Citigroup analysts in their Consumer ABS Weekly published today examined the near-term impact of the interchange settlement on credit card master trusts and determined it was marginal.
The proposed agreement entails Visa, MasterCard, and several major banks and retailers entering into a Memorandum of Understanding (MOU). This settlement would resolve the merchants’ antitrust lawsuit if finalized before its planned trial in September. If approved by a judge, it would relieve the parties from litigation risk and finally end the uncertainty relating to this issue, Citi analysts said.
However, Citi stated that it contains two principal provisions that could have an effect on credit card master trusts, including lowering interchange fees and allowing surcharging.
In relation to the first provision, the settlement will decrease the interchange fee by 10 basis points for an eight-month period aside from enforcing a fixed $6.05 billion cash payment. An interchange fee, also referred to as merchant discount, is a key component to the retailer’s total cost of accepting credit cards as a method of payment.
Analysts argued that the decrease would impact specific trusts differently, depending on the individual trust receivable turnover. For instance, trusts that include a high proportion of “transactors” would likely experience a larger drop in portfolio yield than trusts with more balance-carrying consumers.
Seasonality could also be a factor on portfolio yield shrinkage. If the validity date of the settlement overlaps with the holiday spending period, as it is expected to take effect in mid-2013, the penalty’s impact could possibly be greater if consumer spending is proportionally higher during the holiday season.
In addition, Citi cited Fitch Ratings figures of interchange fees ranging from 1%–5%. and Visa Association numbers that averaged about 1.6% from 2002–2007. Citi analysts said that the 10 basis point penalty would lower the average interchange fee by about 6% for 8 months/. As a whole, however, Citi said that the overall effect of this change in fees will be fairly small.
Furthermore, if the portfolio turns over less than two times per annum, the 10 basis point penalty will have even be less significant. It would be lower than 1% of the current typical portfolio yields.
Due to the second principal provision, the settlement would also allow merchants to charge consumers an additional fee to use a credit card at their discretion. The result of a merchant surcharge is that it could hinder consumers’ willingness to use credit cards, thus place negative pressure on credit card master trust pool balances.
Despite this, analysts said that it is difficult to measure the negative impact of surcharging on already diminishing credit card master trust pool balances. Still, they name several factors that would offset surcharging’s detrimental effect. These factors include the prohibition of surcharging in some states, the retailer’s inability to apply a surcharging fee higher than the merchant discount rate and the “unencumbered managed balances.”
Citi analysts anticipate that the effect of the proposed settlement should be insignificant and they quantify the impact in a range of 10–20 basis points for eight months, assuming typical portfolio turnover rates. Analysts still recommend the credit card sector and expect it to remain low risk and have low spread volatility.