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Government proposals to crack down on the credit card industryComment from Ian Foottit, retail banking and payments partner at Deloitte |
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"The proposals are targeting a number of practices that card companies have used to increase their returns in the past. As such, it will put further downward pressure on the profitability of the card issuing business, which is already being hit hard by a number of issues, including:
- Declining payment volumes, as consumers use their debit cards and cash more to help control their budgets (reducing interchange revenues);
- Declining balances outstanding, as consumers seek to de-leverage (reducing net interest income);
- Rising write-offs, as the effects of rising unemployment start to bite; and
- Significantly higher funding costs, as banks continue to seek to restructure their balance sheets away from what is now seen as excessive wholesale funding, which is putting significant upwards pressure on the price of retail deposits
“It is expected that the reaction from the industry could go be two-fold. First, unless card companies can find other ways to boost the profitability of the business, the overall supply of card-based credit is likely to be further constrained, as essentially this has just reduced the risk adjusted return on the business. In turn, higher risk customers, for example, younger, lower income customers, will probably find it harder to obtain card-based credit.
“However, in so far as card companies can take other steps to replace this lost revenue, for instance, through (higher) annual fees, then there is no reason for the supply of credit to tighten just because of this announcement.
“That said, such action would in itself likely reduce the demand for cards, as people are more aware of the explicit annual fee than a higher APR. So we are also likely to see card companies taking another look at their cost base. It is also expected that we will see some of them taking a long hard look at the creation of specific transactor products in an attempt to rebuild profitability.”
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