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In the U.S., credit card rewards (e.g. cash back) are funded by high credit card interchange fees, which are paid by vendors on every purchase.

In the E.U., interchange fees are capped by law at a much lower percentage (0.3%) than what is prevalent in the U.S..

When a tourist comes to a E.U. country and makes a purchase using a 1% cashback credit card issued in the U.S., who pays for the rewards on the transaction? I presume that E.U. 2015/751 prevents a higher fee being charged to the vendor, so does this mean that the credit card's issuing bank takes the hit on the reward? Are frequent travelers to the E.U. therefore a potential liability for U.S. credit card issuers?

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    Do you get the cash back when you use the card abroad?
    – Willeke
    May 25, 2023 at 18:17
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    Unless you have a travel-specific credit card, it may be funded by the foreign transaction fees and terrible exchange rates that many U. S. cards have. (Not answering because I don't know for sure.) May 25, 2023 at 18:39
  • @AndrewRay many (maybe even most?) US credit cards don't have international transaction fees.
    – JonathanReez
    May 25, 2023 at 19:19
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    I have a card that pays me one percent on purchases in USA, but charges me one percent elsewhere. And another that has no rewards (and no fees) but reimburses ATM fees.
    – WGroleau
    May 26, 2023 at 6:38
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    @AndrewRay Many U.S. travel-focused cards have no foreign transaction fees and the exchange rates are usually very close to the interbank rate.
    – reirab
    May 26, 2023 at 15:59

3 Answers 3

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The EU regulations only cap fees on EU-issued cards. Cards issued outside the EU don't have their fees capped and banks indeed charge a higher rate to process those transactions. For example, in Czech Republic banks charge ~1% per transaction on EU cards but ~2% per transactions on non-EU cards. This difference should presumably be sufficient to cover the losses on 1% cashback cards used by non-EU tourists.

If the extra fee is not sufficient and the bank doesn't charge you an international transaction fee, then the bank presumably eats the loss.

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    I don't know if it's the same for US issuers,but retail exchange rates offered by EU banks include a markup that's certainly more than 1% (often like twice as much). That should be more than enough to cover any rewards.
    – TooTea
    May 26, 2023 at 6:50
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    @TooTea some credit cards might do that but mine gives a great exchange rate
    – JonathanReez
    May 26, 2023 at 16:21
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    @JonathanReez Yeah, I use several different U.S.-issued credit and debit cards when traveling and all of them use exchange rates that are very near the interbank rate.
    – reirab
    May 26, 2023 at 17:02
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    @gparyani that's called DCC and it's a scam that payment terminals try to pull off for any cards in a different currency. Terminals will give you that option even if you pay with a Czech card in Germany.
    – JonathanReez
    May 27, 2023 at 20:53
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    @JonathanReez Yeah, dynamic currency conversion is virtually always a rip-off (and a completely unnecessary one from which the consumer gains literally nothing.) The merchants just hope that the consumers don't know enough about it to realize that there's absolutely no reason at all to charge their card in their home currency rather than the local one.
    – reirab
    May 27, 2023 at 21:42
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Regardless of where the transaction occurs, the "rewards" (be they cashback, points, miles, etc) are paid by the financial institution that issues the card (lets call then "banks" for simplicity). As you've implied, these would normally at least in part be funded by the "interchange" fees that the merchant is charged when you make a credit card transaction.

Even without considering EU regulations, there are many occasions where the value of the rewards is higher than the fee that the bank charges for the transaction, and in these cases the bank will be losing money on that specific transaction. This is especially true for credit cards that offer variable rates of points/cashback based on the merchant types (eg, 5% at gas stations, 2% for travel, 1% elsewhere). In these cases the banks intent is generally to get the card holder to use their card everywhere, so even whilst they may lose money on the gas station transactions, they make it up on the 'elsewhere' transactions. They may also make money from things like the credit card annual fee, or from other requirements that they enforce on the customer (eg, some higher-rewards cards are only available to customers who have a certain amount of money invested with the bank).

Specifically for EU transactions on non-EU cards, there's going to be 2 main situations. Firstly, may cards charge an "international transaction fee" to the cardholder for all transactions outside of their home country, which can be as high as 3-5% of the value of the transaction. In these cases, this fee would obviously cover the cost of any additional bonuses they were offering to the card holder.

The second situation is for cards with no international fee. In this case the bank is simply doing the same thing they are doing for the 'gas station' case mentioned above - they are losing money on that specific transaction, with the expectation (maybe "hope" is a better word?) that they will cover that cost elsewhere - either from the annual fee, domestic transactions with higher interchange fees, etc. Generally (but certainly not always) cards with no international fees are ones that have higher annual fees, and often only available to those with higher credit scores which would generally imply someone that spends more on their credit card domestically (obviously this is an over-simplification, and there will be countless exceptions, but the general statement is correct).

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    Is there a reason that you completely omitted exchange rates as a source of revenue? At least for European issuers,the spreads are like 2%,so at least comparable to the transaction fee.
    – TooTea
    May 26, 2023 at 6:53
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    @TooTea At least in my experience, the exchange rate spread on U.S. cards is a close approximation of 0%.
    – reirab
    May 26, 2023 at 16:00
  • " the financial institution that issues the card (lets call then "banks" for simplicity)." Not sure what's complicated about the term "issuer". "the rewards is higher than the fee that the bank charges for the transaction" While the issuer is receiving the interchange, it's set by the network, so it's not really the issuer charging it. May 28, 2023 at 5:36
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In the U.S., credit card rewards (e.g. cash back) are funded by high credit card interchange fees, which are paid by vendors on every purchase.

Other than what has been mentioned, i.e. higher fees for international cards and explicit and hidden (exchange rate markup) foreign transactions fees, it is not necessary that every single transaction viewed individually needs to be profitable for the banks if encouraging the usage of the cards by all customers is profitable for them.

Many credit cards charge annual fees. And U.S. credit cards also get a sizable revenues from interests and late fees etc. Despite the common advice (which isn't so commonly taught outside recently popular online financial forums) that you should pay down your bill every month, many U.S. credit card users don't.

American Express, for example, earns 30.7 billion from merchant fees, 6 billion from card fees and 4.5 billion from service fees (commissions for travel bookings, late fees, foreign currency exchange earnings etc.) in 2022. Of course the AmEx model has its own particularities (it has its own network and it is not so debt-focused with its charge card offerings).

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  • Fascinating figures at the end!
    – Fattie
    May 26, 2023 at 11:56
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    IIRC AmEx is also excluded from the EU's 0.3% cap mentioned in the question, because of that own network.
    – MSalters
    May 27, 2023 at 1:14

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