Following cuts ordered to default fees in 2006, card issuers’
charging practices have come under the spotlight. As consumer
bodies call for simplified card pricing, will UK regulators now
take a harder line with UK card issuers? Victoria
It’s been just over a year since the UK’s main financial
regulator, the Office of Fair Trading (OFT), ordered UK card
issuers to slash credit card default fees, after concluding that
they had been set at too high a level. The OFT decided that default
fees over £12 ($24) were excessive and had led to UK consumers
being overcharged by £300 million a year.
Before the ruling, the average credit card default fee was
around £20 and was applied by three of the UK’s major card issuers
– Barclaycard, Lloyds TSB and HSBC. The OFT directed the issuers to
reduce their default fees, or face the threat of legal action – and
the issuers swiftly complied, even though it meant taking a hefty
hit in profits. This was underlined by the 2007 Precious Plastic
report from global business and research consultancy
PricewaterhouseCoopers (PwC), which pointed to reduced
profitability as a result of regulatory action over default fees
and interchange levels.
Significant hit to margins
According to PwC, the combined effect of actual and pending
regulation could hit the UK credit card industry’s margins by as
much as £1 billion annually. PwC said recouping this amount would
equate to an increase in interest rates of another 2 percent.
Annual fees remain an alternative source of income and an annual
fee of around £15 per card would be needed to generate income of £1
billion. PwC said it is only a matter of time before annual credit
card fees are standard.
Credit card issuers are also under pressure due to declining
levels of credit card lending. By the end of December 2005, the
total amount of outstanding credit card balances in the UK amounted
to £59.03 billion. By December 2006, this had fallen to £55.79
billion, according to data from UK payment industry body APACS. It
is expected that the figure for the end of 2007 will be around £53
billion to £54 billion.
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Since the OFT’s 2006 ruling, UK card issuers have increased
numerous charges for card usage, according to UK consumer
association Which?. It says that since the lowering of default
fees, there have been ten changes to the way that card issuers
implement charges, including the introduction of low use fees.
Interest rates have also been raised, particularly for the
withdrawal of cash on credit cards, and some issuers have
introduced annual fees.
In February 2007, Lloyds TSB introduced a £35 per year charge
for low card use, and this was followed in May by the UK’s biggest
credit card issuer, Barclaycard, which said it may start charging
up to 1 million customers £20 a year for low card use. Earlier this
year, HBOS said that the reduction of credit card default fees
would result in a loss of £60 million in income in 2007.
Martin Hocking, editor of Which? Money, said: “Credit
card providers seem to be resorting to a raft of ingenious methods
to recoup lost revenue following the OFT crackdown on penalty
Which? is also putting pressure on card issuers to adopt a
standard method of calculating APRs and in April this year it
complained to the OFT, urging the regulator to investigate the
issue. Which? said at least 12 different methods are in use for
calculating an APR, making it harder for consumers to compare the
real cost of credit cards.
However, the UK payment card industry emphasises that the
information supplied to consumers is now much more transparent than
before and stresses that card charges are clearly detailed. Every
credit card statement has a summary box listing charges. According
to data from APACS, six out of ten credit cardholders pay off their
balances in full each month, meaning that they would not be exposed
to these charges in any case.
In June, the OFT announced a new programme of work with the
credit card industry and consumer bodies to make the cost of credit
cards easier for consumers to understand. The programme is expected
to take around six months and will explore the issues surrounding
the cost of credit cards including purchases, cash advances,
introductory offers and payment allocation. The OFT said it would
work with the credit card industry, consumer groups, other
regulators, government bodies and other key stakeholders.
Ten changes to credit card fee structures since
• annual fees – some cards charge up to £24 a year
• low use fees – customers who don’t regularly use their
card may be charged penalties of up to £35
• balance transfer fees – the cost of switching a balance
is rising, from a typical 2 percent to 2.5 or 3 percent
• lower minimum payments – so borrowers who only pay the
minimum will pay more interest
• order of payments – some providers have changed the way
they allocate repayments, so they start paying off the cheapest
• interest calculation – the lowest APR does not
necessarily mean the lowest interest, as there’s no standard
interest calculation method
• impromptu charges – some card providers penalise
customers who don’t tell them they’ve moved house, by up to £12
• credit card cheques – the interest rate is often more
than 20 percent, there’s a handling fee and usually no
• withdrawing cash – some providers have increased interest
rates and fees for cash withdrawals
• gift vouchers – some cards treat gift voucher purchases
as cash withdrawals, which attract a higher interest rate