some of the mid range hotels might succeed in attracting leisure travellers who want something more comfortable than Premier Inn but who can’t afford luxury hotels. I suspect with the current poor progress in Europe with vaccination that domestic holidays might be more feasible/popular this year too.

        I’m just hoping that some of the hotels I enjoyed visiting over the last couple of years manage to reopen and stay in business!

  • Anon says:

    SA bill added on an extra 0.08% via bendy card – so will that go up??

  • Will says:

    Has anyone actually defined ‘essential’ travel?

    • Rob says:

      No. It would be up to a court to decide if the police attempted to fine you.

  • Will says:

    What is more essential? Seeing your 92 year old parent or playing a professional tennis/cricket/football match or sailing I fear Priti Patel doesn’t have enough empathy to give the right answer

    • Harry T says:

      Probably best to say the priority should not be giving covid to a vulnerable elderly relative?

      • Brian W says:


        Will is still trying to find the HFP delete post button………

        • Will says:

          As usual on social media. an incorrect posting from someone jumping to conclusions. I agree totally with pre-testing and quarantine. I disagree totally with travel bans which aren’t well defined and prioritise business or sport over personal reasons to travel.

          • Anon says:

            £80 to return and reduce isolation days and £1500 for hotel isolation. Just a govt money making scheme. Not in the interest of public safety at all

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

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