Interest And Penalty Fees Revenue

The RBA publishes a veritable welter of financial statistics on many financial instruments. Relying on RBA Excel file c01hist.xlsx Philip Johnston created adjoining worksheets 'CreditCardsSummayData' and 'KeyCreditCardStats'. He estimates that aggregate interest levied on Credit Cards in Australia upon Revolvers during the year ended 30 Sept 2022 was $3.889 billion circa based on an average interest rate of 21.5%.

Until the ABA's 'Banking Code of Practice' (implement by 1 July 2019), Interest Income was materially boosted due to the practice of Credit Card Issuers -

The User Pays Principle which is applies in over 95% of the range/scope of financial transactions in Australia (eg. filling up the tank with petrol, going to the movies, buying a case of beer, paying the electricity bill, catching the bus to work, paying the rent or mortgage repayment) is non-existent when enjoying a Line Of Credit with a Credit Card/s. As evidenced below, Net Interchange Fee income is immaterial to the P&L of a Credit Card Issuers.

The above 'pie chart' (on RHS) appears in a journal report titled "Who Pays for Credit Cards?" dated 2001 which displays a break-up of Card Issuers' Revenues for the aggregate of Visa, MasterCard and Discover cards in the USA. It shows that net U.S. Interest Revenues of 75% and associated Penalty Fees Revenue (Late Payment Fees and Overlimit Fees) of 6.3% and Cash Advance Fees of 5.4% aggregate to 86.7% of U.S. Card Issuers' Annual Revenue. Interchange Fees charged to the Merchant are only 10.7%.

2.9 While the RBA advised that about 75 to 80 per cent of credit card transactions do not accrue interest, about 65 per cent of the total quantum of credit card debt (or, as noted above, $33.1 billion) is accruing interest. To clarify, interest paying cardholders 'account for about 30–40 per cent of accounts, about 20–25 per cent of transactions, but close to two-thirds of the outstanding stock of debt'.9
2.10 The RBA observed that the proportion of credit card debt balances accruing interest has fallen from around 75 per cent to 65 per cent since 2012. Balances accruing interest have also fallen in absolute terms since peaking in late 2011 (as shown in Figure 1 above). The RBA suggested the decline 'possibly reflects a range of factors such as changes in consumers' financial behaviour, government reforms that took effect in 2012 relating to repayments and limit increase arrangements, and possibly also the effect of competition for balance-transfer offers'.10 Similarly, the CBA suggested the trend might be attributed to 'higher customer repayment rates and aggressive zero per cent balance transfer offers'.11
2.12 While the use of credit cards grew strongly through the 1990s and early 2000s, since 2004–05 spending on debit cards has grown more strongly than on credit cards.13 The RBA suggested that this trend: …is likely mostly a reflection of broader macroeconomic trends, as the period to the mid-2000s was one where the ratio of household debt (especially for housing) to income grew significantly and where the household saving rate was falling. By contrast, the period since the mid2000s has seen a broad stabilisation in the household debt ratio, a recovery in the saving rate and more conservative trends in card use and debt.14 2.13 The ABA pointed to similar trends in how Australians were using their credit cards. It noted that while the overall value of credit card transactions is currently growing at around 4 to 5 per cent a year, over the past decade repayments on credit cards, excluding interest, have exceeded new transactions: Over the year ending May 2015, repayments exceeded the value of transactions by $8 billion; the value of transactions on credit cards was $293 billion and repayments were $301 billion.15 2.14 Whereas the RBA referred to recent declines in the amount of credit card debt accruing interest and the proportion of credit card debt to overall household debt, a joint submission from the Financial Rights Legal Centre and Consumer Action Law Centre highlighted higher levels of credit card indebtedness in the past decade: Australian credit card debt is continuing to grow rapidly, in line with a huge growth in household debt. The majority of Australian households now have a net credit card debt. Statistics released by the Reserve Bank of Australia show that as at May 2015 there were 16 million credit cards with outstanding balances of $51.2 billion. Almost 64% of outstanding balances, or $32.6 billion, was accruing interest. This represents an incredible 47.3% increase in balances accruing interest over the past 10 years. These statistics correspond with the huge increase in household debt. Since March 1977, we have seen the percentage of household debt to disposable income increase from nearly 40% to over 140%.16
'Revolvers' and 'Transactors' 2.15 Industry and regulatory analysts commonly categorise cardholders as 'Revolvers' and 'Transactors'. Revolvers typically pay interest on their balances (as they carry forward, or 'revolve', card balances over time), whereas Transactors typically pay off their balance in full and thereby avoid paying interest on their balances. According to the RBA, revolvers are more likely to hold lower-rate cards than Transactors, and Transactors are more likely to hold higher-rate rewards cards.17 2.16 The RBA advised that the proportion of revolvers is higher among low income households and when high-income households do fall into the revolver category, they are more likely to be 'occasional revolvers' as opposed to 'persistent revolvers'.18 2.17 Drawing on data from the household, income and labour dynamics survey in Australia (HILDA), Treasury also noted that low-income households have more credit card debt relative to their incomes and pay more in credit card interest relative to their incomes than high-income households (although higher income households pay more interest in absolute terms). HILDA data similarly shows that low net worth households pay higher proportions of interest relative to their income.19 Summarising the data in its submission, Treasury advised that low income households: …would be more likely to be paying the high interest rates charged on credit cards and be more likely to be subject to high additional fees and charges. In particular, they will be more affected by the practice of backdating interest charges when cardholders fail to pay off their full balance at the end of each billing cycle.20 2.18 The committee also received evidence suggesting that people on low incomes, including many disadvantaged and vulnerable people, are more likely to use credit cards for cash advances.21 In addition to generally being subject to specific fees, cash advances are not eligible for any interest free period and typically attract an even higher rate of interest than the ongoing purchase rate on a credit card. 2.19 The RBA's 2013 Consumer Use Survey showed that 73 per cent of cardholders participating in the survey typically pay off their account in full within the interest free period, implying that 27 per cent typically do not. Industry estimates suggest the proportion of cardholders who typically pay interest is slightly higher, at between 30 and 40 per cent. The RBA ventured that the gap between its survey results and industry data may reflect hoped-for, rather than actual behaviour on the part of consumers. 22 2.20 A similar point was made in a joint submission by the Consumer Action Law Centre and Financial Rights Legal Centre. They referred to a recent ANZ financial literacy survey which found that 65 per cent of cardholders claimed they had always paid their main card balance in full over the last 12 months: However, the proportion of credit card balances accruing interest indicates this figure is overly optimistic. A significant number of consumers are actually 'revolvers': consumers who pay minimum monthly repayments or a fraction of the outstanding balance and incur high interest rate charges— around two thirds of outstanding balances actually attract interest. This tendency towards identifying oneself as a transactor, when in fact you are a revolver, is a basic behavioural bias. Consumers tend to underestimate or are blind to factors that can impede repayment of their credit card balances. People are overly optimistic and have other biases in assessing risk, meaning they are overconfident when it comes to estimating the amount of debt they will incur.23

Each month, cardholders receive statements of their use of credit for transactions over the previous month. For a cardholder who has paid off their previous balance in full, credit cards typically offer an interest-free period of up to 55 days on new transactions, given that the cardholder typically has about 25 days following the end of the statement period to repay the statement balance. If the balance is not paid off in full, interest becomes due from the date of each transaction (and the cardholder will not benefit from an interest-free period the following month).

In the June quarter of 2015, new credit card transactions averaged around $24 billion per month. At the end of June, the total level of credit card debt was $51.5 billion (Graph 11). Of this amount, $33.1 billion, or around 65 per cent was bearing interest. A simple calculation would suggest that around 75-80 per cent of transactions on credit cards do not accrue interest. That is, interest-paying ‘revolvers’ account for about 30-40 per cent of accounts, about 20-25 per cent of transactions, but close to two-thirds of the outstanding stock of debt.9

The proportion of the stock of debt that accrues interest has fallen from around three-quarters of balances in 2012. Balances accruing interest have also fallen in absolute terms after peaking in late 2011 (Graph 11). This decline possibly reflects a range of factors such as changes in consumers’ financial behaviour, government reforms in 2012 relating to repayments and limit increase arrangements, and possibly also the effect of competition for balance-transfer offers.

9 The Bank does not have data on the distribution of account balances. However, the average balance across all 16 million accounts is around $3 200. On the assumption that around 30 to 40 per cent of all accounts accrue interest, the average balance outstanding on those accounts would be around $5 000 to $7 000, and the implied average balance for those accounts that do not accrue interest would be around $1 600 to $1 900.

More broadly, credit card debt has represented a declining share of household borrowing over the past decade. Credit card debt peaked as a share of household debt at around 4½ per cent in 2001 but now represents a little below 3 per cent of household debt. While the ratio of overall household debt to income has been relatively steady over the past decade, the ratio of credit card debt to household income has declined (Graph 12). The decreased share of credit card debt may partly reflect the high cost of credit cards relative to mortgage interest rates and the increasing ability of households to use mortgage offset and redraw facilities as a source of low-cost funds. These products have become increasingly common over the past decade or two, with most loans now including such a facility (see RBA (2015b)). The amount available under these facilities has grown from less than 10 per cent of household income in early 2008 to over 20 per cent of household income (or around $220 billion) in mid 2015.