FT on reward credit cards

35har1old

WillPS said:

lon_don said:

https://www.ft.com/content/0b3349c2-0019-43c3-85ec-fbc6bcbf86b5

You might be able to read this without a sub by copying the address to google.com and clicking the first result on there.

The crux is that even in the US the banks disproportionately make their money from rewards credit cards by customers paying interest and fees. And that's with Interchange rates up to 4% compared with the cap of 0.3% (on Visa/Mastercard/co-branded Amexs) within the UK.

I'm going to point back to this the next time somebody suggests in the UK reward card issuers are making money out of individual transactions, it is total nonsense.

Are you sure that the cap is 0.3 as barclaycard is currently paying 0.5 which surprised me as they previously paid 0.25. And there was no letters highlighting the change.

35har1old

35har1old said:

WillPS said:

lon_don said:

https://www.ft.com/content/0b3349c2-0019-43c3-85ec-fbc6bcbf86b5

You might be able to read this without a sub by copying the address to google.com and clicking the first result on there.

The crux is that even in the US the banks disproportionately make their money from rewards credit cards by customers paying interest and fees. And that's with Interchange rates up to 4% compared with the cap of 0.3% (on Visa/Mastercard/co-branded Amexs) within the UK.

I'm going to point back to this the next time somebody suggests in the UK reward card issuers are making money out of individual transactions, it is total nonsense.

Are you sure that the cap is 0.3 as barclaycard is currently paying 0.5 which surprised me as they previously paid 0.25. And there was no letters highlighting the change.

Update the current rate is 1.5 if card not present I think this applies to contactless payments

WillPS

Marchitiello said:

WillPS said:

eskbanker said:

Deleted_User said:

eskbanker said:

WillPS said:

The crux is that even in the US the banks disproportionately make their money from rewards credit cards by customers paying interest and fees. And that's with Interchange rates up to 4% compared with the cap of 0.3% (on Visa/Mastercard/co-branded Amexs) within the UK.

I'm going to point back to this the next time somebody suggests in the UK reward card issuers are making money out of individual transactions, it is total nonsense.

Can you clarify what within the article is supporting that point of relative profits from interest/fees versus transaction charges, as I don't see it?

It seems to be making the unsurprising point that the less 'sophisticated' will be contributing to profits via interest and fees, while those better off will be generating profit via transaction charges, but I can't see any reference to the relative profits of these streams at a corporate level, as the article simply seems to be looking at the matter from the perspective of the consumer? 

With naive users, banks earn money primarily via interest charges. For sophisticated cardholders, which are often transactional, banks’ profits come from the high purchase volumes, which generate high swipe fees — every time you pay with a credit card, the merchant must pay a small percentage of the value of the purchase to the bank.

Whilst it's probably quite similar setup regarding the naïve i.e. poorer UK users. Sophisticated UK users are no where near as profitable with domestic interchange fee caps and S75 costs.

On the face of it, customers paying interest and fees on top of transaction charges would naturally be expected to generate more revenue than those paying off in full, but presume that the interest payers would also account for all the collection and bad debt costs, so the bottom line profit situation may not be quite so simple.  However, my point wasn't necessarily about challenging that, it was that I don't see the article actually supporting the previous poster's assertion that there's no profit to be made from transaction charges.

The article's key thrust is that the main way money is made off the back of poorer users, in spite of the fact that transactions are individually profitable for issuers in the States, even lucrative.

It's simple maths that dictates it isn't in the UK. The maximum Visa or Mastercard can take from a transaction in the UK (for a UK issued credit card) is 0.3% of the transaction value. The card issuer gets a cut of that - Visa and Mastercard won't lose money so you can safely assume the value is no greater than 0.3%.

In the case of cashback cards, like those offered by Lloyds and Halifax, the amount paid is typically in the region of 0.25-0.5%. Even if you take the lower end 0.25% payout and assume all 0.3% of that interchange money goes to the issuer (which it most certainly will not as otherwise Visa/Mastercard would make 0), that leaves a whopping 0.05% as a net gain on a transaction for the issuer. 5p in every £100 spent.

To put that in to perspective, in order to cover the cost of issuing a plastic contactless card (widely thought to be ~£5) the customer would have to spend £10,000 in order for this overestimated interchange to cover it.

It's nonsense.

With rewards the picture is made a little fuzzier by the fact that the amount the issuer pays for the reward is not known, but the point stands - for example you can safely assume Jaja are paying most of £1 for every £s worth of Asda credit they issue.

The only exception is for transactions where a specific comission is paid by the merchant, usually in exchange for promotion. The most obvious example of these is the 'on card cashback' which many issuers push now, where cashback is paid at specific retailers for certain periods of time. Issuers will earn a 1+% themselves too. Also, co-branded cards such as the Asda/Jaja one mentioned above are likely to get a comission from the co-brand themselves for brand spend, as they are supposed to incentivise loyalty. That, in part, is how the issuer can then afford a more generous rate for the brand.

You are not including in the calculation the card processor… 

just sharing some info I have seen on one of the modern, more competitive processor on the UK market:

they will charge retailers:

0.89% per Visa / MasterCard Credit UK issued 

1.9% per Amex

Plus £0.0385 fix per most transactions .

Visa / MasterCard Debit 0.35% + £0.01 fix

fees are then higher for Business, international cards (up to 3% plus fix fees ) and now EEA issued cards 

That's irrelevant to card issuers though, that's just what the acquiring bank is charging the merchant (which isn't regulated). The only element of that shared with Visa/Mastercard/Amex is what's known as interchange. For Visa and Mastercard UK Personal cards, this is capped at 0.3% (when used in the UK). Any revenue the issuer gets from the transaction itself is commission drawn from the interchange.

Amex obviously keep whatever they get, but even they are capped at 0.3% interchange on their Nectar, BA, Marriott, Vitality etc products.

WillPS

35har1old said:

WillPS said:

lon_don said:

https://www.ft.com/content/0b3349c2-0019-43c3-85ec-fbc6bcbf86b5

You might be able to read this without a sub by copying the address to google.com and clicking the first result on there.

The crux is that even in the US the banks disproportionately make their money from rewards credit cards by customers paying interest and fees. And that's with Interchange rates up to 4% compared with the cap of 0.3% (on Visa/Mastercard/co-branded Amexs) within the UK.

I'm going to point back to this the next time somebody suggests in the UK reward card issuers are making money out of individual transactions, it is total nonsense.

Are you sure that the cap is 0.3 as barclaycard is currently paying 0.5 which surprised me as they previously paid 0.25. And there was no letters highlighting the change.

Yes.
The IFR | Payment Systems Regulator (psr.org.uk)

Barclaycard are losing money every time you use your credit card for a standard purchase, unless you don't clear your statement balance in full. 

SuperAllyB

There are probably a surprising proportion of cashback cars users not clearing in full every month which will help balance the books.  Not so many that are members of this site to be fair.

[Deleted User]

35har1old said:

WillPS said:

lon_don said:

https://www.ft.com/content/0b3349c2-0019-43c3-85ec-fbc6bcbf86b5

You might be able to read this without a sub by copying the address to google.com and clicking the first result on there.

The crux is that even in the US the banks disproportionately make their money from rewards credit cards by customers paying interest and fees. And that's with Interchange rates up to 4% compared with the cap of 0.3% (on Visa/Mastercard/co-branded Amexs) within the UK.

I'm going to point back to this the next time somebody suggests in the UK reward card issuers are making money out of individual transactions, it is total nonsense.

Are you sure that the cap is 0.3 as barclaycard is currently paying 0.5 which surprised me as they previously paid 0.25. And there was no letters highlighting the change.

They will have likely done analysis on that portfolio of cards and found they (at least) break even.

Some cardholders will not pay in full (interest) and some will use overseas (forex loading) plus opportunities for providing a BT (interest). Other cardholders will close accounts as they no longer are needed and others will simply pass on. 

Marchitiello

WillPS said:

Amex obviously keep whatever they get, but even they are capped at 0.3% interchange on their Nectar, BA, Marriott, Vitality etc products.

Amex exited the “3rd party” network market so to avoid the 0.3% cap.

The co-branded card are still run and operated by amex, not the “Co-brand” using Amex as payment network, and as they kept the customer numbers below the thread hold for the 0.3% , Amex as a whole is not included in that regulation, as far as I know (please share the source of your statement)

WillPS

Marchitiello said:

WillPS said:

Amex obviously keep whatever they get, but even they are capped at 0.3% interchange on their Nectar, BA, Marriott, Vitality etc products.

Amex exited the “3rd party” network market so to avoid the 0.3% cap.

The co-branded card are still run and operated by amex, not the “Co-brand” using Amex as payment network, and as they kept the customer numbers below the thread hold for the 0.3% , Amex as a whole is not included in that regulation, as far as I know (please share the source of your statement)

It's true that those cards certainly would have been subject to the cap and Amex binned them for that reason (in part), but the regulator did not agree that it was enough to completely descope Amex:
Payment Systems Regulator deals a blow to Amex (headforpoints.com)
Court says Amex must cut interchange fees on co-brand cards (headforpoints.com)

The brand partner is considered a 'fourth party' (on top of the merchant, consumer and processor) and thus brings the card back in scope for the interchange fee cap.

What slightly muddies the water is that Amex are more deeply involved in the merchant/acquiring side of things so there is clearly a value to them still in having a strong user base. How much of their UK base would they lose if they shed their BA agreement? It must be a significant chunk.

Marchitiello

WillPS said:

Marchitiello said:

WillPS said:

Amex obviously keep whatever they get, but even they are capped at 0.3% interchange on their Nectar, BA, Marriott, Vitality etc products.

Amex exited the “3rd party” network market so to avoid the 0.3% cap.

The co-branded card are still run and operated by amex, not the “Co-brand” using Amex as payment network, and as they kept the customer numbers below the thread hold for the 0.3% , Amex as a whole is not included in that regulation, as far as I know (please share the source of your statement)

It's true that those cards certainly would have been subject to the cap and Amex binned them for that reason (in part), but the regulator did not agree that it was enough to completely descope Amex:
Payment Systems Regulator deals a blow to Amex (headforpoints.com)
Court says Amex must cut interchange fees on co-brand cards (headforpoints.com)

The brand partner is considered a 'fourth party' (on top of the merchant, consumer and processor) and thus brings the card back in scope for the interchange fee cap.

What slightly muddies the water is that Amex are more deeply involved in the merchant/acquiring side of things so there is clearly a value to them still in having a strong user base. How much of their UK base would they lose if they shed their BA agreement? It must be a significant chunk.

Thanks, that article did not have the definitive conclusion though, and there have been several more review in 2020 and 2022 as far as I understand. Will try to search the regulator website for later updates. 

WillPS

Marchitiello said:

WillPS said:

Marchitiello said:

WillPS said:

Amex obviously keep whatever they get, but even they are capped at 0.3% interchange on their Nectar, BA, Marriott, Vitality etc products.

Amex exited the “3rd party” network market so to avoid the 0.3% cap.

The co-branded card are still run and operated by amex, not the “Co-brand” using Amex as payment network, and as they kept the customer numbers below the thread hold for the 0.3% , Amex as a whole is not included in that regulation, as far as I know (please share the source of your statement)

It's true that those cards certainly would have been subject to the cap and Amex binned them for that reason (in part), but the regulator did not agree that it was enough to completely descope Amex:
Payment Systems Regulator deals a blow to Amex (headforpoints.com)
Court says Amex must cut interchange fees on co-brand cards (headforpoints.com)

The brand partner is considered a 'fourth party' (on top of the merchant, consumer and processor) and thus brings the card back in scope for the interchange fee cap.

What slightly muddies the water is that Amex are more deeply involved in the merchant/acquiring side of things so there is clearly a value to them still in having a strong user base. How much of their UK base would they lose if they shed their BA agreement? It must be a significant chunk.

Thanks, that article did not have the definitive conclusion though, and there have been several more review in 2020 and 2022 as far as I understand. Will try to search the regulator website for later updates. 

I'm not sure how much more definitive one can be than "American Express loses its final appeal – it must cut its interchange fees".

The law hasn't changed.