Payments System Board Annual Report – 2009 Developments in the Retail Payments System
Use of non-cash payments in Australia continued to rise over 2008/09 at a rate similar to that of recent years. Trends in the composition likewise continued those of recent years – cheque use continued to decline and use of electronic methods of payment grew further. The recent trend in card payments – towards debit and away from credit – accelerated in 2008/09 and the use of BPAY also continued to grow strongly. Other developments during the year were an increase in credit card fraud and continued rapid adoption by merchants of surcharging of credit and charge cards.
Trends in Retail Payments Use
Cash payments
Relatively little information is available on cash payments. A consumer survey undertaken by the Reserve Bank in 2007 indicated that, at that time, around 70 per cent of the number of consumer payments and 38 per cent of the value were undertaken using cash. There are no time-series data on cash payments. Some information can, however, be inferred from the value of cash withdrawals. These data suggest that cash payments continued to decline in importance relative to non-cash payments over the past year. The value of cash withdrawals increased by 1 per cent in 2008/09, around 4 percentage points slower than consumption growth over the same period.
The two primary means of accessing cash are through ATMs and over-the-counter at bank branches, although there is also a significant number of relatively small cash withdrawals using EFTPOS at merchants. The value of ATM withdrawals, which account for around 63 per cent of the value of cash withdrawals, rose by around 4 per cent over the year, around the same as in recent years but slower than consumption (Graph 1). The value of over-the-counter cash withdrawals, which account for around 26 per cent of cash withdrawals, fell by around 5 per cent. Within the year, however, there was substantial volatility in the month-to-month growth in cash withdrawals reflecting a number of special factors. First, there was a substantial rise in the value of cash withdrawals, both over-the-counter and at ATMs, in December 2008 and March 2009, coinciding with the Federal Government's stimulus payments (Graph 2). Second, there was a large rise in the number and value of EFTPOS cash outs in March 2009, possibly a reaction to the introduction of direct charging at ATMs. Cash advances on credit cards, a small and declining means of accessing cash, accounted for only 5 per cent of the total value of cash withdrawals in 2008/09, down around half a percentage point over the past two years.
Non-cash payments
The long-term trends in non-cash retail payments that have been observed in previous years continued in 2008/09. The number of non-cash payments grew by around 7 per cent over the year, although the value of those payments remained virtually unchanged. This growth was driven by electronic payment methods. In particular, use of debit cards continued to grow strongly during 2008/09, while growth in both credit card and direct entry payments was modest by recent standards (Table 2, Graph 3). In contrast, cheque use continued its long-term decline. Whereas a decade ago cheques accounted for around 30 per cent of the number of non-cash payments – the highest share of all non-cash payment instruments – they accounted for just 6 per cent in 2008/09.
With growth in debit card transactions outpacing credit cards in recent years, debit cards were the most frequently used non-cash payment instrument in 2008/09, accounting for close to one-third of the number of non-cash payments. Credit card payments and direct credits each accounted for roughly one-quarter of non-cash payments. In terms of value, however, direct debits and direct credits together made up 85 per cent of non-cash payments, reflecting the much larger average size of these payments. Cheques accounted for 11 per cent of value, while debit and credit cards together made up only around 2½ per cent.
Per head of population, there were 86 debit card, 66 credit card and 62 direct credit transactions in 2008/09. This compares with only 16 cheque transactions.
Card-based payments
Growth in card-based payments remained strong in 2008/09. Total card payments increased by around 10 per cent by number and 9 per cent by value in the year to June 2009. These growth rates were slightly slower than in the previous year, consistent with weaker economic activity.
Within card payments, the trends in the growth of debit and credit card payments continued to diverge: debit card payments continued to grow strongly, while the use of credit cards moderated (Graph 4). Debit card payments grew by around 15 per cent by both number and value in the year to June 2009. In contrast, growth in credit and charge card payments slowed further to 4 per cent by number and 5 per cent by value over the same period. Consistent with these broad trends, over the past year the number of debit card accounts increased by nearly twice the rate of credit card accounts – 5 per cent, compared with 3 per cent, respectively. Nonetheless, while debit cards made up a higher share of card payments by number (57 per cent), credit cards still comprised a higher share by value (62 per cent), reflecting the higher average size of a payment made on a credit card.
A number of factors may account for the divergence between growth in debit and credit card transactions in recent years. The first is that the Board's card payment reforms may have had an effect on the use of credit cards. Issuers responded to the reduction in interchange fees by increasing annual credit card fees and reducing the reward points offered (see ‘Pricing to cardholders’, below). The increased use of surcharging by merchants may also have discouraged credit card use (see ‘Surcharging’, below). At the same time, the marginal cost of making EFTPOS transactions has been reduced for many customers as a result of the introduction of ‘all you can eat’ deposit account pricing, which, in part, reflects the Bank's intervention on EFTPOS interchange fees.
A second factor is that some of the strength in debit card growth has been driven by scheme debit products. These products draw funds from a deposit account held at a financial institution, but process transactions through the networks owned by the international card schemes, rather than the EFTPOS system. This means that, unlike EFTPOS, scheme debit cards can be used in card-not-present environments (such as the internet) and internationally. Scheme debit products have been actively promoted by the schemes and some issuers over recent years and have been growing strongly. The Bank recently started collecting data that allow EFTPOS and scheme debit transactions to be separately identified. These data indicate that over the year to the June 2009 quarter, the value of scheme debit purchases increased by 35 per cent, compared with a 12 per cent increase in the value of EFTPOS transactions. Scheme debit accounted for around one-quarter of the value of debit card payments in the June quarter of 2009, compared with a share of around one-fifth a year earlier (Graph 5).
A third factor that may have influenced credit and debit card spending has been the global financial crisis and the slowing in economic activity in Australia over the past year. There is some evidence that consumers have taken an increasingly cautious approach to debt and have therefore favoured the use of debit cards over credit cards. This has, for instance, been evident when the Government stimulus payments were made. These tended to boost debit card spending and cash withdrawals more than credit card spending. In addition, credit card repayments have typically exceeded credit card transactions since the end of last year, sometimes by large amounts (Graph 6). There were particularly large repayments relative to normal in December and April, suggesting that some consumers used the stimulus payments to reduce credit card debt.
One result of this is that growth in balances outstanding on credit cards has slowed significantly over the past two years (Graph 7). The growth in balances accruing interest has also slowed, suggesting that there has been a greater tendency to pay balances off by the due date.
The relatively weak growth in credit card transactions over the past year appears to mainly reflect weak growth in card-present transactions, rather than card-not-present transactions. The number of card-present transactions, which comprised 77 per cent of the share of total credit card transactions, was virtually unchanged over the year to the June quarter 2009, while card-not-present transactions grew by 7 per cent. Of card-not-present transactions, the strongest growth was in online transactions, which made up around 10 per cent of total credit card transactions, but mail-order and telephone-order transactions also grew strongly.
Other electronic payments
Growth in direct entry payments slowed slightly in 2008/09. The number of direct debit and direct credit transactions each grew by around 6 per cent, a little slower than the 9 per cent in 2007/08. Growth in values slowed more dramatically, from 14 per cent to 2 per cent, as the average size of direct entry payments declined. Nonetheless, average values remained quite high relative to most other retail payment instruments, at around $8,000 for a direct debit and $5,000 for a direct credit, reflecting the purposes for which direct entry transactions are used. Direct credits are typically used for payments such as salary, rent, social security and tax refunds, while direct debits are used for mortgage repayments and regular bill payments.
The use of BPAY also continued to grow strongly, although at a slower pace than in the previous year. In 2008/09, the number and value of BPAY payments grew by around 12 per cent, faster than all other non-cash payment methods except for debit cards. The average value of a BPAY transaction was fairly steady at around $700, reflecting the concentration of payments in a small number of merchant categories where transactions are related to large household payments. These categories include, for example, housing and utilities, insurance payments and payment of taxes and fines.
Cheques
Cheque use continued to decline over 2008/09, accounting for around 6 per cent of the number and 11 per cent of the value of non-cash payments. Cheques nevertheless remained important for a variety of transactions, especially high-value payments such as property settlements and business transactions. The average value of a cheque in 2008/09 was $4,225, a slight decline from $4,492 for the previous year.
International payment trends
International trends in payment instrument usage over the past few years have been similar to those in Australia. Electronic payment instruments, in particular payment cards, continued to increase in importance while cheque use declined (Graph 8). In 2007 (the latest period for which final data are available), payment cards were the most important retail payment instrument overseas, making up almost half of all non-cash payments compared with less than one-third at the end of the 1990s. Other electronic means of payment, mainly payments through automated clearing houses, have not grown as quickly as payment cards but still accounted for around 30 per cent of non-cash payments in 2007. Use of cheques, while concentrated in a small group of countries, declined consistently over the past decade; cheques were used in only around 20 per cent of non-cash payments compared with almost 50 per cent in 1998.
While there has been a broad-based trend towards use of electronic payment instruments, there are some significant differences across countries in the types of payment instruments used (Table 3).
In Germany and several other Western European countries, for example, electronic debits and credits have traditionally been the most used method of payment. In other countries, including Australia, Canada and the United States, payment cards have been the most heavily used payment instrument. Furthermore, while debit cards were used more frequently than credit cards in all the major countries in 2007, Australia, Canada and the United States remained relatively heavy users of credit cards. In all the major countries, however, debit card use has grown faster than credit card use over the past few years (Graph 9).
Other Retail Payments Developments
Interchange fees
Interchange fees in the MasterCard and Visa systems in Australia are regulated by the Reserve Bank. Under the regulations, the weighted average of these fees (which are paid by the transaction acquirer to the card issuer) must be at or below specified benchmarks on certain compliance dates. The benchmarks are currently 50 basis points for credit card transactions and 12 cents per transaction for Visa debit card transactions.[1] The benchmarks were unchanged in 2008/09.
This approach allows for significant variation of individual fees, provided that the weighted-average cap is met. Accordingly, MasterCard and Visa have set a variety of fees based on factors such as: the type of credit card account (consumer, commercial, premium); the type of merchant (government, charity, petroleum, high volume); the type of card (chip-enabled); and the type of transaction (card present/not present, micropayments) (Table 4). The regulatory arrangements required no change in interchange fees by the schemes during 2008/09 and none were made.
Interchange fees in the EFTPOS system are also regulated by the Reserve Bank. These fees (which are bilaterally negotiated and are paid by the card issuer to the transaction acquirer) are required to be between 4 and 5 cents per purchase transaction. This range remained unchanged during 2008/09.
Merchant service fees
On average, the fee paid by merchants when accepting payments on MasterCard and Visa credit cards was unchanged in 2008/09. The average merchant service fee for purchases on these cards was 0.81 per cent in 2008/09, the same as the previous year but 0.58 percentage points lower than prior to the Reserve Bank's reforms (Graph 10). Likewise, the margin between merchant service fees and interchange fees on MasterCard and Visa transactions – which had contracted over recent years – remained stable in 2008/09.
The combined average merchant service fee for the American Express/Diners Club schemes continued to decline in 2008/09, falling by 0.1 percentage points to 2.04 per cent. These fees have fallen steadily since the implementation of the reforms and in June 2009 were around 0.43 percentage points lower than they were prior to the reforms.
The aggregate net savings to merchants over 2008/09 from declines in merchant fees across all four schemes since the reforms were introduced is estimated at $1.2 billion or around 74 cents for every credit or charge card purchase over the year.
Average merchant fees for EFTPOS transactions fell slightly over 2008/09 to 7.5 cents. Nevertheless, average EFTPOS merchant fees were 9 cents per transaction higher in June 2009 than they were prior to the reduction in interchange fees in 2006. As for credit cards, competition in acquiring has resulted in a reduction in the margin of EFTPOS merchant fees over interchange fees. Prior to the debit card reforms, the average merchant fee was around 18 cents higher than the interchange fee but this had declined to around 11 cents per transaction by the June quarter 2009. Over 2008/09 the margin fell by 1.1 cents.
Pricing to cardholders
The average annual fee for standard rewards and gold rewards credit cards issued by major banks remained unchanged in 2008/09 at $85 and $140 respectively. Annual fees have been steady for around three years.
In 2008/09, credit card rewards programs attached to MasterCard/Visa cards issued by the major banks required spending of around $17,000, on average, in order to obtain a $100 shopping voucher. This was a slight decline in the value of rewards points, from 0.60 per cent of spending in June 2008 to 0.59 per cent of spending in June 2009 (Table 5).
The benefit to the card holder as a proportion of spending does, however, vary somewhat across reward cards. For example, some issuers provide complementary three-party scheme cards to premium MasterCard/Visa credit card holders whereby cardholders can accrue rewards points more quickly if they use the three-party scheme card rather than a MasterCard/Visa card.
In addition, some large merchants have entered into co-branding arrangements with credit card issuers whereby cardholders earn more points per dollar spent for purchases made at the merchant partner. In contrast, in some rewards programs, cardholders accrue points more slowly, or not at all, for spending above a certain amount.
Credit card interest rates fell during 2008/09, by an average of 1.6 percentage points for standard credit cards and 0.7 percentage points for low-rate cards, to stand at 17.9 per cent and 11.95 per cent respectively at the end of June 2009 (Graph 11). These reductions, however, did not match the decrease in banks' funding costs over this period.
The pricing of EFTPOS transactions to customers is typically built into deposit account pricing and has not changed significantly over the past year. Debit card holders are usually charged a flat account-keeping fee of around $4 per month, for which they are entitled to an unlimited number of free electronic transactions, including EFTPOS, scheme debit, own ATM, BPAY and direct entry transactions.
One major pricing development during 2008/09 was the introduction of direct charging by ATM owners for ATM services and the accompanying abolition of ‘foreign fees’ which had traditionally been charged by financial institutions when customers used an ATM belonging to another network. This is discussed in more detail in the chapter, ‘Regulation of the Payments System’.
Surcharging
An important element of the Bank's reforms to card payment systems was the removal of the ‘no surcharge’ rules that had previously been imposed on merchants by the international card schemes. Under these rules, merchants were unable to pass on the costs of accepting these cards to cardholders. Following the removal of these rules on 1 January 2003, merchants could choose to surcharge for transactions, allowing them to better signal the relative costs of different payment methods, while also providing them with more ability to exert competitive pressure on interchange fees.
Data from East & Partners' half-yearly survey of the merchant acquiring business show that there has been strong growth in surcharging by merchants over recent years, although the majority of merchants still do not surcharge. In June 2009, just over one-third of very large merchants (those merchants with annual turnover exceeding $340 million) imposed a surcharge on at least one of the credit cards they accepted (Graph 12). The rate of surcharging among smaller merchants has also risen noticeably over the past several years, although it is still around half the rate of larger merchants.
Data on merchants' plans to surcharge suggest that strong growth in surcharging will continue. As at June 2009, only 6 per cent of very large merchants surveyed had no plans to surcharge in the near future, down from 46 per cent four years ago (Graph 13). Even among very small merchants, less than 30 per cent have no plans to surcharge – down from over 83 per cent in June 2005.
While there are no restrictions on the level of surcharges that can be applied, on average they have broadly reflected the relative merchant service fees of the schemes. According to the East & Partners' survey, surcharges on MasterCard and Visa cards have been around 1 per cent on average, and those on American Express and Diners Club cards have been around 2 per cent on average over the past few years.
Fraud
While fraud rates in Australia have remained relatively low by international standards, they have risen in recent years. The most recent data show that payments fraud rose to 8.2 cents for every $1,000 of payments in the year to December 2008, from 6.3 cents in the preceding year.
Credit and charge card fraud continued to be the most significant and fastest growing component of payments fraud in Australia (Graph 14). In the year to December 2008, the rate of fraud on credit and charge cards increased by 19 per cent, from 45 cents to 53 cents in every $1,000 of credit and charge card payments. The fraud rate on debit cards fell from 7.2 cents to 6.6 cents, while for cheques, fraud rates remained at less than 1 cent per $1,000. The weighted-average fraud rate for debit and credit cards together was 32 cents in every $1,000 transacted during 2008, up from 28 cents in 2007.
The two largest components of credit and charge card fraud are card-not-present (CNP) fraud and counterfeit or skimming fraud. CNP fraud typically involves the theft of genuine card details which are then used to make a purchase over the internet, by phone, or by mail order. This type of fraud increased by 33 per cent in 2008, and accounted for nearly half of the total value of credit and charge card fraud (Graph 15).
Counterfeit/skimming fraud typically involves the creation of a fake card using compromised details from the magnetic stripe of a genuine card. This was the second most common type of card fraud in 2008, accounting for one-third of the value of all credit and charge card fraud. As the industry moves to chip technology for credit and charge cards, this particular type of fraud is expected to abate somewhat, particularly if combined with compulsory use of Personal Identification Numbers (PINs).
Footnote
MasterCard has undertaken to voluntarily comply with the Visa Debit benchmark. [1]