The EU adopted new rules limiting interchange fees, or the prices that payment networks can charge, for credit and debit cards.
I asked, are credit cards about to be killed off in Europe? The economics of credit cards as we know them are predicated on fees that go to the payment networks and banks in exchange for processing transactions.
Not everyone was concerned, such as this snark:
Alarmist? Miles from Blighty pointed out today that Capital One has stopped issuing some rewards cards and is informing existing customers that their cards will receive less in the future.
The Telegraph reports:
Consumers face cuts to the air miles, cash bonuses and other rewards they collect from credit cards because of a law passed in Brussels last month.
Capital One, one of Britain’s biggest card providers, has become the first firm to scrap the perks following new EU restrictions on the profits it can make.
In a statement the company said its cards, which paid customers up to 5p for every £1 spent, were “no longer sustainable”.
All Capital One reward cards have been removed from sale with immediate effect. Letters will be sent to existing customers, believed to number in the hundreds of thousands, warning that from June 1 the amount they earn in future will be much lower.
Disruption of payment networks will come from technology maybe not bitcoin and as it turns out not paypal but processing costs are coming down. It’s ironic that it took about 65 years for governments to crack down on the prices charged by credit card payment networks, as they’re coming under market pressure for the first time.
But the idea that payment processors and the banks who extend short term credit should get paid for the services they provide is surreal. As I wrote last month,
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.
- They’re far more convenient than cash
- They limit the ability for employees to steal, compared to cash, so offer real savings to merchants
- Payments happen electronically, no more warehousing cash and taking it to the bank. This not only saves time it also prevents theft (robbery).
- 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.
- 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).
For now though let’s just sympathize with our frequent flyer friends across the Pond. And just as nearly everything premium cabin is about to get more expensive with British Airways Executive Club, too.
A good reason to hoard points. Here they may all soon be based on revenue.
as with many other things, the correct response is for Britain to tell Europe to f-ck off, and remind them that they currently don’t speak German because of Britain.
Well I’m a glass half full kind of person, and if this means less points chasing awards, as a US card(s) holder I say bring it on!
The Telegraph article is a little misleading, 5% was only ever an introductory rate which soon changes to 0.5 – 1.25% depending on your card.
Also while this can easily be extrapolated to rewards cards since they face the same rate caps, Capital One only ran cashback cards in the UK to my memory.
If they had cards that paid 5% cash back on everything, I am jealous.
As I mentioned last time you Posted about this; I’m more than happy to take advantage of the the way the market is tilted in my favour as a wealthy credit card holder. Overall, though, I’d be happy to see this market inefficiency, that results in the banks making undue rents, swept away, we’ll all benefit from much more efficient markets.
I just don’t see that this is the proper role of government.
Banks and processors should be able to charge whatever processing fee they like and what the market will bear (where no monopoly exists). Let them compete with one another. Merchants can choose to use them or, if not, only accept cash or checks from customers.
Consumers can use credit cards if they are good enough credit risks to get accepted for one. If not, there is no inherent right to possess one. If you don’t like the interest rates or other terms and conditions, don’t apply for the card. Even if you have a card, and a rewards earning card at that, you always have the option to ask for a cash discount in lieu of using the card. The merchant can choose to accept this, or not.
Where, quite frankly, is the role of government here?
I’m still fairly glass half-full. Clearly we’ll never have the amazing deals you guys have, although IIRC there’s been a bit of crackdown on repeat sign-up bonuses with Amex US recently? However the Capital One card quoted was only 0.5% cashback in the main, the 5% was a short term promo. I can’t see points cards disappearing as the airlines (and to a much lesser extent hotels) find them far too lucrative a source of income. I think the deals won’t be quite as good but I can’t see them vanishing entirely.
@Ron ‘Where no monopoly exists’ is your operative phrase there. I would suggest that there is no effective competition for payment networks. Small stores pretty much have to be price takers, they have to take the rates their banks offer, even new entrants such as Square and PayPal compete on convenience and barriers to entry rather than on price. There’s no real competition between the payment networks. There really are only two comprehensive global payments networks, with some smaller players. You can tell there is no real competition because there is no real innovation coming from he industry. Innovations like EMV and apple pay come from outside and are treated with ambivalence or hostility.
What there is intense competition for high value customers, ever better backhanders for the likes of us. It makes what should be a basic utility whiff a little of corruption.
As I say, I’ll keep taking the bribes till they are removed, but the vast majority of consumers and businesses will benefit from reduced charges.
So what happens to a cc issued in USA but used in EU .. Like CSP..
Who is going to eat the 2 points / dollar spent I on travel / dining. Visa or chase ? Looks like PRG elimination of FX starting June cannot have been timed worse ?
@JustLooking – Nothing will happen. Since when does the EU have authority to regulate US banks?
Gary,
all five points you list in favour of credit cards are valid for debit cards as well.
The one about bad cheques is just plain funny – these parts they haven’t been sighted since the 1980’s
Since when are European countries “our neighbors”???
@Julie
as in “love thy neighbour” ? *grin*
What’s wrong with speaking German?