When loyalty points become interchange fees

Every time you pay with a credit card, a small fee travels invisibly behind the scenes from the shop’s bank to yours. That fee is called an interchange fee, and EU law caps it at 0.3% of the transaction to keep prices lower for consumers. 

But what happens when a card company finds a creative way to move money that looks different on paper yet works exactly the same way in practice? 

That is the question the Court of Justice of the European Union addressed on 16 April in a case involving American Express and the airline KLM.

A loyalty card with a hidden price tag

American Express Netherlands and KLM had been running a co-branded credit card since 2010. The deal was straightforward from a customer’s point of view: you spend on your Amex-KLM card, you earn Flying Blue miles, you fly for less. 

Behind the scenes, however, a stream of money flowed from Amex to KLM every year, made up of four different payments: a royalty for using KLM’s brand and loyalty programme, a cut of the annual fees charged to cardholders, a share of everything cardholders spent, and the price Amex paid to buy the miles it then handed to customers.

The Dutch competition authority looked at all those payments together and did a simple calculation: divide the total by how much cardholders actually spent on the card. The result came out well above 0.3%. 

The authority’s conclusion was that Amex was, in effect, paying KLM an inflated interchange fee, just disguised as something else. It fined Amex €10 million for refusing to stop.

Why the case reached Europe’s highest court

Amex did not accept the Dutch regulator’s interpretation, and the dispute eventually made its way to a Dutch appeals court. Judges there concluded that the case raised broader questions about how EU payment rules should apply in modern card schemes, and referred the matter to the Court of Justice of the European Union.

The core dispute was about a gap in the rules. The EU regulation that caps interchange fees was written with four-party card networks in mind, think Visa or Mastercard, where your credit card issuer bank and the shop’s acquirer bank are always separate. 

Amex, however, operates a three-party scheme: it acts simultaneously as both the card issuer and the merchant’s acquirer. 

And KLM is not a bank or payment institution; it is an airline. The legal question was therefore whether EU interchange fee rules could still apply to an arrangement structured in this way.

Substance beats structure

The Court said yes, clearly and firmly, and the reasoning behind the decision may prove more important than the outcome itself. The judges refused to allow legal structure to obscure economic reality. In their view, it did not matter whether the money was paid to a credit card issuer or to an airline. 

What mattered was the function of those payments. 

If they were intended to reward a partner for driving greater use of the card, then they effectively operated as interchange fees and had to be treated accordingly.

The judgment reflects a broader trend in EU case law, where courts increasingly focus on the real economic effect of an arrangement rather than the labels attached to it. Similar reasoning has already appeared in competition cases involving Mastercard and Visa. The same principle now applies to co-branded card partnerships as well.

Lawyers describe this as an anti-formalistic approach, where the law focuses on the real economic function of an arrangement rather than the labels attached to it. 

European courts have already applied similar reasoning in competition cases involving Mastercard and Visa. With this ruling, the same logic now extends to co-branded card agreements as well.

Drawing the line on what counts as an interchange fee

The ruling also clarified several practical points that could have significant consequences for businesses. 

First, the Court made clear that the legal test is disjunctive, not cumulative. If a payment is intended to encourage card use, or if it has that effect in practice, it falls within the cap. Companies therefore cannot avoid the rules by arguing that only one condition is met while the other is not.

Second, when KLM accepts Amex cards like any other merchant and pays the standard merchant service charge, that payment does not offset the money Amex pays KLM under their partnership agreement. The Court treated the two relationships as legally distinct. 

The fact that KLM wears two hats — both airline partner and merchant accepting the card — does not allow Amex to reduce the amounts relevant for compliance with the cap.

Third, and perhaps most importantly for companies operating loyalty programmes, the Court recognised that non-cash benefits can represent genuine economic value. If KLM gives Amex access to its loyalty programme, and that access carries a real market value, that value may be deducted from the total payments being assessed.

The judges also imposed an important limit. That value must reflect market reality, not simply the figure negotiated between the parties themselves. 

If loyalty miles are publicly available at a certain price, that market price becomes the relevant benchmark. Companies cannot artificially inflate the value of loyalty benefits in order to make the numbers comply with EU rules.

Who feels the impact the most

The immediate consequences are likely to fall on three groups. Card schemes such as Amex that rely heavily on co-branded partnerships may find it far harder to structure payments in the way they have until now. 

Almost every standard component of a co-brand agreement, including royalties, revenue-sharing arrangements and loyalty point purchases, could now be reclassified as a disguised interchange fee.

For partner companies such as airlines, hotel chains, supermarkets and telecom operators, the judgment sends a clear warning. 

Existing contracts will need to distinguish carefully between payments that genuinely compensate for services provided, such as technical support, marketing activity or access to customer data, and payments that effectively reward the promotion of card use. Regulators are now likely to examine that distinction far more closely.

National authorities across Europe, from the Dutch ACM to Italy’s Banca d’Italia, also now have a much clearer legal basis for investigating similar arrangements. Co-branded cards are especially widespread in the travel sector, and the ruling applies not only to future partnerships but to existing agreements as well.

A broader signal for EU financial regulation

The European Union is currently overhauling its payment services framework through the PSD3 and PSR package, which has recently completed its final negotiation phase. Although the reform does not directly amend the interchange fee regulation, the European Commission has already identified three-party schemes and co-branded arrangements as areas where circumvention risks have emerged. 

The Court’s judgment now provides a legal foundation that could shape future legislative changes and potentially embed these principles directly into EU law.

The broader lesson is ultimately a simple one. 

In European financial regulation, sophisticated contract structures cannot replace genuine compliance. Regulators and courts will focus on the real economic function of a payment rather than the label attached to it. 

Businesses whose co-brand models rely on financial flows that effectively incentivise card usage may now have to redesign those arrangements or be prepared to justify them with robust market evidence from the outset of any new partnership agreement.