The U.K. Office of Fair Trading (OFT) moved closer to reaching a decision on the interchange fees charged to merchants and retailers by credit card companies for credit card purchases. Last month OFT issued a statement of its objections on the fees and sources say a resolution could be reached in the near term.
"Whether it's [the] OFT saying point-blank that creditors can't charge these fees or the industry implementing some medium of self regulation where the fees are brought down - we are likely to see some changes in the process," said one market source. "There's been a lot of negative noise about the fees. They are high but in the end they incorporate some of the cost and expenses for the cardholder."
These fees are typically only disclosed in credit card ABS offering circulars, according to researchers at Deutsche Bank Securities. Interchange fees normally contributes between 0.5% to 2% to a portfolios, total cash yield, representing approximately one-tenth of total cash yield in interchange-dependent portfolios but the impact on excess spreads could be greater, added researchers. Some estimates are that at least one-third of excess spread could potentially be erased if a one-off total withdrawal of this fee is determined by an OFT ruling.
OFT said it would also be looking at the legitimacy of late payment penalties charged to U.K. credit card customers. These charges were estimated by Deutsche Bank to contribute to 1% to 2% of total cash yield. A forced withdrawal would also lead to an impact of excess spread, said researchers. "These fees are not part of the cashflows that support the transaction," said one market source. "The fees cut into the excess spread component of the transaction, it washes out at the bottom of the waterfall and back as excess spread to the originator."
But a sudden withdrawal of both interchange and late payment penalty fees would be noticeable within credit card master trusts as excess spread could more than halve under this scenario and could prompt some securitized trusts to breach base rate triggers, theorized Deutsche Bank.
"But of course that is not what's happening - any enforced reduction in charges or fees, which at any rate have been falling in recent years, is likely to be at a measured pace," said researchers. "We believe the impact on U.K. credit card portfolios can be offset by the servicers' ability to generate yield from other sources." Changes to interchange or late payment penalties could be compensated by new charges such as handling fees or through the reduction of reward programs.
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