OFT interchange intervention to cost £450 million; Apacs applauds payment system climbdown

OFT interchange intervention to cost £450 million; Apacs applauds payment system climbdown

Research from PricewaterhouseCoopers into the UK credit card market estimates that a reduction in interchange fees, which is being considered by the Office of Fair Trading (OFT), will cost the industry more than £450 million per annum.

This is likely to result in higher charges for credit card users and the dilution or elimination of popular rewards programmes which are funded by interchange fees, says the consultancy.

An interchange fee forms part of the commission paid by retailers every time a credit card transaction is made. Whilst regulators argue that the move will result in lower retail prices, PricewaterhouseCoopers anticipates that a fee reduction could cause a consumer backlash as credit card services become more expensive, with fewer rewards for customers.

The study also identified a trend towards conversion of store cards to credit cards.

Richard Thompson, partner at PricewaterhouseCoopers, observes: "Fee income is subject to regulatory pressure and market growth has begun to fall, with scarce acquisition opportunities in the UK. In combination, these factors will force providers to reshape their offerings to card holders and to look outside the UK for future growth opportunities."

He believes growth opportunities exist in the developing markets in Central and Eastern Europe, where issuance of payment cards has been growing at very high rates.

Separately, UK banking bodies have responded with relief to plans outlined by the Government in yesterday's pre-budget report to pursue non-statutory measures to improve competition in payment systems.

The OFT will shortly take on an enhanced role in relation to payment systems for a period of four years. The Government says it will then review competition in the industry and will legislate unless there has been a significant improvement.

Shortcomings in the transparency of UK payments systems were identified three years ago in the Treasury-commissioned Cruickshank report on banking.

Sandra Quinn from payments body Apacs says: "This shows that the Government has listened to us and appreciates the progress made by the industry since the Cruickshank Report, supporting our view that the outstanding concerns can be addressed without recourse to legislation."

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