Are Credit Cards About to Be Killed Off in Europe?

Doctor of Credit writes that EU lawmakers agreed to impose limits on EU debit and credit card interchange fees of 0.2% and 0.3% respectively.

The Effect of Debit Card Fee Limits in the U.S.

Debit interchange is already limited in the US by the Durbin Amendment to Dodd Frank (which led, more or less, to the end of rewards debit cards though I’m grateful that my Suntrust Delta debit card is grandfathered – for now).

Of course it wasn’t just the end of rewards debit cards that happened as a result of the Durbin Amendment. Banks no longer earn much off of debit cards, which means that the average checking account customer is no longer profitable, there has to be another non-checking relationship there. So it becomes more difficult to get free or fee-waived checking accounts. You price a whole lot of people out of the banking system, and push them to check cashing places.

But there are ‘loopholes’ in the rule, and Amex is able to put out a product (initially, Bluebird) that circumvents debit interchange limits and allows them to create what are effectively online bank accounts for the very market segment which was increasingly unbanked as a result of the Durbin Amendment.

Lots of second and third order consequences to these rules, both good and bad, that may not be initially obvious.

Credit Card Fee Limits in Europe

Credit card interchange fees — which can often run 1.8% – 5% — would take a major hit in Europe. A cap of 0.3% would likely limit the issuance of cards, in a market where cash is already far more common than in the U.S.

American Express, Diners Club, and business cards are exempt from the cap. Exemptions last for at least three years.

Credit Cards Provide Valuable Benefits to Merchants

While merchants want to be able to accept credit cards while not having to pay to do so, it’s worth nothing that credit cards are a really great benefit and value-creator in ways we often take for granted.

  1. They’re far more convenient than cash
  2. They limit the ability for employees to steal, compared to cash, so offer real savings to merchants
  3. Payments happen electronically, no more warehousing cash and taking it to the bank. This not only saves time it also prevents theft (robbery).
  4. Eliminates risk to the merchant of bad checks. Merchants can of course pay to insure their checks, but that too comes at a cost. That means retailers don’t have to worry about collecting the money in the event a customer passes a check from an account with insufficient funds.
  5. Credit cards foster online transactions.

And of course plenty of studies have shown that people spend more on credit cards than they do when paying by cash. Why shouldn’t card companies get paid for this? Despite legal cases claiming monopoly, we have not only Visa and MasterCard networks but also American Express and Discover (and internationally Diners Club still processes through its own network rather than via MasterCard as in the US).

Tinkering is Irresistible and Neverending

Forget chip and pin, credit cards generally could become less common as the benefit to card providers in issuing them shrinks substantially in Europe. And then merchants may become less likely to take them even at a lower cost, to the extent that fewer customers have them. Although no doubt this will vary by type of establishment.

One regulation is rarely enough. Australia allowed merchants to charge consumers to use their credit cards, but is now considering limiting those charges.

Credit cards are a pretty amazing market innovation. They go a long way towards enabling the shift from personal to impersonal exchange which is an underpinning of development. The urge to tweak it, though, is pretty irresistible isn’t it? At the very least, if these rules are in fact implemented, our European friends will lose their rewards cards.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Some input on this subject form an European perspective:

    Yes, all the 5 points you make on advantages of creditcards are spot on. However, all of them apply to (insured) debitcards as well. Most consumers in EU do not have creditcards and lots of people do not want them either, because they are expensive for more or less the same thing a debit card can do (except for the availability of credit itself of course, at very high (‘unethical’ in common EU view) interest rates.

    Several banksystems in EU have proven to be able to deliver all the advantages you point out, at a rate of approx 0,1% interchange fee. So why pay the few big companies these absurd amounts for running an oligopoly? It’s 100% profit, after maybe some more marketing cost…

    BTW: The amount of interest to be charged on creditcards is capped too in EU countries (max 12-15% in most countries) and rightly so imo. The way credit cards work in the US really harms a lot of people.

    Yes, they can be a great tool and asset (I have a ton of them in the US and a few in EU) but there are better/cheaper alternatives for the average consumer.

  2. I have a feeling the thought of this happening in the US keeps you and the rest of the BA community up at night.

  3. With Europe being primarily a socialist governed area, this shouldn’t come as a surprise. The governments takes most of the citizen’s money, and they sure aren’t going to let a credit card company steak that lucrative business from them for too long. “Honey, gosh we have it so bad in the US, I think we should move to Europe for a better life”–said no person ever.

  4. Europe will eventually end up with an over regulated, struggling, non-diverse economy, devoid of innovation and reliant on agriculture and tourism.

  5. @Jake: Agreed. He’s worried about killing the goose that lays the golden eggs!

    As much as I have personally benefited from credit cards, signup bonuses, etc., for society as a whole they are a cancer. It eats away at business’ margins, causes people to go into never-ending debt cycles, etc.

  6. Cash creates crime. The author’s point #2 (as well as #4) is very important.

    One can carry credit cards that give a purchasing power of tens of thousands of dollars. I am about to carry that much cash in a strange city where pickpockets and thieves abound – especially in Europe where they seem to go virtually unpunished?

  7. we pay annual fees for credit cards. So there is no justification for the issuers to charge 1-5% to merchants. this is sucking huge amounts of money out of the US economy.
    And the interest rates of in some cases over 20% on late payments? That is usury and should absolutely be illegal. Yes, I enjoy the signup bonuses etc and the miles I earn, but we all need to remember who pays for all this – poor suckers who can’t pay their bill on time and get their house taken away. And, everything any of us buy (except at cash-only places) is 3% more expensive due to credit cards being ubiquitous.

    I’m sure there is a solution somewhere in the middle. Maybe 1% transaction fees and limit interest rates at 12%? that’ll still leave quite a bit of profit to the CC companies.

  8. This post is very much from an American point of view and fully ignores the reality of the banking system in Europe, which in my personal experience is much more advanced, efficient, and consumer friendly as the US one (yes, I live on both sides of the Atlantic, so I can compare). In the US the credit card companies use the inefficiency of the traditional banking system to their advantage. This is more complicated in Europe – and therefore credit cards are less common here – since in most countries Europe has already a very efficient debit card and bank transfer system, which has all of the advantages of credit cards pointed out in the article, but at a fraction of the cost of credit cards to the consumer (the fact that credit cards are expensive for the merchant drives prices up if everybody uses them).

    You can use your debit card virtually everywhere in the EU with no problem, while cash usage is still higher than in the US, it is steadily going down. For the merchant, the cost of processing the debit card is lower than that of a credit card, keeping prices down.

    In addition, virtually nowhere in Europe are large payments as those implied by comment #7 done in cash. To buy, e.g., a car, people use their debit card without any problem. Or, alternatively, they use the very efficient bank transfer system that works within the Euro Zone with no additional fees (European based www sites typically offer payment by bank transfer and by direct debit in addition to credit cards).

    With the introduction of SEPA a few years ago, you can now transfer money to any account in the EU without any of the difficulties that many people in the US associate with bank transfers and therefore rather use overpriced wires or send a check. The direct debit system in Europe is much more secure and better regulated than in the US, which means that in many countries most people pay virtually all of their regular bills (utilities etc.) via direct debit, and not through credit cards.

    So, in conclusion, this is no socialist attempt to force people to use to continue checks, this is an attempt at price regulation to keep the price for the exchange of money between merchants and customers down, as credit card companies are several times more expensive than debit cards but do not provide additional services (note that by law, for online purchases European debit card payments have similar insurance as that provided by US credit cards)

  9. I don’t think you can argue that financial transactions are more efficient in Europe at the same time that cash transactions are higher.

  10. In Scandinavia (yeah, it’s also Europe) cash is hardly ever used – there is even talk about going fully cashless in Sweden. It was a small culture shock in the US, how much actual money is used in daily transactions.

    As for cheques – yeah, my father had those in the 80’s (that’s the Ronald Reagan era) but they haven’t been spotted since.

    The 5 points you list in favour of credit cards – which of them is not working with debit cards?

    I like credit cards and use them exclusively – but seen from a macro-economic point of view, they are just making for higher transaction costs.

    PS – to those Europe basher commenters: ignorance is bliss.

  11. @augias – “we pay annual fees for credit cards. So there is no justification for the issuers to charge 1-5% to merchants.”

    What about credit cards with no annual fees, of which there are many?

  12. @Jake — I had to laugh when I read that. Yeah, BA has essentially turned into a well paid marketing dept. thanks to Durbin. Perish the thought that we should return to the days before Dodd-Frank essentially killed off debit cards. You remember pre Dodd-Frank, i.e.- back when Chase stopped all affiliate referral payments completely. 😉

    @Gary — Exactly right. Cash payments are FAR more common in the EU.

    I read the comments hoping to learn how the EU’s banking system is so much more efficient than the US’s. Instead all I saw was the same old eurotrash BS about how the euros are so much better at it than the lowly Americans, even though Americans invented Visa/MC/AmEx/Discover/DC.

  13. I think most of the long-time readers of this blog are used to seeing their travel subsidized. First by the airlines (ridiculously generous and game-able frequent flyer programs) and now by the credit card companies. The USA airlines got smart and pretty much stopped subsidizing us. While many expect the credit card companies to eventually do the same, they might not actually have the incentive to clamp down — unless the gov’t changes the rules of the game. So the risk may not be from the Chase and Citi CEOs, but from Washington. Of course, what’s good for us on this score is not necessarily what’s best for the country.

  14. “With Europe being primarily a socialist governed area, this shouldn’t come as a surprise. The governments takes most of the citizen’s money, and they sure aren’t going to let a credit card company steak that lucrative business from them for too long. “Honey, gosh we have it so bad in the US, I think we should move to Europe for a better life”–said no person ever.”

    Well, I assume all those US citizens who don’t have health insurance and can’t afford to get well would probably find it quite comfy in the UK 🙂

    I think I need to send this guy a photo of the US citizens who queue up at the US Embassy in London each day to renounce their US citizenship.

    Remind me again which 3 countries tax income on a global basis irrespective of where you live … that would be North Korea, Eritrea and … 🙂

  15. @Raffles you are right Europe is a far superior place to live than the USA. Well that is, unless you are a Muslim, Jew, Italian, Spaniard, or Greek.

  16. The Post Office is thinking about doing simple banking, which would help the unbanked, rather than throwing them to the check-cashing businesses.
    Also, a very simple solution to the whole bankster issue is Bitcoin.
    As far as free checking, if you’re over 50 most banks give you free checking, amoung other valuable perks.

  17. Interesting you mention the Australian situation. I often avoid using my credit cards due to the often ridiculous surcharges added by retailers. (4.5% to use Amex is not worth 1.5 Quantas points per dollar)

    By and large, although I enjoy taking advantage of points, I realise I am taking advantage of a deeply inefficient market. I am accruing rents because somebody else is paying them to access payment networks. More efficient markets would result from removing unfair transaction costs. I’d much rather prices fall than continue to benefit from an iniquitous market.

  18. In Germany one can do some banking at the local Post Office. Very handy.

    I get angry every time I go to Australia. The fee to use your credit card there is idiotic and needs to disappear.

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