Lower Credit Card Fees - What Next For Banks?

June 3, 2006

By Peter Kenny

The Office of Fair Trading (OFT) seems to have won the battle over credit card penalty charges, but has it won the war?

The majority of the main UK banks have stepped back into line with their promise to cut penalty fees to the OFT recommendation of £12 per transaction. As of today only the Royal Bank Of Scotland and NatWest are still holding out, and are indeed still locked in talks with the OFT.

The banks that have reduced their penalty fees have all stated that they do so under protest. Barclaycard took the step to release a statement informing us that while it will reduce its penalty charges (August 1st) it strongly disagrees with the OFT’s conclusions.

Barclaycard took one step further and announced that on the back of the penalty fee reduction, it will be increasing the standard APR for purchases by between 2% and 5% for some of it cardholders. Also, Barclaycard stated that the interest rate for cash withdrawals would increase from 21.9% to 27.9%.

The move by Barclaycard to increase their interest rates is seen by many as controversial; however, will other banks and credit card companies do the same?

The OFT estimated the total amount of unfair charges came to £300 million each year while at the same time branded the level of charges as higher than is legally fair.

Debt advice agencies accused the banks and credit card companies of using late payment penalty charges as a source of profits.

What steps are available to banks to recover the “lost” £300 million?

• Cash withdrawal rate increases – Barclaycard has already stated it will introduce a 27% increase to this rate. Expect other banks to do the same, although, not with such a hike.

• Annual fee introduced – Consumers in the UK expect their credit card to come with no fee. It would be a very bold move by a bank to introduce an annual fee. This is unlikely to happen due to the demand by UK consumers for basic items like credit cards and current accounts to be “free"

• Standard APR increase – This has a strong possibility of happening. Analysts reckon an increase of about 2 – 3% could be expected

• 0% introductory offers reduced – Over the past 18 months we have seen 0% introductory offers scaled back or levied with an extra charge. It is expected that the 0% offers will remain at the same level as they are with the only change being an increase in the balance transfer fee or the removal of the fee cap by some credit card companies.

• Interest free period reduced – The interest free period is the time you have from the date of purchase to the time you make payment to the credit card company. The time scale can range from 46 to 59 days depending on the credit card supplier. By reducing the interest free period the credit card company would increase profits. Expect many banks and credit card companies to take this step.

Around 60% of UK credit cardholders pay their balance every month and are therefore unaffected by rate increases. What would affect these consumers is a reduction in the interest free period.