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

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.



Report 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.


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Overview 1
Catalyst 1
Summary 1
Methodology 1
Regulation, competition and the threat to revenues 5
The UK card market continues to face regulatory intervention at the national level 5
2006 saw many issues wrapped up 6
The OFT has set a threshold of £12 for default fees 6
ATM fees have been the subject of scrutiny 7
Credit card purchase cover has been extended to overseas transactions 9
The CCA 2006 has extended protection offered to consumers and was enacted in April 2007 9
Datamonitor Cards and Payments Team view 10
The OFT has referred its report on payment protection insurance to the Competition Commission 11
The FSA has been investigating the sale of PPI since 2005, and has imposed penalties on several players 12
Datamonitor Cards and Payments Team view 13
The OFT has called for greater information to be provided with credit card cheques 14
The DTI began a consultation following earlier discussions by the TSC and the Task Force on Tackling Over-indebtedness 14
Following up on this, the OFT has agreed that further regulation is required to improve transparency 15
Datamonitor Cards and Payments Team view 16
The Payment Systems Task Force was wound up in December 2006 and replaced with a new strategic governance body 17
The PSTF published a report into access and governance of the LINK ATM network 17
The PSTF did not pursue its investigation into the access and governance of UK card schemes 18
Following an appeal, the OFT's ruling on MasterCard's MIF was overturned. However, it has vowed to continue its investigations 19
The OFT's current investigation is likely to focus more closely on the principle of interchange itself 20
Datamonitor Cards and Payments Team view 21
Background to interchange and its regulation 22
Interchange is one of five key revenue streams for the industry 22
Merchants are behind the downward pressure on interchange 24
The OFT's current interest in domestic interchange began when MasterCard applied for an exemption from the UK Competition Act 1998 26
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' 28
In response to this finding, MasterCard, backed up by the rest of the industry, lodged an appeal with the CAT 29
Although reasonably unlikely, there remains a possibility that domestic interchange fees could be reduced to around 0.7% 30
Domestic regulators are pushing to make interchange a more accurate reflection of costs 31
A cut in interchange would significantly reduce issuer revenues, forcing them to make cuts elsewhere 32
Datamonitor Cards and Payments Team view 32
The UK card market also continues to face regulatory intervention at the international level 33
The European CCD promises to make further changes to regulation in the UK 33
Timeline of the directive 33
The revised proposal has seen changes to a number of key areas, but the commitment to maximum harmonization remains 35
Other areas of the directive remain unchanged from its previous form 37
Despite being well intentioned, there are key problems with the directive 37
Datamonitor Cards and Payments Team view 39
The European banking industry continues to work towards the creation of SEPA 39
For a number of years the EC has pushed to create a single payments area 39
However, Europe's banks were initially reluctant to change their practices 39
Yet the threat of further regulation pushed the industry to take steps to self-regulate 40
At the end of 2004, the EPC issued a roadmap to 2010 42
However, there are signs that regulators are becoming frustrated with the slow progress of the banks with SEPA 42
In March 2006, the EPC published a second version of its Cards Framework 43
Datamonitor Cards and Payments Team view 43
Intense competition in the market has driven down interest margins 44
Intense price competition has kept a downward pressure on introductory rates, while the pressure to earn revenue has kept headline rates up 44
APRs have risen, reflecting recent rises in the base rate and the pressure to generate revenue 45
Introductory APRs have fallen 5.6% relative to the base rate since January 2001 46
The introduction of balance transfer fees reflects this shift away from the aggressive acquisition campaigns of recent years 49
Regulation and competition have cut into issuer revenues. Current regulatory moves will reduce this further 50
Datamonitor's UK Credit Card Industry Revenue Model 50
This model estimates revenue flows from the card issuance side of the business only 50
A wide range of data resources and qualitative input have been brought together to form this model 51
Datamonitor estimates that the revenue pool from issuance in the UK credit card market has shrunk to £9.9 billion 51
Interest is the key revenue stream for the industry 53
Other sources make up the remaining revenue income 54
Interest is accounting for a greater share of revenue as the base rate increases and income from other areas is cut 55
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. 56
Issuers have a range of levers to pull in terms of revenue generation 57
Scenario 1: the fall in revenue is countered by an increase in the standard rate of APR charged by issuers 57
Scenario 2: the fall in revenue is countered by the introduction of annual fees on a greater proportion of cards 58
Scenario 3: 'hidden charges' can help issuers recover revenue 58
Datamonitor Cards and Payments Team view 60
Summary 60
APPENDIX 61
Data tables relating to the revenue model 61
Definitions 61
AAGR 61
APACS 61
Average transaction value 61
Balances outstanding 62
Bank of England base rate 62
CAGR 62
Charge card 62
Credit card 62
CVV 62
Debit card 62
EMV 62
Fraudulent use of card details (card-not-present fraud), also known as fraud on phone, mail order or Internet transactions 63
Interchange 63
Non-standard 63
OFT 64
Methodology 64
Primary research 64
Secondary research 64
Further Reading 65
Ask the analyst 66
Datamonitor Consulting 66
Disclaimer 66

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Table 1: The credit card industry can recover revenue by raising charges and fees in a number of areas, 2006 59
Table 2: Breakdown of revenue in the UK credit card market by channel, 2002-2006 61
Table 2: Current relevant Datamonitor publications, 2007 65
Table 4: Future relevant Datamonitor publications, 2007 66


Figure 1: Interest is the key revenue stream for the UK credit card issuance business, 2006 24
Figure 2: Organization chart of the EPC, 2006 41
Figure 3: While standard purchase APRs have been stable, introductory and balance transfer APRs have fallen, 2001-07 45
Figure 4: Average APRs have been rising at a faster rate than the base rate, November 2005-January 2007 46
Figure 5: Introductory purchase APRs have fallen relative to the base rate, 2001-07 47
Figure 6: Average balance transfer APRs have fallen, despite a rising base rate, November 2005-January 2007 49
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 52
Figure 8: The margin between the base rate and APRs has begun to grow, 2002-06 54
Figure 9: Interest is the key revenue stream for the UK credit card issuance business, 2006 55
Figure 10: Revenue from interest on balances and interchange has declined, while income from default fees has fallen, 2005-06 56

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