Is the credit card sector on the verge of another earthquake? The Antitrust Authority is supporting a measure for transferring the money from credit card transactions to businesses within one day, while the businesses currently receive the money only twice a month. Such a measure will benefit businesses, but this is liable to come at the expense of customers, because the credit card companies are likely to roll their financing costs onto the customers in the form of interest, and to cancel the delayed billing method their customers currently enjoy. The Strum Committee considered such a measure, and recommended it in its interim report. The recommendation was omitted from the final report, however. It now appears that the Antitrust Authority is not abandoning the initiative, and has decided to go ahead with it by itself.

At present, when a credit card transaction is conducted, the customer is not billed for it right away (unless the card involved is a debit card for immediate billing). Customers are billed for their transactions once a month, and no interest is charged for them. The average number of interest-free credit days is 17.

The reason that the credit card companies can afford such delayed billing of their customers without charging them interest is that they themselves transfer the money to the business only twice a month. Now, however, it appears that this situation is likely to change completely.

If the credit card companies have to transfer the money to businesses the day after the transaction is conducted, but collect the money from the customer an average of 17 days later, there will be an estimated cash flow gap of NIS 15-20 billion a month. This will generate annual financing costs estimated in the tens of millions of shekels. It is reasonable to assume that the credit card companies will avoid absorbing this cost by rolling it over onto their customers.

The credit card companies' customers are currently billed only once a month. This method will probably disappear, or be retained only for strong customers that the credit card companies are anxious to retain. There will be two main payment methods for most customers, as is the prevailing practice in the US: billing for immediate payment or billing on credit, i.e. delayed billing, but with considerable interest being charged for it. The background for the change in Israel is the policy of the Bank of Israel and the Antitrust Authority on renewal of the cross-fee agreement in the credit card sector. This arrangement, which enables the credit card companies to perform clearance for each other, is under supervision, because it involves an agreement in restraint of trade.

Ostensibly, the main part of this arrangement is setting the amount of the cross fee - the fee that the company clearing the credit card transaction pays the card issuer. The amount of the fee constitutes the floor price for clearance fees of businesses. The Bank of Israel this time obtained the authority to set the fee rate, and published a schedule two weeks ago in which the cross fee will fall from 0.7% to 0.5% over six years. Every decrease of 0.1% in the cross fee reduces the credit card companies' revenue by NIS 300 million a year. The Antitrust Authority does not like the Bank of Israel's schedule; it believes that the rate of decrease in the fee is too slow. At the same time, the authority to determine cross fee is in the Bank of Israel's hands, so the Antitrust Authority is probably limited in its ability to intervene. The Antitrust Authority, however, has apparently found a different way to intervene in the payments by businesses to the credit card companies. Shortly after the Bank of Israel published its fee schedule, the Antitrust Authority published a draft document entitled "Conditions for Renewing the Cross Fees Agreement." Ostensibly a standard document for renewal of the agreement, a clause has been added to it requiring the credit card companies to switch to daily clearance. "Money transfers between an issuer and clearer in respect of transactions carried out in a single payment will take place no later than the day after the transaction is performed." This short sentence is a dramatic change for the credit card sector, which is already undergoing an upheaval.

Two weeks ago, when the Bank of Israel published its cross fee schedule, "Globes" commented that uncertainty had finally been removed from the sector, and the large banks would be able to go ahead with the sale of the credit card companies that they owned. The Promotion of Competition and Reduction of Concentration Law, which went into effect a year ago, stipulates that Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI) must sell Isracard and Leumi Card within three years. The deals for the sale of these credit card companies are being stalled, however, because without knowing the amount of the cross fee, it is difficult to determine the value of the credit card companies. The Antitrust Authority has now trumped all of the cards. The decision to switch the sector to daily clearance is renewing the upheaval in the industry, and is likely to make deals for the sale of the credit card companies difficult in the near future. This is a dramatic change with far-reaching consequences, including a change in the payments sector structure, financing costs, and technological and operating changes, at a time when the sector is already in the midst of implementing the Strum reforms.

The silent war between the Bank of Israel and the Antitrust Authority

The Antitrust Authority's notice to the credit card companies of its intention to switch to daily clearance was issued on the day after the Bank of Israel published its cross fee schedule. In all probability, this is no coincidence. It appears that there is a profound dispute between the two regulators concerning businesses costs in respect of the credit card companies and the steps that should be taken on the matter. How will it end? It is difficult to predict. One possible face-saving solution is for the Antitrust Authority to abandon the idea of daily billing , while the Bank of Israel publishes a more aggressive final schedule for cross charges than its current schedule. Will it end in a compromise, or will the Antitrust Authority pursue its proposal to the end? Time will tell.

Published by Globes [online], Israel Business News - www.globes-online.com - on February 1, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018