Default charges are a thorny subject for many cardholders. Ranging from GBP20 to GBP25, default charges are levied if a cardholder fails to pay a bill on time, exceeds their credit limit, or if a check or direct debit payment is not honored.
The OFT is not against the concept of default charges, but believes that current levels are disproportionately high. Charges can be considered excessive if they amount to more than a genuine estimate of what a card issuer would win in damages if it took a cardholder to court for breach of contract.
Clearly, if the final ruling is to cut default charges, then card issuers will suffer from a decrease in fee income. Yet the true implications of such a ruling are only realized when set against the wider context of the investigation into interchange fees.
Interchange (a wholesale fee paid by a shop's bank to the card issuer's bank on each credit card transaction) constitutes, along with fees and interest, a major revenue stream for card issuers. The legitimacy of this fee is currently being investigated under competition law in the UK and, while a final decision is yet to be reached, the industry belief is that interchange rates will be cut.
If both default charges and interchange fees are cut, card issuers will undoubtedly suffer. But it is unlikely that they will take this lying down. Instead, card issuers are likely to cut costs, through reducing cashback and loyalty schemes, which could be bad news for consumers.
More importantly, issuers will look to recoup lost revenue elsewhere. This could be done by encouraging borrowing and reintroducing annual fees, or, for those card issuers that are also retail banks, the option to win back revenues from another part of their portfolio also exists. In any event, card issuers will not stand by and allow fee revenues to disappear completely.