OREANDA-NEWS. The European Parliament's vote to cap interchange fees in credit and debit card transactions in the EU is the culmination of long-standing regulatory pressure on these fees in Europe, Fitch Ratings says. As such, our UK credit card ABS ratings anticipated regulatory intervention.

The European Parliament on 10 March voted in favour of caps on interchange fees, which the European Commission had proposed in 2013. An EU Regulation will cap fees at 0.3% of the transaction value for consumer credit cards, and 0.2% for consumer debit cards (for debit cards, member states can impose lower percentage caps and maximum fee amounts).

The effect will be felt most at banks with operations concentrated in the EU that issue payment cards on the Visa and MasterCard networks. The impact will vary depending on business models as some banks rely more than others on transactions to drive revenue relative to loan balances. However, because the interchange fee caps have been widely anticipated and will come into force towards the end of this year, we believe that issuers have had time to prepare for the impact on revenue.

Data from Fitch-rated UK credit card master trusts shows that interchange fees contribute much less than interest income to portfolio yield - typically around 10%-15% (unchanged since the caps were originally proposed). The exception is Tesco Bank's Delamare master trust, where the figure is higher at around 35%-40%, reflecting the high proportion of transactors in the trust.

Fitch has expected regulatory pressure on interchange fees for several years and this has been reflected in our criteria as we calculate an adjusted yield that considers only 50% of the interchange and fee income (and no credit to recoveries). This, rather than the reported gross yield, is used to determine our steady state yield assumptions. The now agreed interchange caps slightly exceed the 50% reduction but our analysis found that this is not sufficient to have an impact on our ratings. Fitch expects to maintain the 50% haircut to interchange and other fee income specified in the criteria for UK trusts as regulatory and competitive pressures are likely to continue (see 'Global Credit Card ABS Rating Criteria' available at www.fitchratings.com).

The full impact of interchange caps will depend on how card issuers respond. To maintain profitability targets, card issuers could introduce other fees (such as annual membership or account maintenance fees) or reduce benefits such as reward systems, potentially making fee income more stable but reducing monthly payment rates.