Regulation, Competition, and the Threat to Revenues in the UK Card Market

Table of Contents

• Overview
  • Catalyst
  • Summary
  • Methodology
• Table of Contents
• Table of figures
• Table of tables
• Regulation, competition and the threat to revenues
  • The UK card market continues to face regulatory intervention at the national level
    • 2006 saw many issues wrapped up
      • The OFT has set a threshold of £12 for default fees
      • ATM fees have been the subject of scrutiny
      • Credit card purchase cover has been extended to overseas transactions
    • The CCA 2006 has extended protection offered to consumers and was enacted in April 2007
      • Datamonitor Cards and Payments Team view
    • The OFT has referred its report on payment protection insurance to the Competition Commission
      • The FSA has been investigating the sale of PPI since 2005, and has imposed penalties on several players
      • Datamonitor Cards and Payments Team view
    • The OFT has called for greater information to be provided with credit card cheques
      • The DTI began a consultation following earlier discussions by the TSC and the Task Force on Tackling Over-indebtedness
      • Following up on this, the OFT has agreed that further regulation is required to improve transparency
      • Datamonitor Cards and Payments Team view
    • The Payment Systems Task Force was wound up in December 2006 and replaced with a new strategic governance body
      • The PSTF published a report into access and governance of the LINK ATM network
      • The PSTF did not pursue its investigation into the access and governance of UK card schemes
    • Following an appeal, the OFT' s ruling on MasterCard' s MIF was overturned. However, it has vowed to continue its investigations
      • The OFT' s current investigation is likely to focus more closely on the principle of interchange itself
      • Datamonitor Cards and Payments Team view
    • Background to interchange and its regulation
      • Interchange is one of five key revenue streams for the industry
      • Merchants are behind the downward pressure on interchange
      • The OFT' s current interest in domestic interchange began when MasterCard applied for an exemption from the UK Competition Act 1998
      • In its September 2005 ruling, the OFT accepted the need for a collective agreement on interchange, but objects to what it sees as ' extraneous costs'
      • In response to this finding, MasterCard, backed up by the rest of the industry, lodged an appeal with the CAT
      • Although reasonably unlikely, there remains a possibility that domestic interchange fees could be reduced to around 0.7%
      • Domestic regulators are pushing to make interchange a more accurate reflection of costs
      • A cut in interchange would significantly reduce issuer revenues, forcing them to make cuts elsewhere
      • Datamonitor Cards and Payments Team view
  • The UK card market also continues to face regulatory intervention at the international level
    • The European CCD promises to make further changes to regulation in the UK
      • Timeline of the directive
      • The revised proposal has seen changes to a number of key areas, but the commitment to maximum harmonization remains
      • Other areas of the directive remain unchanged from its previous form
      • Despite being well intentioned, there are key problems with the directive
      • Datamonitor Cards and Payments Team view
    • The European banking industry continues to work towards the creation of SEPA
      • For a number of years the EC has pushed to create a single payments area
      • However, Europe' s banks were initially reluctant to change their practices
      • Yet the threat of further regulation pushed the industry to take steps to self-regulate
      • At the end of 2004, the EPC issued a roadmap to 2010
      • However, there are signs that regulators are becoming frustrated with the slow progress of the banks with SEPA
      • In March 2006, the EPC published a second version of its Cards Framework
      • Datamonitor Cards and Payments Team view
  • Intense competition in the market has driven down interest margins
    • Intense price competition has kept a downward pressure on introductory rates, while the pressure to earn revenue has kept headline rates up
      • APRs have risen, reflecting recent rises in the base rate and the pressure to generate revenue
      • Introductory APRs have fallen 5.6% relative to the base rate since January 2001
      • The introduction of balance transfer fees reflects this shift away from the aggressive acquisition campaigns of recent years
  • Regulation and competition have cut into issuer revenues. Current regulatory moves will reduce this further
    • Datamonitor' s UK Credit Card Industry Revenue Model
      • This model estimates revenue flows from the card issuance side of the business only
      • A wide range of data resources and qualitative input have been brought together to form this model
    • Datamonitor estimates that the revenue pool from issuance in the UK credit card market has shrunk to £9.9 billion
      • Interest is the key revenue stream for the industry
      • Other sources make up the remaining revenue income
      • Interest is accounting for a greater share of revenue as the base rate increases and income from other areas is cut
    • The recent changes in regulation and the general slowdown of the UK card market have cost issuers approximately £357m in revenues. Future restrictions on the sale of PPI could cost issuers even more.
      • Issuers have a range of levers to pull in terms of revenue generation
      • Scenario 1: the fall in revenue is countered by an increase in the standard rate of APR charged by issuers
      • Scenario 2: the fall in revenue is countered by the introduction of annual fees on a greater proportion of cards
      • Scenario 3: ' hidden charges' can help issuers recover revenue
      • Datamonitor Cards and Payments Team view
  • Summary
• APPENDIX
  • Data tables relating to the revenue model
  • Definitions
    • AAGR
    • APACS
    • Average transaction value
    • Balances outstanding
    • Bank of England base rate
    • CAGR
    • Charge card
    • Credit card
    • CVV
    • Debit card
    • EMV
    • Fraudulent use of card details (card-not-present fraud), also known as fraud on phone, mail order or Internet transactions
    • Interchange
    • Non-standard
    • OFT
  • Methodology
    • Primary research
    • Secondary research
  • Further Reading
  • Ask the analyst
  • Datamonitor Consulting
  • Disclaimer
  • List of Tables
    • Table 1: The credit card industry can recover revenue by raising charges and fees in a number of areas, 2006
    • Table 2: Breakdown of revenue in the UK credit card market by channel, 2002-2006
    • Table 2: Current relevant Datamonitor publications, 2007
    • Table 4: Future relevant Datamonitor publications, 2007
  • List of Figures
    • Figure 1: Interest is the key revenue stream for the UK credit card issuance business, 2006
    • Figure 2: Organization chart of the EPC, 2006
    • Figure 3: While standard purchase APRs have been stable, introductory and balance transfer APRs have fallen, 2001-07
    • Figure 4: Average APRs have been rising at a faster rate than the base rate, November 2005-January 2007
    • Figure 5: Introductory purchase APRs have fallen relative to the base rate, 2001-07
    • Figure 6: Average balance transfer APRs have fallen, despite a rising base rate, November 2005-January 2007
    • Figure 7: The total issuance revenue pool in the UK credit card market fell from 2005 to 2006, in absolute terms and as a proportion of transaction values
    • Figure 8: The margin between the base rate and APRs has begun to grow, 2002-06
    • Figure 9: Interest is the key revenue stream for the UK credit card issuance business, 2006
    • Figure 10: Revenue from interest on balances and interchange has declined, while income from default fees has fallen, 2005-06