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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.

  • ChrisC says:

    Most people won’t notice these fees because in most cases they aren’t aware of them because as you say they are paid by the retailer and included in the price.

    But people will be more concerned with having to pay VAT, customs fees and admin fees on anything they order online from an EU country that they didn’t have to pay before.

    So I think you underestimate the number of transactions people have with the EU that are now affected by all these changes.

    They may think they are ordering from a UK shop but in actuality they aren’t and as long as the stuff gets delivered they don’t particularly care where it comes from.

    Friend of mine was also hit with VAT etc charges on goods (in fact gifts) sent from the UK to the Netherlands.

    • Andrew says:

      Surely as soon as people realise all of these fees are now due on EU purchased products it will make them more likely to find a UK source? Every now and again I used to place a large order for my favourite wine from a German online store who were far cheaper than UK stores. With the extra custom fees due that’s no longer the case so I’ll just buy from a UK distributor instead.

    • Andrew says:

      Quote:- “But people will be more concerned with having to pay VAT, customs fees and admin fees on anything they order online from an EU country that they didn’t have to pay before.”

      That’s not right. On most goods up to £135 there’s nothing extra to pay on imports nowadays. (In the olden days the limit was £15).

      This makes a massive difference ordering from the Amazon US site or Canada site.

        • Andrew says:

          Yup, as the article says, pretty much everything under £135 is fine.

          Makes a massive difference as I regularly order items from the US and Canada.

          • Alex M says:

            Was going to buy smth from dutch online shop for 60 euro + 8 euro delivery to the UK couple weeks ago. When adding item to cart got “Sorry, we can’t deliver to the UK at the moment” message. Few days ago the message disappeared but delivery charge now is 32 euro – 30% increase on the total price. Thanks Brexit! :-/

          • Will says:

            We’rent they already subject to duties?

      • kitten says:

        The problem is the admin fees which unless the purchase is very high value, turn out to be a very high proportion.

        It looks like ‘what a victory we got 0 tariffs agreed with the EU’ is going to be a very hollow promise for consumers given the amount and cost of ‘non-tariff surcharges’ ie moneygrabs on even small transactions.

        • DeB20 says:

          The UK – EU trade deal has the dubious distinction of being the world’s first ‘free trade’ agreement that raises barriers to trade instead of reducing barriers and making trade frictionless.

          The UK government has already stated previously that the cost to UK companies of doing business with the EU will be £7 billion per year. There will be similar issues for businesses on the other side.

          It is a contradiction to free trade principles, despite everything that it is painted to be by our dear leader and his cohorts.

  • Tony says:

    Well that explains the extra fee on a new Ryanair booking ….

    I doubt he will move his payment center to the UK.
    Also watch out for Amazon as well.

    • Genghis says:

      Has Amazon not already moved and billing from UK branch? No double points on my Creation card this month but still got them from Etsy.

      • Simon says:

        Just wondering whether the location of the payment/billing has implications for where the company pays tax? I assume not (and that if it did then they’d do something clever with a subsidiary) but have no idea.

        • BuildBackBetter says:

          It does. That’s the whole point of using Lux / Ireland.

          • Simon says:

            So Amazon et al have to decide between absorbing a 1% merchant fee, or booking sales in the UK and paying UK tax? Makes me think the Gov won’t rush to regulate this fee down…

      • DeB20 says:

        Amazon wants to charge me an extra £37 delivery and other charges for a set of Austrian hand blown wine glasses that cost £85+ for a set. Last December it was £85+ with no additional charges.

        HMRC requires all European business selling goods online to the UK to register with them, collect the applicable VAT and provide regular VAT returns.

        Should be interesting to see how it goes over the next few months. Most EU online retailers might decide that it is not worthwhile doing what HMRC requires and therefore stop selling to customers providing an address in the UK for delivery.

        • Czechoslovakia says:

          Every EU state will have to do the same thing anyway, even when selling intraEU. This was supposed to be the same as HMRC on 1/1/21, but the EU postponed it until later this year. Not really a brexit thing at all. The EUs Onestopshop is already set up for this.

        • The real John says:

          Doesn’t the £85 include Austrian VAT which should be taken off (unless they just want to charge UK customers extra)?

          • kitten says:

            Yes they are supposed to process it as an it export purchase so generally minus their VAT as VAT for goods is according to the destination as a rule of thumb

  • HAM76 says:

    The cash infrastructure is expensive, too…

    • Jonathan says:

      Cash is easily the most expensive form of receiving payment for the retailer, when everything is factored in, securely storing cash, banks charge businesses to pay cash in, cash collection companies (G4S and Loomis), man time counting up each end of days cash total etc.

      • old codger says:

        My parents had a cash business back in the day and we used to have to count and batch up the days takings each night. As kids we used hate it as it took away from TV and play time. In reality it took only about 15 minutes.

        Card useage was very small those days and not offered by their business. We’d make trips to the bank every week to deposit the cash and it was a time when the bank teller really was someone you’d just tell things too. We’d just give the name of the store, no account, passbook or other id. They’d weigh the cash and give us receipt for it. Job done! Fine for a sole trader but not possible for big companies.

        • Fenny says:

          As a second year at Infant school, I used to help the class teacher count the dinner money on a Monday morning and then take it over to the office. I think that was where my lifetime love of counting cash started.

          My first permanent job was in a sock factory in Halifax. Twice a week, I had to count up the cash from the canteen, the 3 payphones and the factory shop, bag it all up and take it to the bank. The trip out with the caretaker was almost as much fun as counting the dosh!

    • Heran says:

      Yes in addition to the cost of actually producing the cash (including mining & minting for coins) which is absorbed by all taxpayers, there are also logistic costs. Free-to-us ATM charged 23p (to the bank) per withdrawal, so you need to withdraw >£76 to make the rate less than 0.3%. Even this may not be sustainable as many free ATMs are disappearing and there are now many ATMs that also charge customers (

  • Chris Heyes says:

    Rob Looking forward to your article next week regarding buying Hilton points,
    We have a lot of Hilton points already almost 500k.(not bought)
    Trying to weigh up if we need to buy any ?
    We want to book Hilton Imperial Dubrovnik 5 for 4 (but maybe a week)
    We will earn by stays this year in UK if allowed
    Really we would like a Suite (3 of us) we have always just booked a 3 bedded room and every time been upgraded to a Suite but in September
    We will be Going Aug 22 so not sure about getting a upgrade in Aug ?
    So bit of a dilemma ?

    • Rob says:

      Hilton had a 100% bonus for probably 2/3rd of 2020 and 2021 may be no different. I wouldn’t be too concerned at present. Wouldn’t hold out your hopes for a suite in August unfortunately.

      • Chris Heyes says:

        Rob, Thanks for info, might use points to get a suite then.
        i presume that will get us one that way, expensive way to go about it
        can i still use 5 for 4
        Will i need to work out total points or is there a easy way to work out total points i will need without ringing

        • Rob says:

          You can’t use points to get a suite unless you do a Premium Redemption, and they are terrible value as they are fixed at 0.2p-ish per point (Hilton Honors buys your room for the full cash rate from the hotel).

    • Harry T says:

      Why not just pay cash in Dubrovnik?

      • Chris Heyes says:

        Harry T Already got 500k points hmm maybe cash n points an option ?

        • kitten says:

          can you book a standard 5for4 on points, then contact the hotel to ask about cash pricw for upgrade to a suite? presumably if you paid or got it in writing now you’d be covered if hotel got busy later.

  • dezbez says:

    Call me a pedant, at today’s fx rate of 1.375 the cost per point now works out at just over 0.36. So the maths doesn’t still work but it is getting closer to the break-even rate.
    Some way to go yet still though….

  • Heran says:

    “It remains a regressive transfer to this day”
    Yes but apart from some (very few by proportion?) people who cannot get a credit card, some people use cash for other benefits, e.g. privacy (cannot be tracked), tax avoidance (so I am not surprised the article mentions that a Chinese restaurant only accepts cash).

    • Ryan Gill says:

      I have seen a Chinese takeaway with a sign up offering a 20% discount for cash payment. To my mind a bit of cash in the pocket isn’t the end of the world. It encourages productivity.

  • Wally1976 says:

    Anyone fancy a punt on when Marriott will run a similar 100% bonus on points purchases…??

    • Rob says:

      Marriott never does 100% but there is something on the way.

      • Harry T says:

        @Rob please can you reveal whether it is better or worse than the recent 60% bonus?

        • ChrisC says:

          Harry you should know by now if Rob can say he’ll say it so he’s obviously under some sort of embargo.

        • Pangolin says:

          I don’t believe Marriott has ever given more than 60% bonus.

  • PP says:

    It seems like profiterring! Especially during a pandemic.

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