Submission to the Senate Inquiry into Matters Relating to Credit Card Interest Rates

Introduction

Credit cards offer two separate – albeit interrelated – functions, a payments function and a credit function. The Reserve Bank's primary responsibilities with respect to credit cards relate to the payments function of such cards. In particular, the Reserve Bank's Payments System Board (PSB) has an obligation to promote the efficiency of the payments system and promote competition in the market for payment services, consistent with the overall stability of the financial system. Accordingly, the Bank's work on credit cards over the past decade and a half has focused on the role of credit cards in the payments system. As part of its work, the Bank collects and publishes data on credit and debit cards as well as other payment methods. This submission focuses on various aspects of the payments function of credit cards and the data on credit cards collected to support this work.

The Bank has also addressed issues with respect to the ATM system as part of its mandate for competition and efficiency in the payments system. Accordingly, the submission also provides some information on the ATM system, including data from a survey conducted in recent weeks for the benefit of the Inquiry.

The major points include:

• There are a wide range of card products and issuers in the Australian credit card market, and while ‘standard’ interest rates on credit cards tend to be very high, lower-rate cards are widely available, as are balance-transfer arrangements where issuers offer zero or low interest rates for a defined period of time.
• In addition, many credit card holders take advantage of interest-free periods such that they do not pay interest on their card balances.
• While the Bank's payments system reforms have reduced the incentive for consumers to use credit cards over debit cards, the existence of interest-free periods and rewards programs on credit cards still provide an incentive for credit card use for many consumers.
• The proportion of the stock of credit card debt that accrues interest has been falling in recent years. In addition, credit card debt has fallen as a share of all household debt over the past decade.
• The limited data available suggest that loss rates on the credit card portfolios of major banks are currently around 2½ per cent.
• Advertised rates on standard and lower-rate cards have been quite sticky in recent years, despite significant falls in funding costs. Spreads on advertised credit card interest rates over funding costs increased during the global financial crisis and have remained at that level or drifted modestly higher since then. Available estimates suggest that the spread on the full credit card portfolios of the major banks was around 9 per cent in early 2015, implying a spread on the interest-bearing component of about 14¾ per cent.
• The 2009 ATM reforms have seen non-transparent fee arrangements replaced by arrangements that are transparent to the cardholder and which have enabled ATMs to be installed in a range of locations where previously cardholders did not have access to cash. The vast majority of Australians have access to a wide network of fee-free ATMs and around 80 per cent of cash withdrawals (including eftpos cash-outs) do not attract a fee.
• Data from a new survey by the Reserve Bank indicate that ATM direct charges have increased at a similar rate to consumer prices since the reforms were introduced, with charges at independently owned ATMs increasing by more than those at ATMs owned by financial institutions. However, both the proportion and absolute number of ATM transactions on which a fee is paid have declined in recent years, with cardholders in total paying around $60 million less in withdrawal fees in 2014/15 than in 2010.