Card users to be big losers?

The majority of credit card users will be the losers as consumer protection rules could cost lenders £1 billion a year, according to 'Precious Plastic 2007', the latest study of the UK consumer credit market from PricewaterhouseCoopers.

The research reveals credit card margins continued to fall in 2006, as the industry came under unprecedented scrutiny from the Office of Fair Trading OFT, the Competition Commission and the Financial Services Authority.

In fact, after allowing for bad debts, net yield on balances fell from 6.5% to just under 5% in the year to June 2006. Although APRs have risen by about 1 percentage point on average, margins have fallen as bad debt has risen faster, from just 4% p.a. in December 2004 to 7% by June 2006.

Meanwhile, the OFT's decision to cap default charges at £12 is further impacting margins. The ongoing investigations into credit card interchange fees effectively the charge retailers pay on credit card transactions and payment protection insurance may add to the pressure. The combined effect from the rulings and investigations could result in lost revenue to the industry of £1 billion a year.

Richard Thompson, partner at PricewaterhouseCoopers, makes the point that with fierce competition and rising bad debts already hitting issuers, it's hard to see how the banks will absorb £1 billion of lost revenues. "We are likely to see a waterbed effect, whereby charges pushed down in one area pop up somewhere else."

Thompson says card issuers would have to levy annual fees costing the average credit card user £35 a year to recoup the potential £1 billion loss. He adds that if lenders tried to do this through interest rates alone, we would see APRs increase by 2 percentage points on average.

He notes that we are probably already seeing the beginning, following the April decision by the OFT to cap credit card default charges. It has been reported that over the 3 months to September 19th card issuers raised their rates. Ultimately the impact of regulation could hasten the return of annual charges as the norm - something the industry has so far managed to do without.

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2006-11-14 10:46:12 © Moneyextra.com