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

This publication has been discontinued on July 19, 2011.

Introduction

Abstract

Overview

Introduction

This brief forms part of the UK Plastic Cards 2007 report. It provides in depth coverage of both national and international regulatory activity that has impacted on the UK card market. The report then explains how and why issuers' revenues are changing as a result of this. The report concludes with our unique Revenue Model, explaining how issuers can replace lost revenue.

Scope

• The report covers all regulation in 2006 and the first half of 2007 that has affected the card market in the UK.
• It provides in depth analysis of how increased competition has squeezed down the profit margins of issuers.
• Detailed coverage of the various revenue streams in the issuance business and an explanation of how these have changed over the last year
• Datamonitor' s Card Issuance Revenue Model shows how issuers can replace revenue lost as a result of competition and regulatory change

Highlights

The UK market continues to be subject of strict new regulations. The suggested maximum default fee of £12 (as set by the OFT) has had a significant impact on the way that issuers operate, knocking off an estimated £524 million from the industry' s revenue pool.

Datamonitor estimates that the total revenue in the card issuance market has fallen by 7% between 2005 and 2006. The fall in income from default fees, as regulated by the OFT, was one of the main areas to suffer.

In order to make up revenue that has been lost from 2005 to 2006, issuers have a number of "levers" to pull. Datamonitor' s issuance model shows that a 0.5% rise in interest rates over the base rate would recoup £177m of revenue in the market.

Reasons to Purchase

• Gain a clear understanding of the regulatory developments in the UK market
• Find out how issuers are adapting to changing market conditions.
• Learn how issuers can earn back revenue lost through regulatory activity and intense competition

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

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