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

The Credit Card Market

Credit card issuing

Credit cards (and charge cards) are cards offering payments functionality and linked to a line of credit. They are typically issued by banks and other financial institutions, linking to the cardholder's credit account, and provide access to a particular payment network, the two largest being Visa and MasterCard. Cards accessing the American Express or Diners Club networks can be issued either by those networks or banks.

There are few regulatory barriers to entry in this market. In the early 2000s, the Reserve Bank identified some restrictions on participation imposed by the credit card systems that unnecessarily inhibited competition and could not be justified as protecting the safety of the system. The PSB therefore established Access Regimes for the systems which required that a new class of financial institutions, specialist credit card institutions (SCCIs), were eligible to apply for membership in the schemes on the same basis as other authorised deposit-taking institutions (ADIs; banks, credit unions and others). More recently, however, the Bank judged that the Access Regimes for the MasterCard and Visa systems were no longer necessary, given the change in the ownership structures of the schemes (from member associations to listed companies) and the interest shown by some niche players, which might not warrant full prudential regulation, in seeking access to the card systems. Accordingly, the Access Regimes applying to the MasterCard and Visa systems were varied effective January 2015, along with corresponding changes to the Banking Regulations. The changes are deregulatory in nature, giving the card systems greater flexibility to expand membership beyond existing participants. Following changes to Access Regimes, MasterCard and Visa have published assessment criteria on their websites for potential applicants seeking access to their respective systems, as required under the varied regimes. They are also required to report annually to the Bank on applications to participate, new participants accepted and the reasons for any rejections. Although the revised Access Regimes have only been operating for just over half a year, the indications are that the expanded scope for new participants in the schemes appears to be working, with a number of new participants admitted or progressing applications.

Issuers compete strongly for cardholders in many respects. There is a wide range of cards, issued by a broad range of financial institutions. The Bank's Retail Payments Statistics collection gathers data on credit card accounts and transactions from 25 issuers. As in many aspects of the financial system, the four largest banks are the major players in the market; cards issued by the four majors accounted for around three-quarters of credit card transactions in 2014/15. Alongside the major banks, there are a range of regional and foreign banks providing card products, as well as issuers serving the credit union and building society sector, and some specialist issuers. The product mixes of the small issuers contain a higher proportion of lower-rate and low-fee cards than those of the major banks.

There are few formal impediments for cardholders contemplating switching between institutions. Indeed, there are numerous websites which allow cardholders to compare product features, introductory offers, interest rates and annual fees across a range of credit cards available on the market. Customers must, however, undergo credit approval from a new issuer, which may be a barrier for some to switching between banks. In addition, cardholders may sometimes experience difficulties in cancelling or modifying some types of periodic or recurring payments that are debited from their credit card account. These difficulties can arise when a merchant does not act on a cardholder's instruction to cancel a recurring payment, or when the cardholder closes their account but does not take steps to cancel such payments.^[1]

The strong competition for customers is shown in the existence of a range of offers that waive annual fees for the first year or give sign-on bonuses in the form of frequent flyer points. Most notably, many credit card issuers offer a zero per cent interest rate (or a significantly reduced interest rate) for balance transfers from other institutions; these apply for a defined period of time, after which outstanding amounts attract the higher, ongoing rate. The Bank monitors advertised features of around 95 consumer credit cards. As of January, around 70 of these credit cards had some form of active balance transfer offer, with periods ranging from 4 to 24 months.^[2]

Credit card issuers earn revenue on their credit card portfolios from three major sources:

• Fees: including annual fees, over-limit fees, cash-advance fees, foreign currency conversion fees and late payment fees. Data collected by the Bank for 2014 estimate these at around $1.4 billion, or about $90 per account.
• Interchange revenues from transactions on MasterCard and Visa credit cards (and issuer fees from American Express ‘companion’ card transactions): based on incomplete data, the Bank estimates these at around $1½–1¾ billion in 2014. These are discussed below in Box B.
• Interest payments: Data reported to APRA put these at around $5.4 billion in 2014 for banks. These are discussed further below (see page 17).

The Bank undertakes an annual survey of advertised (ongoing) annual fees for a selection of credit cards (Graph 1). Advertised annual fees appear to have risen somewhat around the time of the Bank's initial payments reforms (see Box A below), but in recent years have been reasonably stable in nominal terms (and have thus tended to decline in real terms). Care should be taken with these data however as there are no data on annual fees actually paid by cardholders. Some cardholders will not pay an annual fee if they have chosen to hold a zero-fee card, if they have an initial no-annual-fee offer, or if they have had their fees waived as part of broader banking package they hold with their bank. In addition, the benefits associated with particular types of cards may have changed, so the time-series of fees may not be entirely comparable across different periods. Individual financial institutions would be able to provide more detailed information on the actual average annual fees paid by cardholders.

Credit card holders

There are around 16 million credit and charge accounts in Australia. While almost all Australian adults have transaction accounts that can be accessed with a debit card, the proportion with credit cards is somewhat smaller. Of the 1,167 consumers that participated in the Bank's 2013 Consumer Use Survey (see Ossolinski, Lam and Emery (2014)), 97 per cent held a debit card while 59 per cent held a credit card.

Over the past decade and a half, a broader range of credit card products has become available. At the broadest level, cardholders can choose between holding credit cards that offer no rewards (now including ‘lower-rate’ and ‘low-fee’ cards) and cards with programs offering varying levels of rewards (cards offering more substantial rewards generally command higher annual fees). Consumers who use their credit card relatively frequently may be attracted to cards offering rewards points and other benefits such as travel insurance and enhanced warranties for goods purchased on the card. Low-fee cards may be more attractive to cardholders who use their credit card relatively infrequently and typically pay their credit card balance in full within the interest-free period. For cardholders who carry outstanding balances outside of the interest-free period, lower-rate cards tend to be more attractive as the average interest rate on these cards is around 6½ percentage points lower than the interest rate on rewards cards.

The Bank's 2013 Consumer Use Survey provides some evidence as to the card choices that individuals make. Whereas there is little variation in holdings of debit cards by income level, the survey shows that credit cards are more widely held by higher-income individuals (Graph 2). Furthermore, those in the highest income quartile are far more likely to hold a premium-status card than those in the lowest quartile.^[3] Cardholders that identify as ‘revolvers’ (i.e. who pay interest on balances) are more likely to hold a lower-rate card than ‘transactors’ (who typically pay off their balance in full), while transactors are more likely to hold rewards cards (Graph 3).

Footnotes

See, for example, Consumer Action Law Centre and Financial Rights Legal Centre Inc (2015). [1]

The interest-free transfer offer typically applies only to the balance transferred from another bank; any new purchases immediately attract interest. Although the Bank monitors features of card products, it does not receive data on the actual value of balances transferred. [2]

If ‘gold’ cards are treated as having premium status, the fourth quartile (that is, the highest-income quartile) is six times more likely to hold a ‘premium’ card than the first quartile; including only ‘platinum’ and ‘super-premium’ products, holdings of the fourth quartile are 10 times larger. [3]