There's sometimes a penalty that comes with being innovative: often those who copy your idea leapfrog you. It happened with color television. Americans were enjoying this for many years while Europeans and others continued to peer at murky, mushy monochrome screens.
Then, in the late 1960s, some countries adopted the PAL color television coding system, which delivered better definition and truer colors into foreign living rooms. Right up until digitization, whenever we ventured to Europe we marveled at the picture quality in our hotel bedrooms.
Credit cards were invented in the U.S., but have since spread worldwide. Has American plastic been leapfrogged by other countries in the same way American television was?
Maybe. For example, credit cards in most other first-world countries have had ultra-secure EMV chips (microprocessors) embedded in them for more than a decade. American companies have only recently finalized plans to adopt those chips here.
Rewards credit cards: U.S. vs U.K.
But most of us care little about chips, unless we're eating them during a big game. We're much more interested in whether we're getting a good deal from our credit card companies. So how do American rewards programs stack up against British ones?
Well, using a U.K. comparison-shopping website called CompareTheMarket.com, which is roughly the British equivalent of CardRatings.com, things initially looked bad for Old Glory. The first card up was the Capital One Click Card MasterCard, and the first thing you noticed about it was its APR: 9.9 percent - well below the U.S. average credit card rate of nearly 17 percent. Had the Union Jack delivered a knock-out punch in the opening seconds of the first round?
Well, no. That APR might look pretty amazing, but as rewards credit cards go, this one really didn't make waves. No cash back, no points, no miles. All you get is access to certain discounts when shopping online through selected sites.
Scroll down through the list of British rewards credit cards, and the deals became a bit more familiar to American eyes. Here's the U.K.'s American Express Platinum Cashback Card offering "5% cashback in first 3 months up to £100. 1.25% cashback on virtually everything," alongside an 18.5 percent APR.
Divided by a common language
The trouble was, most of the credit card deals on offer were not for cash back, but for points or miles (why not kilometers?). All well and good, but what about the exchange rate? No, not the dollar/pound one. The question is, how do you compare Avios miles, Clubcard points and Nectar points with their equivalents on our side of the Atlantic? How do you find out what you get for your points?
It was time to consult an expert, and few know more about the British credit card market than Mark Jackson, a U.K.-based director of Auriemma Consulting Group, a research firm headquartered in New York. Given that CardRatings.com seemed a little reluctant to spring for an all-expenses-paid trip to London, it was lucky he agreed to a telephone interview.
How Brits feel about their rewards credit cards
In a March 30 press release, ACG reported on research that found UK consumers had become "apathetic" towards their rewards credit cards. Nearly 1 in 3 perceived rewards to be less worthwhile than a year earlier, and significant numbers were "extremely interested" in getting better value (33 percent), earning rewards faster (24 percent) and earning rewards in more categories (23 percent).
Not many people snort with derision anymore, but Jackson got close to it when asked if British credit card rewards might be as generous as those in the States. He explained: "Even though a point is still a point in the U.S., and a point is still a point in the U.K., the value of that point is much higher in America." And he went on:
Over in the U.S., they've invested an awful lot more in developing more innovative rewards programs than we've seen over here. And for a long time in the U.K., the market's been under-served. Consumers have noticed that there hasn't been any innovation in their rewards, and they're noticing that the value of their rewards programs is diminishing as their requirements are getting higher and higher.
So that's it then. Question answered, and the U.K. is flat on the canvas while the U.S. raises both hands above its head in a classic Rocky pose. Well, sort of.
Who pays for great credit card deals?
We're still left with a puzzle: How come rewards are less generous in Britain? It's not that card issuers are meaner over there. And it's nothing to do with interest rates. Turns out that the Capital One card was an exception, and the UK Cards Association, a British trade group, estimates that credit card rates in the U.K. averaged 17.3 percent in Dec. 2011, which is a little higher than here.
No, the reason our credit card companies can fund more generous rewards programs is our higher interchange fees. Those fees are the cut of the transaction value that a merchant has to pay, mostly to card issuers, every time a card is swiped. Jackson reckons that those in Britain are roughly half what they are in the U.S. He observes:
The largest difference between the two markets is the commercial framework that sits behind rewards. So, in the U.S., interchange on credit cards is considerably higher than it is in the U.K., which means that issuers can invest more in rewards programs, making them deeper, more tangible -- and easier for consumers to see their value.
We're straying into politics here, but there are two ways of looking at interchange fees:
- Some argue that merchants pass on the cost of the fees in higher prices to all customers, including poor ones who pay cash. This means that if you're struggling to put food on the family table, you may be subsidizing the free flights, cash back and other rewards enjoyed by more prosperous consumers.
- Others contend that these fees are just another cost of doing business, and should be regarded in the same way as rent, utility bills, salaries and all the other unavoidable expenses that merchants have to cover.
One more thought. The Durbin Amendment recently slashed interchange fees on debit cards. If legislators were ever to do the same on credit cards, we could see U.S. rewards reduced to U.K. levels. Would that lead to greater fairness, or would it provide an opportunity for another nation to leapfrog us on yet another American invention? Your call.