The major U.K. credit card lenders announced last week plans to cut penalty charges by almost half their current rate. For issuers, this means finding new ways to generate yield that could translate into higher charges for the consumer.
The recent legal and regulatory challenges faced by the U.K. credit card industry will affect yield in the short term, but market sources believe that card issuers will find other avenues to replace that lost yield. The latest change comes via the Office of Fair Trading (OFT) investigation into penalty charges. The OFT said in March that credit card charges for late or missed payments were set at a significantly higher level than is economically fair and said that it would consider any penalty charge of more than GBP12 ($22) as being unfair.
Banks were given until May 31 to tell the OFT whether they would reduce their penalty charges, which typically average between GBP20 and GBP25. The major U.K. card lenders - Barclaycard, Lloyds TSB and HSBC - said that they plan to cut penalty charges to the suggested GBP12 limit. HBOS, Egg and the Royal Bank of Scotland have also announced that they intend to reduce penalty fees, though not by how much.
Deutsche Bank analysts estimate that late payment charges contribute between 2% to 3% to portfolio yield and estimated that a GBP15 cap on default charges could reduce the late payment fee yield contribution to around 1.5% to 2% of U.K. credit card trusts. In a report on the industry released last week, analysts at Moody's Investors Service said they expected that some credit card issuers are likely to supplement income by tapping other revenue streams, such as raising APRs or reintroducing annual fees, thereby limiting the potential impact on gross yield. Barclaycard has already indicated that it plans to recoup the lost revenue by increasing the credit card APRs for its 900,000 customers.
The fee reduction comes after a string of legal and regulatory changes that have faced credit card issuers over the past two years, beginning with the OFT looking into interchange fees charged by U.K. credit cards. That investigation found that the charges made by MasterCard restricted competition and, as a result, the OFT pressured U.K. companies to reduce these fees. While these charges are not considered for ratings purposes, any sudden reduction is also likely to impact U.K. credit card ABS trust yields and excess spread (ASR, 02/13/06).
The OFT is also in the early stages of an investigation into payment protection insurance, but market sources believe that the findings should have a limited impact on card issuers.
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