A preliminary ruling by the Office of Fair Trading made earlier this month proposed to enact potential changes to existing interchange fees that can amount to approximately 1% of overall cash yield, explained Fitch Ratings. While it looks as though U.K. interchange fees are likely to drop, market sources say it should be of little consequence to credit card securitizations.
This latest push to cut fees stems back to the earlier Cruikshank report, where Chancellor Gordon Brown and Don Cruikshank (now president of the London stock markets) looked to reduce costs for business - small business in particular - and consumers. The efforts took the form of an informal committee headed by Cruikshank, and one of the things focused upon was the payment system between retailers and card companies.
"A couple of big retailers were about to accept cards for the first time, but lobbied aggressively against what they regarded as high interchange fees," explained Kevin Ingram at Clifford Chance. "The committee has now agreed with some of the retailers' points and concluded that it was unfair to pass on costs to retailers through high interchange fees."
Basically, the Interchange fee was a way for cards to dip into profits generated by retailers. Ingram explained it in this way: a cardholder shops with a card that is accepted by the retailer, who then passes it over to the merchant acquirer. The merchant acquirer pays a yield to the store and enters the charge into the system, where it might take one day to clear. Meanwhile, the cardholder could take up to 30 days to pay part of the balance; consequently, the card-issuing company receives no return while the retailer enjoys the merchant yield and gets paid in full by the card company. With the fee, the companies are compensated for not being immediately paid by the cardholder.
"Interchange is not an immaterial yield component in U.K. credit card portfolios and, though it could have some impact on spread levels in ABS transactions, the spread in these structures is significantly high enough so that the level of excess will absorb this sort of thing anyway," said Ingram.
The question now is who should absorb this fee. According to Fitch, with an increasingly competitive rate-driven credit card market, a reduction in fees could force companies to introduce annual fees, reduce introductory interest fee grace periods (which typically average six months) or enact even harsher penalty fees. However, Ingram said, this would have to be an industry-wide decision in order to work; otherwise, it would be deemed competitively unacceptable.
In the end, rating agencies said that the yield garnered from this fee has never been taken into account in the rating process on the securitization side, mainly because such a scenario was widely anticipated. The current ruling is against fees charged by MasterCard U.K. members to retailers. The card company has been given a grace period in which it must justify the level of the fees by spring of this year. Whatever the outcome, it's anticipated that the ruling will be applicable to other card companies charging this fee as well.
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