The popular credit card, which was closed last month to new customers, will only be able to earn a maximum of £9 a month.
The bank is also hiking the rate of interest on purchases from 12.7% to 15.9% – which means borrowers outside of their introductory 0% period will have to pay more on their borrowing unless they repay their debt in full each month.
This is the latest blow to Santander customers that use the bank's popular 123 products.
In January it hiked the feeon its 123 Current Account from £2 a month to £5 a month and in November the interest rate on the account was cut from up to 3% to a flat rate of 1.5% on balances up to £20,000.
Currently 123 Credit Card users can earn 1% cashback at supermarkets and 2% at department stores without any limit and 3% cashback on travel spends up to £300 a month.
But from February next year the amount you can spend to earn cashback will be limited to £300 at supermarkets, £150 at department stores and £100 a month on travel.
The changes mean that customers will only be able to earn a maximum of £3 for each type of spend amounting to just £9 a month.
The new caps already apply to those who signed up after September 15 while older customers will have the limit imposed from February.
Customers will have to weigh up whether the deal still makes sense for them considering the card also attracts a £3 monthly fee.
Why is this happening?
Santander says the cut to cashback is down to the EU cap on interchange fees introduced last year to limit the amount card companies charge retailers for card transactions.
The interchange fee cap has been blamed for a number of other cashback and reward schemes on credit cards having to be scaled back or scrapped at RBS, NatWest, Tesco Bank and Capital One.
The best alternatives
If you have the Santander 123 Credit Card and aren't happy about the changes you could switch to a new cashback credit card deal that is more rewarding.
An easy option might be to switch to the new Santander All in One Credit Card which offers 0.5% unlimited cashback on spending at home and abroad as well as 40 months 0% on balance transfers with a 1% fee.
There's also the Asda Cashback Credit Card which offers 1% unlimited cashback on Asda shopping and 0.5% unlimited cashback everywhere else.
The American Express Everyday Platinum Cashback Card offers a leading 5% cashback on spending for three months and tiered rates depending on how much you spend up to 1% after that.