Interest rates and informed choice in the Australian credit card market - December 2015

The Senate - Economics References Committee  © Commonwealth of Australia 2015    ISBN 978-1-76010-340-8

Senator Chris Ketter (Chair from 22 October 2015) Queensland, ALP

Senator Sean Edwards (Deputy Chair) South Australia, LP

Senator Sam Dastyari (Chair to 22 October 2015) New South Wales, ALP

Senator Matthew Canavan Queensland, NATS

Senator Jenny McAllister New South Wales, ALP

Senator Nick Xenophon South Australia, IND

Dr Kathleen Dermody, Secretary

Dr Sean Turner, Principal Research Officer

Ms Ashlee Hill, Administrative Officer (until 24 September 2015)

Ms Sarah Batts, Administrative Officer (from 25 September 2015)

PO Box 6100

Parliament House

Canberra ACT 2600

Ph: 02 6277 3540

Fax: 02 6277 5719

E-mail: economics.sen@aph.gov.au

Internet: www.aph.gov.au/senate_economics 

"My personal view is that it is an issue well worth further and deeper investigation and consideration. I am driven partly by the fact that it does seem that the people who pay these credit-card interest rates—those who do not fully pay off the amounts—tend to be people, perhaps, less capable of servicing that debt, and that worries me. I think it is something well worth considering, and we will give some further thought to it.1 "

1.7 During the same Senate Estimates hearings, officials from the Reserve Bank of Australia (RBA) were also asked about the 'stickiness' of credit card interest rates ('stickiness' meaning that credit card interest rates had not fallen in line with the fall in the RBA cash rate in recent years). Dr Malcolm Edey, RBA Assistant Governor (Financial Systems), noted that there were several factors that might help explain why credit card interest rates had not responded to a falling cash rate, including higher costs of funding (independent of the cash rate) and a repricing of risk in the post-Global Financial Crisis (GFC) period. However, Dr Edey acknowledged that the 'gap seems high and it is hard to explain why it is as large as it is'.2

1.8 Dr Edey quite rightly made the point that Australia does not regulate interest rates, and, as such, there is no interest rate regulator. He told the committee that Australia does have 'an ACCC [Australian Competition and Consumer Commission] that can investigate uncompetitive conduct if they see it, but they clearly have not seen it in this market'.3  It was put to Dr Edey that the issue was not so much whether there was uncompetitive conduct in the market, but whether regulatory settings were conducive to the promotion of sufficient competition to put downward pressure on credit card interest rates.4 In part, the committee's inquiry has been directed at understanding whether existing regulatory settings in relation to credit cards are appropriate in this respect. More broadly, the committee has sought to determine what might be done to improve competition in the credit card market or otherwise put downward pressure on credit card interest rates.

3 Dr Malcolm Edey, Assistant Governor, Financial Systems, Reserve Bank of Australia, Official Committee Hansard, 1 June 2015, p. 67.

4 Acting Chair (Senator Dastyari), Official Committee Hansard, 1 June 2015, pp. 67–68.

2.4 In recent decades, credit cards have grown to become a critical component of the Australian payments system. There are currently around 16 million credit cards on issue in Australia, and approximately 40 per cent of Australian adults have at least one credit card.1 There are also a large number of credit card providers and products available to Australian consumers: according to CANSTAR data cited by Westpac, as at July 2015, there were at least 83 institutions offering 266 credit card products.2

2.5 Credit cards and debit cards account for approximately two-thirds of non-cash transactions in Australia (although only about 3 per cent of the value of total transactions, with high-value non-cash transactions typically using payment methods such as electronic funds transfer). In 2014–15, Australians made 2.2 billion credit card payments, with a total value of $285 billion. According to the RBA, in the June quarter of 2015 new credit card transactions averaged around $24 billion per month. At the end of June 2015, the total quantum of outstanding credit card debt was $51.5 billion. Of this total, $33.1 billion was accruing interest.3   Bullshit

1 Australian Bankers' Association, Submission 15, pp. 1, 5.

2 Westpac, Submission 21, p. 3; Australian Bankers' Association, Submission 15, p. 1.

3 Reserve Bank of Australia, Submission 20, p. 5.

2.6 Credit cards comprise a small and (as discussed further below) declining proportion of total household borrowings, at about 2 per cent according to the Australian Bankers' Association (ABA), or a little under 3 per cent according to the RBA.4 However, according to the ABA, 'this metric tends to underplay the importance of credit cards in household finances because they are a revolving credit facility with loans generally taken for short periods, partly or totally repaid, and then drawn again'.5 In this sense, credit cards provide revolving credit facilities which can play an important role in helping households manage cash flows.6

4 Australian Bankers' Association, Submission 15, p. 4; Reserve Bank of Australia, Submission 20, p. 16.

5 Australian Bankers' Association, Submission 15, p. 4.

6 Australian Bankers' Association, Submission 15, p. 1.

7 See, for example, Australian Retailers Association, Submission 6, p. 2; Australian Bankers' Association, Submission 15, p. 2.

8 Australian Securities and Investments Commission, Submission 16, p. 7.

9 Reserve Bank of Australia, Submission 20, p. 15.

[Credit cards] have reduced the risk for merchants having to keep large amounts of money on the premises and made the point of sale experience faster and easier. Before credit cards, many retailers held accounts for customers (where they could take their goods and pay for them at a later date) for several weeks, thus accepting and carrying the risk of not being paid for the duration—and in some cases, not being paid at all. With the use of credit cards, retailers are paid overnight and do not have to worry about credit losses.7

2.8 Typically, interest on credit card debt is only applied if a cardholder does not pay their balance in full at the end of the one-month statement period. As cardholders generally have about 14 to 25 days to pay their monthly balance, this means there is usually an interest fee period of up to 44 to 55 days, or thereabouts. If a balance from a statement period is not paid off in full, then interest will be applied to the outstanding balance, and any transactions made since the end of the statement period will also attract interest from the date of transaction.8

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). 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

10 Reserve Bank of Australia, Submission 20, p. 15.

11 Commonwealth Bank of Australia, Submission 23, p. 5.

Source: Reserve Bank of Australia, Submission 20, p. 15.

2.11 Credit card debt has also declined as a proportion of overall household debt in the past decade, from about 4.5 per cent in 2001 to a little below 3 per cent now. It is important to note that while the ratio of household debt to income has remained relatively stable over this period, the ratio of credit card debt to household debt has declined. The RBA observed that this trend might reflect the increasing availability and use of mortgage offset and redraw facilities (mortgage interest rates being lower than credit card interest rates).12

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:

12 Reserve Bank of Australia, Submission 20, p. 16.

13 Reserve Bank of Australia, Submission 20, p. 5.

14 Reserve Bank of Australia, Submission 20, pp. 5–6.

15 Australian Bankers' Association, Submission 15, p. 3.

16 Consumer Action Law Centre and Financial Rights Legal Centre, Submission 13, p. 4.

…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 mid-2000s 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

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

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

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:

17 Reserve Bank of Australia, Submission 20, p. 5.

18 Reserve Bank of Australia, Submission 20, p. 6.

19 Treasury, Submission 17, p. 2.

20 Treasury, Submission 17, p. 3.

21 For example, see Good Shepherd Australia New Zealand, Submission 5, p. 5.

…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

22 Reserve Bank of Australia, Submission 20, p. 6.

23 Consumer Action Law Centre and Financial Rights Legal Centre, Submission 13, pp. 4–5.

24 Westpac, Submission 21, p. 3. These figures do tend to fluctuate from month to month. The ABA cites CANSTAR data from June 2015 showing at least 67 providers (32 banks, and 35 other institutions) offering at least 193 credit card products. Australian Bankers' Association, Submission 15, p. 6. The change is perhaps indicative of both the fluidity of the market and the difficulty in precisely measuring the number of providers and products available at any point in time.

25 Australian Bankers' Association, Submission 15, p. 4.

26 Westpac, Submission 21, p. 1.

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

2.21 As noted above, there are currently over 80 institutions offering more than 250 credit card products in Australia. CANSTAR data provided to the committee by Westpac showed that of the 83 institutions offering credit cards in July 2015, 30 were banks, 45 were credit unions and building societies and 8 were not Authorised Deposit-taking Institutions (ADIs).24 The number of providers operating in the market obscures the fact that the Australian credit card market is dominated by banks, and in particular the four 'majors' (the CBA, Westpac, ANZ and NAB, and their subsidiaries). The ABA informed the committee that banks provide approximately 88 per cent of credit cards on issue in Australia, and account for approximately 81 per cent of balances outstanding.25 The four majors alone account for about 68 per cent of balances outstanding.26

2.22 As Treasury noted, while the four major banks' share of the credit card market is high, this reflects the 'concentration of the Australian banking system more generally rather than being a unique feature of the credit card market'.27 It can also be noted that the majors' 68 per cent share of balances outstanding has fallen slightly over the past decade (from around 74 per cent in 2004, although it has increased from about 66 per cent immediately prior to the GFC) and is lower than the major banks' share of household deposits, which stands at just over 81 per cent.28

2.23 It is also important to state that neither Visa nor MasterCard, the two most widely used credit card brands, actually issue any credit cards themselves. Rather, they are both operators of payment networks that are utilised by banks and other providers of credit cards. As such, Visa and MasterCard do not have any role in determining credit card interest rates (or indeed any other aspect of credit card pricing), and do not receive any revenue from interest payments.29

27 Treasury, Submission 17, p. 4.

28 Westpac, Submission 21, p. 1.

29 MasterCard, Submisson 2, p. 1; CANSTAR, webpage, 'Visa or MasterCard: what's the difference?' http://www.canstar.com.au/credit-cards/visa-or-mastercard/, accessed 30 November 2015.

30 Nicole Pedersen-McKinnon, 'Big bank sentence? 18 years card-labour', Canberra Times, 22 August 2015, http://www.canberratimes.com.au/money/borrowing/big-bank-sentence-18-years-cardlabour-20150819-gj2xo3.html.

31 Australian Bankers' Association, Submission 15, p. 11.

2.25 Interest charged on credit cards varies widely depending on the type of card and provider. According to an August 2015 search of comparison website Mozo, there is a 15.5 per cent gap between the lowest rate card, a Quay Credit Union Visa Credit Card with an ongoing purchase rate of 7.99 per cent, and the highest rate card, a GE Money MasterCard at 23.5 per cent.30

2.26 While there are a range of credit cards available offering a variety of rate features and pricing structures, cards on issue can be broadly categorised as either 'low-rate', 'low-fee' or 'rewards'. With respect to interest rates, the RBA maintains and publishes two data series: one on 'standard' cards, a category that most reward and many low-fee cards fall into, and which commenced in January 1990; and the other on low-rate cards, commencing in November 2003.31 The RBA explained in its submission that while there is a wide variation in the advertised interest rates for credit cards, standard cards currently tend to bunch around the 20 per cent mark, while lower-rate cards bunch around 13 per cent.32

2.27 As Treasury confirmed in its submission, while the RBA cash rate has declined by 2.75 percentage points since late 2011, credit card interest rates have remained essentially unchanged over the same period (see Figure 2).33 According to consumer advocacy group CHOICE, if credit card rates had moved at the same rate as the cash rate over that period, Australian credit card holders would have paid $2.07 billion less in interest since mid-2011.34

32 Reserve Bank of Australia, Submission 20, p. 10.

33 Treasury, Submission 17, p. 3.

34 CHOICE, Submission 10, p. 12.

35 Mr Stephen Henry Mickenbecker, Group Executive, Ratings and Financial Services, CANSTAR Pty Ltd, Proof Committee Hansard, 22 September 2015, pp. 32–33.

Source: Treasury, Submission 17, p. 3.

2.28 A document tabled by CANSTAR also shows that the gap between credit card interest rates and the RBA cash rate has grown considerably since 2007, although the gap has grown rather more slowly in the post-GFC environment. CANSTAR's document tracked the gap since 2007 between the official cash rate and three other measures of credit card interest rates: the average purchase rate, the minimum purchase rate, and the maximum purchase rate. The gap between the cash rate and each of these three measures has, according to CANSTAR's document, grown since 2007 (see Figure 3). As CANSTAR explained, whereas the gap between the average credit card purchase rate and the cash rate was 8 per cent in 2007, it currently stands at about 15 per cent. This was, CANSTAR suggested, 'an extraordinary blow-out'.35

2.29 The growth in the gap between the cash rate and headline credit card interest rates appears even more pronounced when annual fees are added to the interest rate. Mr Ross Greenwood, the Nine Network's Business and Finance Editor, tabled a document that annualised average fees into average credit card rates from a range of providers to a card with a $5000 balance. Using this approach, Mr Greenwood assessed the gap between the adjusted interest rate (the interest rate with the annual fee annualised into it) and the RBA cash rate. Mr Greenwood found that for cards provided by the major banks the gap had in effect blown out to between around 17 and 20 per cent (and higher still for Amex and Citibank). This compared, according to Mr Greenwood's analysis, to a gap for the same banks' card offerings that, using the same measure, was consistently around the 12 per cent mark in 1998.36

36 Document tabled by Mr Ross Greenwood, Channel 9, at a public hearing held in Sydney on 27 August 2015. For Mr Greenwood's explanation of his analysis, see Mr Ross Greenwood, Business and Finance Editor, Nine Network, Proof Committee Hansard, 27 August 2015, pp. 33–34.

2.30 It should be noted that average advertised interest rates do not fully reflect trends in interest actually paid by cardholders, at least in aggregate terms. Advertised rates do not, for instance, capture the effect of interest free periods or low or zero-interest balance transfer offers. According to the RBA, the effective interest rate received by the major banks on their entire credit card portfolios—actual interest earned as a proportion of balances outstanding—has fallen about 2 per cent since mid-2011, and is currently 11.6 per cent.37 As noted above, since the current easing cycle began in late 2011, the cash rate has fallen from 4.75 per cent to 2 per cent, suggesting that it has fallen a little more than effective interest rates on credit cards over the same period, but not dramatically so.

2.31 In seeking to understand interest rate spreads,38 it is also useful to look at the gap between effective interest rates and the weighted average of the interest rates paid on banks' sources of funds, as opposed to the gap between effective interest rates and the RBA cash rate. While funding costs have moved roughly in line with the RBA cash rate since the current easing cycle began, Treasury pointed out that funding costs 'have risen relative to the target cash rate since the financial crisis as banks switched to a greater proportion of (more expensive) deposit funding'.39 Treasury presented a comparison of funding costs and effective credit card interest rates since 2007 for the major banks (see Figure 4).

2.32 The abovementioned average effective interest rate of 11.6 per cent takes account of the banks' entire book of credit card loans, including debt that does not yield interest. The effective rate for cardholders who do pay interest ('revolvers') is around 17 per cent, which is down about 1 per cent since 2011 (see Figure 4). The RBA concluded:

37 Reserve Bank of Australia, Submission 20, pp. 17–18.

39 Treasury, Submission 17, p. 7.

40 Reserve Bank of Australia, Submission 20, p. 18.

Taken together, the recent changes in these two series [for the effective rate for credit card balances accruing interest, and the average rate on entire card portfolios] are consistent with the observed decline in the proportion of the stock of debt that is accruing interest (either reflecting more consumers paying down debt ahead of being charged interest, or reflecting an increase in the take up of zero and lower-rate balance transfers) and also some switching by consumers from high- to lower-rate cards.40

Source: Reserve Bank of Australia, Submission 20, p. 18.

Source: Treasury, Submission 17, p. 3.

Source: Reserve Bank of Australia, Submission 20, p. 19.

Kingdom 'suggest the dynamics for interest rates on credit cards in Australia are not out of line with international developments'.41 Similarly, the RBA noted that high-rate cards are not uncommon overseas, and that it was likely 'some of the same forces are at work' in those markets as in the Australian market.42

41 Australian Bankers' Association, Submission 15, p. 2.

42 Dr Malcolm Edey, Assistant Governor, Financial System, Reserve Bank of Australia, Proof Committee Hansard, 27 August 2015, p. 15.

43 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, p. 14.

44 Professor Abbas Valadkhani, Department of Accounting, Economics and Law, Swinburne University of Technology, Proof Committee Hansard, 3 September 2015, p. 28.

45 Australian Securities and Investments Commission, Submission 16, p. 2. Prior to the introduction of the responsible lending obligations on 1 July 2010, consumer credit was primarily regulated by the states and territories.

If you look at international experience, in the UK you will find credit card rates ranging from about seven to 30 per cent and in the US probably in the range of 11 to 30 per cent, despite their cash rates being effectively at zero. That supports the fact that credit card providers, not just domestically but internationally, are very cognisant of pricing for risk. Those markets have demonstrated that losses can be substantial in any given year, and our role is to price competitively and appropriately through the cycle.43

2.39 However, Professor Abbas Valadkhani claimed that the gap between the cash rate and credit card rates was substantially wider in Australia than in the United States and United Kingdom. He asserted that if credit card spreads in Australia were like those in the United States, Australians would be somewhere in the order of $840 million better off; and if spreads were the same as those in the UK market, Australians would be $2.2 billion better off.44

2.40 The National Consumer Credit Protection Act 2009 (National Credit Act) sets out responsible lending obligations which apply to all forms of regulated credit, including credit cards. ASIC has responsibility under the Act for administering the obligations.45

2.41 The responsible lending obligations require credit licensees to do certain things before providing a credit card to a consumer or increasing a cardholder's credit limit. As ASIC explained, these processes include making reasonable inquiries about a consumer's requirements and financial situation, taking reasonable steps to verify the consumer's financial situation, and making an assessment as to whether a credit contract is 'not unsuitable' for a consumer based on inquiries made.46

2.42 As ASIC noted, its primary guidance on responsible lending, including in relation to credit cards, is set out in Regulatory Guide 209, Credit licensing: Responsible lending conduct (RG 209). RG 209 also provides guidance to credit licensees on ASIC's interpretation of the responsible lending obligations.47

2.43 ASIC also administers obligations that are specific to credit cards and were introduced by the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 and associated regulations. These obligations are as follows:

• a requirement for card providers to send a 'key facts sheet' to new card applicants, setting out how minimum repayments are calculated, interest rates that apply, and interest-free periods and fees;

• a prohibition on unsolicited offers to increase card limits;

• restrictions on the ability of providers to charge fees or higher interest rates when a cardholder exceeds their credit limit;

• a requirement that repayments on credit cards must first be allocated towards those portions of a balance to which the highest interest rate applies (this applies to cards issued after 1 July 2012); and

• the inclusion of a minimum repayment warning on monthly credit card statements, highlighting the length of time it would take a cardholder to repay their balance if they only made the minimum payment.48

46 Australian Securities and Investments Commission, Submission 16, p. 3.

47 Australian Securities and Investments Commission, Submission 16, p. 5.

48 Australian Securities and Investments Commission, Submission 16, pp. 4–5.

For those with the most acute problems with credit card debt, the debt seriously harms their lives. It can cause, amongst other things, family breakdown, violence, crime and deterioration in health (including mental health). Significant credit card indebtedness can also have a long-term impact on the capacity to provide for housing, health, education and retirement.49

49 Consumer Action Law Centre and Financial Rights Legal Centre, Submission 13, p. 6.

50 St Vincent De Paul Society, Submission 4, p. 2.

51 Good Shepherd Australia New Zealand, Submission 5, p. 6.

52 Consumer Credit Legal Service (WA) Inc., Submission 12, pp. 3–5.

53 Financial Counselling Australia, Submission 25, pp. 8–9.

…borrowing money, selling items of value, taking out short-term pay day loans, and seeking the assistance of welfare services in addition to increasing the limit or taking out new credit cards when the offer is made available.50

2.47 A number of organisations relayed personal stories of hardship resulting from high-interest credit card debt. Good Shepherd Australia New Zealand told how one of their clients had not only been a victim of domestic violence but also financial abuse, and had incurred a large credit card debt as a result.51 The WA Consumer Credit Legal Service referred to a number of cases it had dealt with where, as a result of mental illness, family breakdown or other crises, a vulnerable individual had amassed a credit card debt that they had no prospect of ever repaying.52 Financial Counselling Australia (FCA) provided a number of examples which showed that people of all ages and from all walks of life could become trapped by credit card debt. For example, FCA told how a woman in her 30s had accrued a long-term credit card debt and now felt 'trapped, and unable to move forward with any financial plans until she had repaid this debt'. The FCA also explained how a 75 year old pensioner had used his credit card to supplement his income and avoid homelessness, but in the process had built a credit card debt so large that he struggled simply to pay the interest.53

3.1 As explained in the previous chapter, different measures of credit card interest rates offer different insights into whether those rates are fair and appropriate, or whether, as Mr David Koch put it, average Australians are getting 'fleeced at every step on the credit card journey'.1 During the inquiry, critics of card providers pointed to the 'stickiness' of headline (advertised) interest rates, arguing that for revolvers, this was the most meaningful measure of interest costs. Card providers, however, pointed to declines in the aggregate interest paid on their entire credit card portfolios (the 'effective' interest rate). This chapter outlines and assesses the relative merits of these different perspectives.

1 Mr David Koch, Finance Editor, Seven Network, Proof Committee Hansard, 27 August 2015, p. 34.

3.4 Two related measures of credit card interest rates (that often attract the most public scrutiny), are headline rates and the gap between average headline rates and the RBA cash rate. As noted in chapter two, headline interest rates on standard cards currently bunch around 20 per cent, while low-rate cards tend to be set at 13 per cent or thereabouts. The average headline rate—the effective rate for cardholders who are paying interest on their balances—is around 17 per cent. There is therefore a 15 per cent gap between the average headline rate on credit cards and the current RBA cash rate of 2 per cent. In 2007, the same gap was around 8 per cent.2

Interest rates in the order of 20 per cent on credit cards are not uncommon. The average rate for borrowers who incur interest on credit cards is currently about 17 per cent. Once you deduct from that banks' cost of funds and the cost of credit losses, that would equate to an interest margin of more than 10 percentage points.3

3 Dr Malcolm Edey, Assistant Governor, Financial System, Reserve Bank of Australia, Proof Committee Hansard, 27 August 2015, p. 10.

4 Abbas Valadkhani, Sajid Anwar and Amir Arjomandi, 'Downward stickiness of interest rates in the Australian credit card market', Journal of the Asia Pacific Economy 19(1) (2013), pp. 52–53; Professor Abbas Valadkhani, Department of Accounting, Economics and Law, Swinburne University of Technology, Proof Committee Hansard, 3 September 2015, p. 27.

5 Professor Abbas Valadkhani, Department of Accounting, Economics and Law, Swinburne University of Technology, Proof Committee Hansard, 3 September 2015, p. 30.

3.6 Professor Valadkhani provided the committee with research he had undertaken indicating that credit card providers appear to behave asymmetrically in response to changes in the RBA cash rate. According to Professor Valadkhani, between 1990 and 2012 the banks had immediately passed on 112 per cent of RBA cash rate increases (the full value of increases, plus 12 per cent), but only 53.7 per cent of rate cuts: but cuts were delayed by an average of two-and-a-half months. Professor Valadkhani has suggested this asymmetry is an example of the 'rockets-and-feathers' effect: credit card interest rates 'shoot up like a rocket' in response to RBA cash rate increases, but 'float down like feather' when the cash rate is decreased.4 This means that over time the gap between the RBA cash rate and credit card interest rates has grown, and consumers have been left paying higher rates of interest overall.

We do not have enough information about what their funding sources are. The argument they always make is: 'We cannot pass rate cuts on because our sources of funding are different—it is not just the cash rate; it is our external sources.' My argument to banks is: if that is the case, how come, when the cash rate goes up, you immediately lift your rates? You may have other external sources that are not related to the cash rate, but you increase your rates anyway. When the cash rate goes down, though, you resort to the argument of external sources.5

…if you must have a credit card and you are on a low income that means you cannot pay off your balance every month, a low-rate card is the best option. So to see banks taking advantage of drops in interest rates to dip their hands deeper into the pockets of low-income consumers is of deep concern.6

6 Mr Alan Kirkland, Chief Executive Officer, CHOICE, Proof Committee Hansard, 27 August 2015, p. 51.

7 Ms Erin Turner, Campaigns Manager, CHOICE, Proof Committee Hansard, 27 August 2015, p. 53.

8 Mr Michael Willcock, Acting Deputy Secretary, Markets Group, Department of the Treasury, Proof Committee Hansard, 22 September 2015, p. 55.

9 Mr John Yardley, Chief Operating Officer, Bank Australia, Proof Committee Hansard, 3 September 2015, p. 20.

3.9 An important finding of this inquiry is that consumers do not appear as focused on the interest rates on credit cards as they are for other lending products (such as personal or home loans). In fact, CHOICE told the committee that its consumer survey suggested that 64 per cent of people do not even know their credit card interest rate, up from 48 per cent in 2013, suggesting a 'growing problem'.7

The spread appears not to just reflect pricing of credit risk or non-performing loans and funding costs. Rather, the spread seems to incorporate as well a premium reflecting consumer inattention to headline rates.8

3.11 Bank Australia made a similar point, telling the committee that the spread likely reflected the fact that people are 'not terribly rate sensitive' when they choose a card, because they expect to pay off the card balance in full each month. In this sense, the spread was as large as it could be without affecting the market's ability to sell credit card products.9 Likewise, Mr Greenwood remarked that consumer inertia reduced the need for card providers to lower their average rates:

10 Mr Ross Greenwood, Business and Finance Editor, Nine Network, Proof Committee Hansard, 27 August 2015, p. 42.

11 Australian Securities and Investments Commission, Submission 16, p. 10.

12 Mr Stephen Henry Mickenbecker, Group Executive, Ratings and Financial Services, CANSTAR Pty Ltd, Proof Committee Hansard, 22 September 2015, p. 35. Mozo made the same point to the committee. Mr Rohan Gamble, Managing Director, Mozo, Proof Committee Hansard, 22 September 2015, p. 35.

13 Treasury, Submission 17, p. 4.

14 Ms Erin Turner, Campaigns Manager, CHOICE, Proof Committee Hansard, 27 August 2015, p. 54.

3.12 Drawing on insights provided by behavioural economics, ASIC suggested that people may give insufficient attention to a card's interest rate at the point of application because they are naively optimistic about their ability to pay their balance off in full each month.11

3.13 Credit cards are multifaceted products, with features that have a significant bearing, real or perceived, on the value proposition for a particular consumer. For some consumers, the tendency to prioritise card features such as rewards points may be entirely rational. As CANSTAR explained, for big spenders who consistently pay off their full credit card balance each month, the interest rate is irrelevant. For these customers, features such as rewards programs are likely to be given a higher priority than interest rates. However, CANSTAR emphasised that customers who do not consistently pay off the entire card balance each month 'should not even consider rewards. The interest rate will blow the rewards away'.12

3.14 Despite evidence that interest rates are often the most salient feature of a credit card, Treasury stated that competition is generally more intense on other aspects of the value proposition, including balance transfer offers, interest-free periods on purchases, rewards programs, and other benefits such as insurance and concierge services.13 CHOICE made a similar point, telling the committee that the banks were not competing on interest rates, but instead on other generally less important card features such as rewards points and balance transfers. To focus more competition on interest rates, and thereby put downward pressure on them, CHOICE suggested it was necessary 'to force the banks to give people the information they need when they need it'.14

15 Mr Luke Lawler, Head of Public Affairs, Customer Owned Banking Association, Proof Committee Hansard, 3 September 2015, p. 20.

16 Consumer Credit Legal Service WA, Submission 12, pp. 2, 8.

17 Consumer Credit Legal Service WA, Submission 12, p. 2.

18 St Vincent De Paul Society, Submission 4, p. 6.

19 Good Shepherd Australia New Zealand, Submission 5, p. 3. Good Shephard did not specify which regulator it was referring to.

3.17 A number of submissions argued for limiting or otherwise regulating credit card interest rates. The WA Consumer Credit Legal Service (CCLSWA), argued that in order to protect low income, vulnerable, and disadvantaged consumers, legal reform was required to 'limit the gap between cash rates and credit cards rates'.16 It argued that absent such action:

…it is likely that when cash rates rise, credit card interest rates will rise considerably also. This will increase the already unfair and disproportionate costs placed on low income, disadvantaged and vulnerable consumers and will ultimately result in further long-term and severe damage to these consumers' financial and emotional well-being. Further, with more consumers experiencing serious financial hardship, there would be an increase in demand on government and community services.17

3.18 Similarly, the St Vincent de Paul Society recommended a legislative requirement that 'credit card interest rates align with changes in RBA cash rates'.18 Good Shepard Australia New Zealand argued that a failure to pass on the full benefit of RBA cash rate cuts to credit card customers 'should be seen as an exception, with credit providers being made accountable to the regulator and consumers to apply for an exception to this rule'.19

3.19 While Australia does not regulate interest rates, ASIC explained that the United States had adopted an approach characterised by 'a strong commitment to the direct regulation of fees and interest rates'. For example, increases on interest rates, fees and other charges are banned in the first year of an account being opened. Moreover, the United States has banned 'interest rate increases on outstanding amounts except at the end of an introductory rate period, if the rate is pegged to another rate that is not controlled by the provider or if the borrower is more than 60 days delinquent'.20

20 Ms Fiona Maguire, Senior Specialist, Australian Securities and Investments Commission, Proof Committee Hansard, 27 August 2015, p. 32.

21 Mr Alan Kirkland, Chief Executive Officer, CHOICE, Proof Committee Hansard, 27 August 2015, p. 56.

As an organisation we are inherently cautious about anything that involves price controls or price-fixing. Ideally, the best way to protect consumers is to have effective markets that are supported by effective competition. We would much rather think about how you protect consumers from the negative effects of a market that is not working properly than price interventions, because they tend to ultimately produce other distortions in the system that have unintended consequences.21

3.22 While much of the evidence received by the committee focused on headline interest rates, credit card providers argued that the average effective rate is a better measure of credit card interest rates. As explained in the previous chapter, this is calculated as the percentage of gross interest paid on balances outstanding. According to the RBA, this figure currently stands at 11.6 per cent, which is not only significantly lower than the average headline rate of about 17 per cent, but also 2 per cent lower than the average effective rate in 2011 when the current easing cycle for the RBA cash rate began.22 These figures were supported during the inquiry by

23 Mr David Robert Lindberg, Chief Executive, Commercial and Business Bank, Westpac Group, Proof Committee Hansard, 16 October 2015, p. 25. ANZ provided similar figures to the committee. Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 60.

24 Mr David Robert Lindberg, Chief Executive, Commercial and Business Bank, Westpac Group, Proof Committee Hansard, 16 October 2015, p. 15.

25 Mr David Robert Lindberg, Chief Executive, Commercial and Business Bank, Westpac Group, Proof Committee Hansard, 16 October 2015, p. 15.

26 Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, p. 32.

27 ANZ, Submission 27, p. 2.

First, more customers are spending more and paying off their cards in full [each] month. This means that banks are funding higher balances that are in the interest-free period. In the last three years, interest-free balances have grown by around 45 per cent. In industry speak, the revolve rate has declined. Second, a higher percentage of balances are being held in lower rate cards. This means that the effective average interest rate has declined relative to the headline rate on these products. Finally, low or zero rate balance transfers are becoming a much larger component of the market, with zero for 18 months becoming the industry standard. Balances in this category earning no interest have grown considerably.25

3.24 Similarly, NAB explained that the effective interest rate on its credit card portfolio had been falling, in part due to the increasing numbers of cardholders moving to low-rate cards and taking advantage of zero per cent balance transfer offers (which are discussed further in chapter five).26 ANZ also noted that trends in consumer behaviour in recent years have had 'the combined effect of reducing the total amount of interest bearing debt in the Australian credit card market and lowering the net effective interest rate that credit card providers receive on the lending they provide'.27

3.26 While effective credit card interest rates have fallen in absolute terms in recent years, the spread between credit card effective interest rates and bank funding costs has increased from a relatively stable average of 6.7 per cent in the years prior to the GFC to an also stable average of 8.7 per cent in the years since (see Figure 5 in chapter two). Several witnesses said that this shift could be explained by the global repricing of risk following the GFC. This repricing, the ABA remarked, was by no means unique to the credit card market, but was in fact reflected in a widening in the spread between cash rates and a range of lending and deposit products, both in Australia and internationally.29

28 Mr Anthony Pearson, Chief Economist and Executive Director, Industry Policy, Australian Bankers' Association, Proof Committee Hansard, 22 September 2015, p. 10.

29 Mr Anthony Pearson, Chief Economist and Executive Director, Industry Policy, Australian Bankers' Association, Proof Committee Hansard, 22 September 2015, pp. 9, 11.

30 Treasury, Submission 17, p. 8.

31 Dr Malcolm Edey, Assistant Governor, Financial System, Reserve Bank of Australia, Proof Committee Hansard, 27 August 2015, p. 15.

32 Mr Ross Greenwood, Business and Finance Editor, Nine Network, Proof Committee Hansard, 27 August 2015, p. 37.

…may be attributable to a general under-appreciation of credit risk prior to the crisis, particularly on unsecured lending, but may also reflect a failure to properly price default correlations across asset classes and their propensity to increase following a shock to the financial system.30

3.28 While measuring credit card interest rates using the effective interest rate might appear a logical approach, it must be emphasised that this measure is of little relevance to cardholders who are actually paying interest on their balances. The average rate paid by revolvers (17 per cent) has only fallen about 1 per cent since 2011, against declines in the average effective rate of 2 per cent and in the cash rate of 2.75 per cent, which would suggest an increase in the extent to which 'revolvers' are subsidising 'transactors'. This cross-subsidisation in the credit card market was raised by Dr Edey from the RBA, who noted that 'different kinds of customers incur different fees and different levels of interest expense'. 31 Mr Greenwood was more direct in his criticism of this cross-subsidisation, declaring that 'we have a system where some of the poorest and most vulnerable in our community subsidise the wealthiest in our community'. 32

3.29 Beyond emphasising the importance of focusing on effective interest rates instead of headline rates, card providers asserted that the RBA cash rate was one of many components of the cost base of credit cards. CBA and NAB advised the committee that the cost of funds only accounted for approximately 22 per cent of the costs of providing a credit card; similarly, ANZ reported that it was less than 25 per cent.33 The industry average of the costs of fund as a proportion of the overall cost base, as reported by the ABA, was slightly higher, at about one third. As a relative proportion of the cost base of providing credit cards, the ABA added, this figure had 'fallen substantially over the past six years'.34

33 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, p. 9; Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, p. 32; Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 60.

34 Mr Anthony Pearson, Chief Economist and Executive Director, Industry Policy, Australian Bankers' Association, Proof Committee Hansard, 22 September 2015, p. 9.

35 Westpac, Submission 21, pp. 12–13.

36 Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 60.

The RBA's discussion paper, 'The Evolution of Payment Costs in Australia', confirms that funding costs are a low component of overall Credit Card issuing costs and consequently the official cash rate has a negligible impact on card economics. Rather, the highest Credit Card costs are associated with high operation costs, payments functionality (such as real-time systems) and the rich bundle of benefits associated with Credit Card products.35

3.31 While public commentary often focuses on the low correlation between the cash rate and credit card interest rates relative to the correlation between the cash rate and mortgage lending rates, the banks asserted that the comparison was misleading. ANZ stated that whereas funding costs only accounted for less than 25 per cent of credit card costs, they made up about 85 per cent of the cost base for mortgages. Given this difference, ANZ continued, it was not surprising that the relationship between product interest rates and the cash rate is less direct for credit cards.36 The ABA made a similar point, arguing it was misleading to compare credit card pricing with interest on straight loan products. Credit cards, the ABA submitted, are a more complex product that other loan products:

…because of their payment convenience, the fact that they have 24/7 access to what is a rolling credit facility and the fact that they involve third parties, such as the providers of the credit card infrastructure.37

37 Mr Anthony Pearson, Chief Economist and Executive Director, Industry Policy, Australian Bankers' Association, Proof Committee Hansard, 22 September 2015, p. 19.

38 Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, p. 32.

39 Mr Duncan Berry, Chief Executive Officer, GE Capital Australia & New Zealand, Proof Committee Hansard, 16 October 2015, p. 58.

40 ANZ, Submission 27, p. 9.

41 Commonwealth Bank of Australia, Submission 23, pp. 2, 7.

42 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, p. 1.

3.32 NAB advised that banks have had to 'change their funding mix over time and move to more stable funding mixes', observing that deposit rates have increased in relation to spreads and wholesale funding costs have also increased.38 For non-bank card providers, the correlation between the RBA cash rate and credit card interest rates is weaker still. For example, GE Capital explained that its interest rates are not directly influenced by the RBA cash rate, and depended on the state of wholesale funding markets, rather than the deposit funded market. 39

This risk dynamic is well recognised by both the banks and regulators as evidence by the risk weights applied to credit card limits (APRA defined). While recent increases in mortgage lending requirements increased risk weights to 25 per cent to account for the potential risk borne by banks, the risk weights applied to credit card balances is significantly higher at 40 per cent.40

3.34 CBA explained that this higher risk, and the fact that credit is available on an ongoing basis rather than for a fixed period, meant that the pricing of credit cards was 'sensitive to market pressures and the economic environment, particularly the unemployment rate'.41 According to CBA, this need to price risk through the economic cycle was a 'much more significant contributor' to credit card pricing than funding costs,42 and while credit card portfolios might look profitable over the short-term, profitability needed to be considered over the entire economic cycle:

Whilst we have been fortunate to have periods of economic growth in Australia, many markets have demonstrated that losses increase quite dramatically in times of stress. So our default rates, for example, tend to be in the range of two to three per cent; if you look at the US experience over the last five years, they peaked at more than 10 per cent. So in any given year the credit card business can look very profitable. Over the long term, there is likely to be a year where it is distinctly less profitable—possibly unprofitable—and our role of running a credit card business is trying to ensure that we run it profitably over the long term.43

43 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, p. 6.

44 Westpac, Submission 21, p 15.

45 ANZ, Submission 27, p. 2.

46 Mr John Yardley, Chief Operating Officer, Bank Australia, Proof Committee Hansard, 3 September 2015, p. 19.

47 Reserve Bank of Australia, Submission 20, p. 16.

3.35 Westpac made a similar point, submitting that credit card pricing adjustments 'reflect broad changes over the economic cycle rather than as a frequent, point-in-time response to individual movements such as changes in the official cash rate'.44 ANZ also noted that interest rate movements on unsecured credit products like credit cards 'must take account of through-the-cycle loss rates and the underlying economic factors driving reductions in cash rates (e.g. unemployment)'.45

Pricing still has to take into consideration that credit card default risk and fraud risk is higher than with secured debt. Unsecured debt forms the bulk of the bank's write-offs.46

However, the overall loss rate for credit card issuers is probably higher than suggested by the NPL rate. Unlike some other types of household loans such as residential mortgages, credit card loans are unsecured, with little prospect, in some cases, of recovering a significant portion of the debt if the borrower defaults. As a consequence, some credit card debt may be written-off directly to an issuing institution's profit and loss account, without first being recorded as a non-performing loan.47

3.38 The RBA advised that the current 'loss rate' on credit cards was about 2.5 per cent.48 This corresponds with Westpac's advice to the committee that the annual level of credit losses for credit cards is around 2.52 per cent of outstanding balances, compared to around 0.02 per cent for secured loans.49 Other banks also advised that proportional defaults and losses were significantly higher for credit card lending than for secured forms of lending.50

48 The RBA explained that the 'loss rate' was a more useful measure than the non-performing loan rate, as non-performing loans can become performing again and even if a non-performing loan is written off there may be some recovery. Dr Anthony Richards, Head, Payments Policy Department, Reserve Bank of Australia, Proof Committee Hansard, 27 August 2015, p. 13.

49 Westpac, Submission 21, p. 13.

50 For example, Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, p. 35.

51 Australian Bankers' Association, Submission 15, p. 2.

52 ANZ, Submission 27, pp. 13–14.

…the cost of funds has become less important as a component of overall expenses for credit cards. Scheme fees, value-added services and rewards programs, and security and fraud management now comprise a greater proportion of credit card product costs. There have also been additional costs associated with improved technology such as contactless technology and regulatory change.51

• Funding costs are about 35 per cent of total credit card operating costs. While RBA rates influence funding costs, funding must also take into account credit risk, and liquidity characteristics of credit card financing.

• Credit management and fraud comprise around 30 per cent of costs. These costs include credit related losses, consumer protection and protection against fraud.

• Rewards and product benefits are around 27 per cent. These include scheme administration, points reward, discounts and travel insurance.

• Scheme fees are around nine per cent. Banks pay for services such as infrastructure, processing, settlement, foreign exchange services and customer service and support.52

53 ANZ, Submission 27, pp. 13–14. Westpac also suggested that innovation costs were a significant cost driver. Westpac, Submission 21, p. 14.

54 Reserve Bank of Australia, Submission 20, p. 3.

55 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, pp. 4–5; Mr David Robert Lindberg, Chief Executive, Commercial and Business Bank, Westpac Group, Proof Committee Hansard, 16 October 2015, pp. 19–20; Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, p. 29.

• Fees: which the RBA estimated accounted for about $1.4 billion in revenue in 2014, or $90 per account;

• Interchange revenues: or issuer fees, in the case of American Express 'companion' card transactions, which based on incomplete data the RBA estimated at approximately $1.5 to $1.75 billion in 2014; and

• Interest payments: which APRA reported were around $5.4 billion in 2014.54

3.45 Three of the four major banks advised the committee that they were unable to publicly disclose the profits earned on their credit card portfolios, as they roll credit card outcomes into broader divisional outcomes before those divisional outcomes are disclosed to the market.55 In contrast, ANZ was willing to share its net profit after tax on its credit card portfolio. ANZ Deputy Chief Executive Officer, Mr Graham Hodges, told the committee the bank's credit card business accounted for approximately $400 million, or 5 per cent, of group profit. He added that this profit also:

56 Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 60. ANZ explained that while it typically did not disclose unit profits, 'in a sense it is not a material profit for the group', which is why they could disclose it without having to do a market disclosure. Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 62.

57 Westpac, Submission 21, p. 14.

3.46 As noted earlier, Westpac, while not disclosing its actual profits on its credit card portfolio, advised the committee that its return on capital for its credit card portfolio had remained stable over the past five years:

The Westpac Group's current net margin for Credit Cards is in line with 2010, with small movements up and down over the period. Therefore, while funding costs have declined the overall profitability of the product has not improved as funding cost reductions have been offset by declining revolve rates, higher promotional rates and changes in product mix.57

4.5 The banks were united in the view that the credit card market is, as CBA put it, 'very competitive and innovative'.1 ANZ, for example, argued that the 'credit card segment is one of the most contested markets in the Australian finance industry', and this competition provided consumers with 'more choice than ever before of both provider and product'.2

4.6 Westpac submitted that there were various indicators of the competitiveness of the Australian credit card market, including 'the levels of innovation, the number of credit card providers and wide range of product offerings which suit the needs and behaviours of different customers, low barriers to entry and consumer switching'.3

1 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, p. 1.

2 ANZ, Submission 27, pp. 4–5.

3 Westpac, Submission 21, pp. 16–17.

CBA also argued that the attractive incentives for customers to accept a new card or switch cards was indicative of the 'vigorous competition in the market'.4

4.7 The banks told the committee that customers can and were taking advantage of the range of credit cards available to choose products appropriate to their needs.5 Westpac, for example, noted that 30 per cent of credit card balances across the Westpac Group are now held in low-rate accounts, up from 23 per cent in 2010. Westpac further advised the committee that in the last two years low rate cards had accounted for over 50 per cent of new sales.6 Other banks also reported that low rate cards accounted for a growing proportion of new card applications, and Westpac's figures were broadly consistent with industry-wide trends reported by the ABA.7

4 Commonwealth Bank of Australia, Submission 23, p. 6.

5 Mr Anthony Pearson, Chief Economist and Executive Director, Industry Policy, Australian Bankers' Association, Proof Committee Hansard, 22 September 2015, p. 20.

6 Westpac, Submission 21, p. 9.

7 Commonwealth Bank of Australia, Submission 23, p. 5; Australian Bankers' Association, Submission 15, p. 7.

8 Dr Malcolm Edey, Assistant Governor, Financial System, Reserve Bank of Australia, Proof Committee Hansard, 27 August 2015, p. 10; Reserve Bank of Australia, Submission 20, p. 3.

There are a lot of card products out there that offer lower rates and special deals for balance transfers. In many cases, cardholders should be able to lower their interest rates by taking advantage of those offers if they are willing to shop around.8

4.9 While some submitters were concerned about the dominance of the four major banks in the credit card market, the committee received little evidence to suggest that there are significant barriers to new entrants in the market. Treasury advised the committee that the Australian credit card market appeared 'no less competitive than other Australian lending markets'. It further suggested that changes to credit card access regimes that were introduced by the Banking Amendment (Credit Card)

Regulation 2014, which became effective in January 2015, would further reduce barriers to entry into the market for non-bank credit card providers.

4.10 Westpac argued that these barriers were 'relatively low and have not inhibited new entrants', and also suggested barriers had been lowered further still by the January 2015 legislative changes. As evidence of the low barriers to market entry, Westpac pointed to 'an increase in the number of providers and products in the market. Recent new entrants included Woolworths, Coles, ME Bank, Myer and re-entry by Virgin'.10

4.11 While evidence about barriers to market entry from the four major banks might be received with scepticism by some, representatives of the community and cooperative banking sector also pointed to strong competitive dynamics on the supply side of the market. Of particular note, COBA advised the committee that the market was generally delivering competitive products and choice to consumers. The challenge, COBA argued, was to ensure 'consumers are informed and empowered to act in their own interests'. To this end, COBA recommended that ASIC devote resources to raising consumer awareness of diversity of product offerings in the credit card market, and the risks of high-rate cards.11

4.12 Representatives of comparison websites also suggested that the issue was not so much a lack of credit card options, but apparent consumer inertia. CANSTAR told the committee that despite the wide range of cards available, many consumers had the wrong card and were paying too much interest.12 Mozo also observed that there were good value products available, but consumers were not moving, probably due to a lack of awareness or because they found switching too difficult.13

9 Treasury, Submission 17, p. 4. In relation to these changes, the RBA explained that '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.' Reserve Bank of Australia, Submission 20, pp. 1–2.

10 Westpac, Submission 21, p. 3.

11 Mr Luke Lawler, Head of Public Affairs, Customer Owned Banking Association, Proof Committee Hansard, 3 September 2015, p. 18.

12 Mr Stephen Henry Mickenbecker, Group Executive, Ratings and Financial Services, CANSTAR Pty Ltd, Proof Committee Hansard, 22 September 2015, p. 33.

13 Mr Rohan Gamble, Managing Director, Mozo, Proof Committee Hansard, 22 September 2015, p. 33.

Competition, I would say, is not a one-sided force. Competition is about the interactions that occur within a market. Whenever you see a market where there are lots of offers and lots of things available to consumers but consumers are still being ripped off, that is a sign that there is not effective competition in the market and there is a problem that needs to be fixed, and it requires demand-side interventions.14

14 Mr Alan Kirkland, Chief Executive Officer, CHOICE, Proof Committee Hansard, 27 August 2015, p. 51.

15 St Vincent de Paul Society, Submission 4, p. 5.

16 Mr Michael Willcock, Acting Deputy Secretary, Markets Group, Department of the Treasury, Proof Committee Hansard, 22 September 2015, p. 55.

17 Australian Securities and Investments Commission, Submission 16, pp. 8–9.

4.14 St Vincent de Paul challenged what it suggested was a neoliberal assumption that people on low incomes possessed the financial literacy necessary to 'interpret the implications of their choices upon their long-term financial situation in an economically rationalist manner'.15

…the credit card market is characterised by a large number of products, with these products showing a wide spread of characteristics, including different interest rate and fee structures, balance transfer offers, and rewards. In a way, this suggests that there is competition in the market and there are opportunities for consumers to choose cards suitable for them. However, the complexity of offerings can make it very difficult for consumers to compare products, especially where consumers suffer from behavioural bias such as near-term bias and overconfidence in their ability to constrain future spending.16

Credit cards are at least two products in one—a non-cash payment facility and a credit facility, plus a means of withdrawing cash. They are also often bundled and marketed with other financial products (such as insurance) and loyalty points, which make it more difficult for consumers to separate the price and value to them of each feature. This is particularly the case when some of the costs and benefits are immediate and others are realised in the future.17

Credit card costs are hidden in difficult to interpret percentages, behind worthless rewards points and in bamboozling balance transfer traps. It is far too difficult to answer the most important question: how much does this credit card cost?18

18 CHOICE, Submission 10, p. 4.

19 Commonwealth Bank of Australia, Submission 23, p. 4; Westpac, Submission 21, p. 11.

20 ANZ, Submission 27, p. 3.

21 Mr Alan Kirkland, Chief Executive Officer, CHOICE, Proof Committee Hansard, 27 August 2015, p. 53. Also see CHOICE, Submission 10, p. 4.

4.19 The banks told the committee that they provide customers and potential customers with tools and information to help them choose an appropriate product.19 ANZ, in referring to its own tools and calculators to assist customers in choosing a card, also noted that Australian credit card customers:

…benefit from a strong regulatory environment designed to ensure customers are able to compare products and pricing and make well informed decisions about credit cards.20

Some of the international competition thinkers call this 'confusopoly'—a deliberate strategy of product providers across a whole range of markets to make the comparison more difficult by adding lots of different features that are virtually impossible to compare.21

22 Ms Erin Turner, Campaigns Manager, CHOICE, Proof Committee Hansard, 27 August 2015, p. 53.

23 CHOICE, Submission 10, pp. 24–25

24 Consumer Action Law Centre and Financial Rights Legal Centre, Submission 13, pp. 14–15.

25 CHOICE, Submission 10, p. 25.

26 On the importance of high-quality disclosure, also see Ms Tanya Louise Corrie, Development Lead, Financial Security Specialist, Good Shepherd Australia New Zealand, Proof Committee Hansard, 3 September 2015, p. 36; and Ms Katherine Lane, Principal Solicitor, Financial Rights Legal Centre, Proof Committee Hansard, 27 August 2015, p. 8.

27 Mr Alan Kirkland, Chief Executive Officer, CHOICE, Proof Committee Hansard, 27 August 2015, p. 52.

4.22 CHOICE also argued that card providers should be required to do more to inform their customers about the range of product offerings available in the market. It recommended that card providers should be required to include information in credit card monthly statements 'about the credit card market generally, including the lowest rate in the market as identified by the RBA'.23

4.23 The Consumer Action Law Centre and Financial Rights Legal Centre also argued that consumers would be well served if card providers were required to disclose the average annual cost of their cards across their customer base. They also suggested that the ability of consumers to understand and compare credit cards would be enhanced by requiring card providers to 'include a comparison of the cost of a consumer's current credit card versus the cost of the provider's lowest rate card in a monthly statement'.24 CHOICE made a similar recommendation in its submission, and also recommended that monthly statements include information about the credit market generally, including the lowest interest rate currently on offer.25

4.24 Underpinning these recommendations was the understanding that for disclosure to be effective, it must be, as CHOICE put it, 'timely, relevant and tailored to the consumer'.26 CHOICE further explained:

In order for consumers to enjoy the benefits of competition they have got to be able to understand the offers that are on the market and they have got to be able to compare them and match them to their own circumstances. Unless you have those three factors present, consumers cannot actually take advantage of the offers that are there…27

28 Consumer Credit Law Centre of South Australia (Uniting Communities), Submission 29, p. 7.

29 Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 64.

30 Mr Luke Lawler, Head of Public Affairs, Customer Owned Banking Association, Proof Committee Hansard, 3 September 2015, p. 22; Mr John Yardley, Chief Operating Officer, Bank Australia, Proof Committee Hansard, 3 September 2015, p. 22.

31 Mr Joel Gibson, Campaign Director, One Big Switch, Proof Committee Hansard, 16 October 2015, pp. 52–53.

The challenge around that is it is much more complicated because of the whole range of benefits—so rewards and what you are opting for. There is a multitude of structures in there, and I think it makes it really difficult to just have a comparison rate like on other products.29

4.27 Similarly, COBA and Bank Australia both explained that while there might be merit in the idea, the complexity of credit card products meant a comparison rate would be very difficult to design and implement.30 Mr Joel Gibson, Campaign Director at One Big Switch, also remarked that while a comparison rate would be of some benefit to consumers, the multifaceted and diverse nature of credit cards made designing a comparison rate 'very difficult':

At the moment in the credit card space there are probably half-a-dozen different elements that can be part of a credit card offer or are commonly part of a credit card offer. It might be a balance transfer. It might be an interest-free period at the start of the card. It might be an introductory rate. And there are others as well, of course. When you have all the different permutations and combinations of those half-a-dozen different elements, it can be confusing for people. It can be hard to compare. It can be a case of comparing apples with oranges. That can also be a disincentive to switching.31

…based on the key principle that consumers' data should be released back to them in a uniform, secure, machine readable format. This information will then be able to be used in secure comparison engines to generate personal recommendations. The scheme aims to help consumers make meaningful comparisons about the different products in key markets, with a particular focus on energy and banking.32

32 CHOICE, Submission 10, p. 22.

33 Financial Conduct Authority, Credit card market study: interim report (November 2015), p. 94.

4.29 Currently, midata is used for comparing current accounts, but it may be extended to other products in the future, including credit cards. A November 2015 report by the United Kingdom's Financial Conduct Authority on the credit card market suggested extending the midata initiative to include credit cards may enable consumers to make more informed product comparisons.33

34 Mr Alan Kirkland, Chief Executive Officer, CHOICE, Proof Committee Hansard, 27 August 2015, pp. 54–55.

35 Mr Alan Kirkland, Chief Executive Officer, CHOICE, Proof Committee Hansard, 27 August 2015, p. 55.

36 Mr Alan Kirkland, Chief Executive Officer, CHOICE, Proof Committee Hansard, 27 August 2015, p. 55.

37 Mr Alan Kirkland, Chief Executive Officer, CHOICE, Proof Committee Hansard, 27 August 2015, p. 51.

38 Mr Michael Willcock, Acting Deputy Secretary, Markets Group, Department of the Treasury, Proof Committee Hansard, 22 September 2015, p. 59.

…rather than going to a comparisons site and just seeing a whole bunch of credit card rates you could be going to an online service that says, 'Based on your consumption data this card will cost you X dollars over the next year, whereas this other one will cost you Y dollars.' It is a much more individualised source of information on what is right for you.35

4.32 CHOICE suggested that such a system would need to be heavily controlled by consumer consent, but that it was important that the consumer had access to their own data.36 To this end, it suggested the government should 'start a process that would open up access for consumers to their own data so it is easier to compare offers in the market, similar to some of the reforms that have happened in the UK'.37

…relies on the cooperation of the industry that holds the customer data. There was quite an exercise to get to the place where that data could be released by all the different competing providers in a standardised format so that a third party intermediary could then use it and bring it up and do the comparison. It also required there to be a third party intermediary. Ultimately, an intermediation industry that helps consumers make better decisions should emerge out of this. We have some very basic comparative websites that do that job but…on the basis that all these products are so various and different that it is very [difficult] to line them up and say, 'I am making an apples-to-apples-to-apples comparison, and I know the first one is the best one.'38

They have all the transaction records. They have all the history. They build dynamic behaviour scores. They constantly have a view about who to provide limit increases to and who not to, based on profitability metrics and risks scores et cetera. None of that information typically makes its way into the hands of the borrower in such a way that they can make informed decisions. When will disruption happen? It will happen when borrowers are armed with choices that allow them to determine: 'Which credit product is right for me at this point in time?'39

39 Mr Matt Symons, Chief Executive Officer and Co-founder, SocietyOne Australia Pty Ltd, Proof Committee Hansard, 22 September 2015, pp. 25–26.

40 Under the National Credit Code, an advertisement for a credit product does not need to include an interest rate, but must do so if the advertisement states the amount of any repayment. Australian Securities and Investments Commission, Regulatory Guide 234: Advertising financial products and services (including credit): Good practice guidance (November 2012), p. 21.

4.37 Given the complexities of designing a credit card comparison rate, the committee believes credit card advertising and marketing material should be required to include a prominent statement of a card's ongoing headline interest rate and annual fee.40 In addition to helping consumers compare credit cards, this requirement would serve to better focus consumer attention on credit card interest rates. As described in chapter three, if consumers are more focused on credit card interest rates then this would encourage card providers to make their products more competitive in this regard.

4.43 Treasury advised the committee that there 'are minimal barriers to consumers obtaining a new credit card or switching to a different provider, apart from credit assessments and upfront fees'.41 The major banks claimed that switching cards was a straightforward process, and this was reflected in the incidence of switching in the

41 Treasury, Submission 17, p. 4.

market. For example, CBA told the committee that the ease of switching was demonstrated by the fact that more than $1 billion of CBA credit card balances had been switched to low-rate cards since 2011.42

4.44 Similarly, ANZ argued that competition in the market made switching a simple process, and estimated that close to one million customers change or add a new credit card each year (approximately 8 per cent of all credit card customers). According to ANZ, this made credit cards the most switched product in Australian banking.43 Westpac put forward a similar argument, and referred to the Argus 2014 Benchmarking Study, which estimated that:

42 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, p. 10; Commonwealth Bank of Australia, Submission 23, p. 5.

43 ANZ, Submission 27, pp. 6–7. NAB made similar points. Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, p. 31.

44 Westpac, Submission 21, p. 5.

45 Dr Juliana Silva-Gonclaves, report prepared on behalf of Heritage Bank, Australians' switching behaviour in banking, insurance services and main utilities (September 2015).

…approximately 1.4 million to 1.5 million new Credit Card accounts are opened each year in Australia. This represents around 9% of the 15.7 million accounts currently in the market. Given net account growth is approximately 2% this demonstrates a churn rate of 7% per annum. This data provides strong evidence that consumers are willing to shop around and that switching Credit Card type and providers is relatively easy.44

4.45 A recent survey undertaken by Dr Juliana Silva-Goncalves from the Queensland University of Technology casts some doubt on the banks characterisation of the incidence of switching in the credit card market, particularly relative to switching on other banking products and in other consumer markets. According to the survey, while 32 per cent of respondents indicated that they had seriously considered switching credit cards in the past five years, only 17 per cent have actually switched. This figure was lower than the number of respondents who indicated they had switched their home loan (18 per cent), home and contents insurance (28 per cent), energy supplier (29 per cent), main groceries supplier (22 per cent), and mobile phone and internet providers (both 24 per cent).45

46 Mr Alan Kirkland, Chief Executive Officer, CHOICE, Proof Committee Hansard, 27 August 2015, p. 51.

47 CHOICE, Submission 10, p. 26.

48 Consumer Action Law Centre and Financial Rights Legal Centre, Submission 13, p. 10.

49 Mr David Robert Lindberg, Chief Executive, Commercial and Business Bank, Westpac Group, Proof Committee Hansard, 16 October 2015, p. 18; and Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, p. 28; Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, pp. 6–7. Several banks also allow customers to cancel a card by writing a physical letter. For details, see CHOICE, Submission 10, p. 26.

There is no reason why the process of cancelling a card should not include an online option. Card providers have little incentive to offer this to consumers, instead requiring most customers to have a sales discussion.47

4.48 The Consumer Action Law Centre and the Financial Rights Legal Centre also suggested it can be 'incredibly difficult' to cancel an existing credit card, and as a result customers 'may eventually find they have a number of credit cards, and are gradually increasing their overall credit card limit'. They therefore expressed support for an online option for cancelling a credit card.48

4.49 Appearing before the committee, banks confirmed that it was not currently possible for a cardholder to complete the process of cancelling a card through an entirely online process. Rather, a cardholder would ultimately need to speak to a representative of the bank, either in a branch or over the phone. This is despite the fact that in some circumstances a person can actually apply for and receive a credit card through an entirely online process, without ever having to speak to a representative of the bank.49

50 Mr Richard Wormald, General Manager, Coles Financial Services, Coles, Proof Committee Hansard, 16 October 2015, p. 44.

51 Consumer Action Law Centre and Financial Rights Legal Centre, Submission 13, p. 9.

52 Reserve Bank of Australia, Submission 20, p. 3.

53 Australian Bankers' Association, Submission 15, p. 1.

54 Mr Christopher Zinn, private capacity, Proof Committee Hansard, 27 August 2015, p. 50.

…there should be no difference in treatment between credit card accounts and other accounts under the Banking Code. In our view, a consumer should be able to instruct their bank to cancel a credit recurring payment authority, as they can with a transaction account direct debit authority. Further, upon cancellation or closure of a credit card account, a bank should take steps to cancel all regular transactions and other standing authorities.51

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.52

4.53 Even the ABA acknowledged that the 'one area where switching can be more complex is in arranging the transfer or cancellation of recurring payments entered into with merchants'.53

4.54 Mr Christopher Zinn, a consumer advocate, suggested that enhancing the portability of credit cards, and saving consumers the need to cancel direct debits and the like, would likely make a positive difference.54

The government should introduce legislation to establish a 'tick and flick' switching process to allow customers to easily transfer direct debits to a new credit card. The process should be offered online and in-branch. It should be promoted in credit card statements and other key communications to card holders.55

55 CHOICE, Submission 10, p. 27.

56 The report in question, which was requested by the then Treasurer, the Hon Wayne Swan MP, was prepared by Mr Bernie Fraser. Australian Government, Banking Services: cost-effective switching arrangements (July 2011), http://banking.treasury.gov.au/content/reports/switching/downloads/switchingarrangements_aug2011.pdf.

57 CHOICE, Submission 10, p. 27.

58 Consumer Action Law Centre and Financial Rights Legal Centre, Submission 13, pp. 10–11.

59 ANZ, Submission 27, p. 6.

60 ANZ, Submission 27, p. 7.

4.56 CHOICE further recommended that to overcome impediments to switching, the industry should work towards account number portability. It noted that while account number portability had been ruled out in a 2011 government-commissioned report on technical grounds, innovations to the payments system since then suggested the matter should be reconsidered.56 To this end, CHOICE recommended that the government 'commission an independent report to outline practical next steps to facilitate switching, including portable account numbers, in the credit card market'.57 The Consumer Action Law Centre and the Financial Rights Legal Centre also argued that account number portability for credit cards should be considered.58

4.57 ANZ informed the committee that it was already able to assist customers switching from an ANZ card to transfer recurring payments. It acknowledged that further cooperation between providers might be possible, but cautioned that the required infrastructure would likely impose significant costs on the industry.59 On the possibility of implementing account number portability in Australia, ANZ wrote:

Credit card schemes operate technology on a global scale ensuring infrastructure investment is spread across a large number of customers and transactions. As a relatively small market, implementing 'card number portability' in Australia would result in significant industry costs.60

61 Mr Stephen Henry Mickenbecker, Group Executive, Ratings and Financial Services, CANSTAR Pty Ltd, Proof Committee Hansard, 22 September 2015, p. 34.

62 Mr Rohan Gamble, Managing Director, Mozo, Proof Committee Hansard, 22 September 2015, p. 34.

63 Mr Joel Gibson, Campaign Director, One Big Switch, Proof Committee Hansard, 16 October 2015, p. 50–51. One Big Switch's survey results are supported by CHOICE's survey results, which suggest that the biggest reason consumers do not switch cards (apart from being satisfied with their existing card) is that they want to keep all of their accounts together in the one place. CHOICE, Submission 10, p. 17.

Inertia is a lot beyond the technical and the physical. Particularly, as we have seen in recent tough financial times, there has been a real flight back to the bigger institutions—the big banks and other big institutions. That is part of the inertia as well. People feel more comfortable with a big bank. They are making a choice—a very deliberate choice—to stay with a Big Four bank because they are uncertain about going to a small credit union.62

4.60 The results of a credit card survey of 40,000 of One Big Switch members, while by no means disproving the role of technical and logistical barriers to switching, suggest the barriers to switching are largely attributable to a lack of consumer knowledge about the market and certain consumer preferences. According to One Big Switch, the survey revealed 'massive consumer inertia' in the credit card market. In part, it appeared this inertia was underpinned by a lack of engagement and knowledge on the part of consumers regarding credit card interest rates (discussed in chapter three), and a lack of consumer confidence in comparing the market. One Big Switch added that consumers evidently placed a premium on the convenience of having all of their banking accounts in the one place, and indeed 39 per cent of survey respondents reported that this was their reason for choosing their main card. This perceived convenience, One Big Switch suggested, was a factor in people not changing to a product better suited to their needs, and the fact that the banks often bundled credit card products with home loan packages indicated the banks were alert to this dynamic.63

4.66 During the inquiry, the committee considered whether peer-to-peer lending might provide consumers with access to an alternative form of credit that, for some cardholders at least, is more affordable than using a credit card. SocietyOne, a leading Australian peer-to-peer lender, informed the committee that it provided consumers with access to personal loans where the interest rate was set according to the credit profile of the borrower.

64 Mr Matt Symons, Chief Executive Officer and Co-founder, SocietyOne Australia Pty Ltd, Proof Committee Hansard, 22 September 2015, pp. 24–25.

66 Mr Matt Symons, Chief Executive Officer and Co-founder, SocietyOne Australia Pty Ltd, Proof Committee Hansard, 22 September 2015, p. 27.

67 Mr David Koch, Finance Editor, Seven Network, Proof Committee Hansard, 27 August 2015, pp. 35, 39.

At a policy level, the [Financial Services Authority]65 in the UK decided that there were a number of things that could be done to support the growth of marketplace lending and to present it as a credible alternative to the UK parliament's traditional high-street banks. Some of those initiatives included, at the time, a quite bold policy gesture: 'We will co-invest with investors dollar for dollar on these platforms.' It was a way of credentialing the fact that, from a policy point of view, this was a viable and important option to help drive credit growth and, therefore, job formation, small business development and individual empowerment in the economy.

The second thing that is interesting to note is they created some tax concessions for investors on those platforms to create some advantages that brought it into line with the advantages that are available for other retirement investment schemes. If you look at just those two things, you would say: in and of themselves neither of them are significant, but, as a signalling exercise to the market, it sent a very clear signal that this was a legitimate option for borrowers to consider and it had the support of the government.66

…there needs to be encouragement for cards which set rates based on the credit rating of the user so good behaviour is encouraged. This business of high interest rates because it is unsecured but treating everyone the same just does not wash. They do it with insurance; why can't they do it with credit cards and make it fair across the population?67

I would have to say there has probably been many a small business that has gone broke off the back of a credit card as well. That is a really important one to recognise, the lack of microcredit in our country. This is where maybe even peer-to-peer lending will come into it.68

68 Mr Ross Greenwood, Business and Finance Editor, Nine Network, Proof Committee Hansard, 27 August 2015, p. 39.

69 Ms Katherine (Kat) Lane, Principal Solicitor, Financial Rights Legal Centre, Proof Committee Hansard, 27 August 2015, p. 5.

70 Ms Katherine (Kat) Lane, Principal Solicitor, Financial Rights Legal Centre, Proof Committee Hansard, 27 August 2015, p. 5.

4.69 In contrast to the optimism expressed by other witnesses, Ms Lane from the Financial Rights Legal Centre warned that differential pricing of credit would simply make it harder for people in financial hardship, as they would pay higher interest even if they were not in default.69 Ms Lane was similarly sceptical about peer-to-peer lending, telling the committee:

So, by all means innovate, but the Australian government has to absolutely make sure that there is properly regulated consumer protection. And peer-to-peer lending is not properly regulated; I can categorically say that. It is not properly regulated currently. When the credit laws came in, it was not properly worked out. There has been no review. There should not be peer-to-peer lending—or, in fact, anything—until we work out whether people are protected.70

5.4 It is clear that some individuals end up in credit card debt because of poor decisions in choosing a card, using that card, and managing their card debt. Though individuals are expected to assume personal responsibility for the financial decisions they make, evidence received in this inquiry indicates that the credit card market is structured in such a way as to make it extremely difficult for individuals to make informed decisions about credit card debt. This chapter considers whether the credit card market is, in this respect, failing Australian consumers, and steps that could be taken to help consumers better understand the risks inherent in credit cards. Specifically, the chapter looks at existing financial literacy programs and tools, and weighs options for expanding or improving current offerings in this regard.

5.7 However, a problem arises when a cardholder consistently fails to pay their outstanding balance at the end of statement periods, and ends up using their credit card as a borrowing facility, rather than to manage cash. In such instances, cardholders risk taking on significant levels of ongoing debt with little prospect of repaying it in the short to medium term. Given the high rates of interest often charged on credit card debt, they are unsuited as long-term debt facilities, particularly given more affordable products are often available.2

1 Australian Securities and Investments Commission, Submission 16, p. 7; Mr Michael Saadat, Senior Executive Leader, Australian Securities and Investments Commission, Proof Committee Hansard, 27 August 2015, p. 28.

2 Australian Securities and Investments Commission, Submission 16, pp. 7–8.

3 Mr Matt Symons, Chief Executive Officer and Co-founder, SocietyOne Australia Pty Ltd, Proof Committee Hansard, 22 September 2015, p. 24.

4 Australian Securities and Investments Commission, Submission 16, p. 10.

We think that they are in fact convenient and very useful short-term financing tools and, candidly, are probably one of the most widely used financial products anywhere in the world. The problem, as we see it, is when credit cards are used by consumers to provide something other than very short term financing—that is, medium or even multiyear funding. It is in that scenario that credit cards become some of the most, if not—apart from perhaps payday lending—the most expensive credit choice that is available to Australian consumers for unsecured financing purposes.3

5.9 As already discussed in chapter three, consumers often pay little notice to credit card interest rates when comparing the market. Card providers both reflect and reinforce this consumer inattention, inasmuch as they tend to market credit cards as payment systems, rather than as borrowing products.4 In this sense, while consumers might apply for a credit card on the basis that it represents good value as a payment system, they often end up with what is, in effect, a decidedly poor value debt product without having ever given sufficient consideration to its suitability in this regard.

5 Mr David Robert Lindberg, Chief Executive, Commercial and Business Bank, Westpac Group, Proof Committee Hansard, 16 October 2015, pp. 15–16.

6 Westpac, Submission 21, p. 5.

7 Westpac, Submission 21, p. 6.

8 Westpac, Submission 21, p. 7.

5.11 Banks also suggested that consumers were already making appropriate, informed product choices with respect to credit cards and their borrowing needs more generally. For example, Westpac wrote that there is 'evidence that consumers are selecting the right product for their medium-term borrowing needs with Personal Loans growing faster than Credit Cards over the last few years'.6 Westpac argued that debit cards were increasingly popular as a payment tool, and in fact over the past 12 months spending on debit cards had grown faster than spending on credit cards.7 Taken together, Westpac concluded, these trends demonstrated that 'consumers are being more prudent with Credit Cards and using them more as a payment mechanism than a borrowing tool'.8 As already noted in chapter four, the banks also argued that the increased take-up of low-rate cards was indicative of a customer base that was informed and capable of making solid financial decisions in the consumer credit space.

9 Mr Michael Saadat, Senior Executive Leader, Australian Securities and Investments Commission, Proof Committee Hansard, 27 August 2015, pp. 24–25.

10 Mr Michael Saadat, Senior Executive Leader, Australian Securities and Investments Commission, Proof Committee Hansard, 27 August 2015, p. 28.

11 Westpac, Submission 21, p. 10.

12 ANZ, Submission 27, p. 5; Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 60. The CBA made similar points. Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, p. 10.

13 Westpac, Submission 21, pp. 11–12.

14 ANZ, Submission 27, p. 16.

…very much a point-in-time obligation; the obligation applies when the consumer applies for a credit card, and the lender has to make an assessment at that time as to whether the credit contract is not unsuitable. Once the consumer has the credit card they may well use the credit card in a way that they did not initially expect to use the credit card, so they might end up in a lot more debt than they expected, or their circumstances might change. The responsible lending obligations do not address anything that happens once the credit is provided.10

5.15 Banks insisted that in issuing credit cards and setting credit limits they took the responsible lending obligations very seriously. Westpac reported that it approves less than 60 per cent of applications it receives for new credit, and less than 15 per cent of accounts are eligible for a credit limit increase at any point in time.11 ANZ advised the committee that it 'filters and rejects on average 35 per cent of potential applicants and, where consumers apply for an unsuitable card, looks to suggest a more appropriate card option'.12

5.16 Westpac observed that since the introduction of the responsible lending obligations in the Consumer Credit Act and the subsequent additional reforms regarding credit card lending, key indicators of consumer behaviour showed positive trends. For instance, revolve rates had declined, and average monthly repayments had increased. On this basis, Westpac submitted that there was no need 'for any new regulatory changes to the operation of the consumer credit protection regime'.13

5.17 ANZ also argued that recent reforms, including the 2011 requirements regarding minimum repayment warnings, had been 'successful in reducing balances paying interest', and it expected this trend would continue over time.14 ANZ further advised that in addition to meeting its responsible lending obligations, it also works with customers to review their needs and goals, including finding the most appropriate credit card for their circumstances and needs.

5.18 Similarly, the ABA submitted that there are already strong protections in place for credit card customers. In addition to the existing responsible lending obligations, 'most members of the ABA have signed on to meet further voluntary obligations under the Code of Banking Practice when dealing with individual and small business customers'.16

15 ANZ, Submission 27, p. 16.

16 Australian Bankers' Association, Submission 15, p. 2. On the Code of Banking Practice, which is the banking industry's customer charter on best banking practice standards, see Australian Bankers' Association, webpage, 'Code of Banking Practice', http://www.bankers.asn.au/industry-standards/ABAs-code-of-banking-practice, accessed 4 December 2015.

17 Mr Les Banton, private capacity, Proof Committee Hansard, 27 August 2015, p. 5.

…they would probably knock me back on 13 per cent. With my history and the fact that I am on [the Disability Support Pension]…they would knock me back. Yet they would give me a credit card of 20 per cent.17

18 Consumer Action Law Centre and Financial Rights Legal Centre, Submission 13, p. 16.

19 Ms Katherine (Kat) Lane, Principal Solicitor, Financial Rights Legal Centre, Proof Committee Hansard, 27 August 2015, p. 6.

20 Ms Katherine (Kat) Lane, Principal Solicitor, Financial Rights Legal Centre, Proof Committee Hansard, 27 August 2015, p. 7.

21 Ms Denise Boyd, Director of Policy and Campaigns, Consumer Action Law Centre, Proof Committee Hansard, 22 September 2015, p. 14.

22 Ms Denise Boyd, Director of Policy and Campaigns, Consumer Action Law Centre, Proof Committee Hansard, 22 September 2015, p. 14.

My point here is: it is long-term debt and it should not be, and we need to structurally reform that. A line of credit should not be long-term debt. The banks have managed to put that in and we all accept it as long-term debt— they have pulled a swiftie. We need to fix that. They have well and truly Jedi mind-tricked us into thinking that credit card debt should be long term when it should not.19

5.22 Ms Lane concluded by suggesting that it was imperative people only be given credit card limits that they could afford to repay in a reasonable period of time. Ms Lane reiterated the Financial Rights Legal Centre's position, set out in a joint submission with the Consumer Action Law Centre, that three years would constitute a reasonable period in this regard.20

5.23 Ms Denise Boyd, the Consumer Action Law Centre's Director of Policy and Campaigns, suggested that in implementing this reform it was necessary to be mindful of the risk that preventing certain people from accessing credit cards could push them 'towards even more unaffordable forms of credit'.21 It was therefore necessary, Ms Boyd stressed, to tackle both the issue of credit cards and other forms of lending together:

There are some issues there—we appreciate that—but the worst thing you can do is go and take out an expensive line of credit, whether that is a credit card that you cannot afford to pay the debt on or a payday loan.22

…the assessments required of the consumer's capacity to make repayments and of their requirements and objectives. Ensuring credit card providers assess serviceability based on repayments required to pay off debt within a reasonable period could reduce the incidence of credit card distress.23

23 Treasury, Submission 17, p. 1.

24 Mr Anthony Pearson, Chief Economist and Executive Director, Industry Policy, Australian Bankers' Association, Proof Committee Hansard, 22 September 2015, p. 15.

5.27 In discussing the problem of long-term credit card debt, many witnesses noted very long amortisation periods are only possible because minimum repayment levels are set so low. While card providers are currently able to set their own minimum repayment levels, as the ABA explained these are typically set at about 2 per cent per month, with a minimum flat repayment between $10 and $25.24

That is the difference between two per cent or $25, whatever is greater, and two per cent or $10, whatever is greater. That small change adds a decade of debt. Adding some sort of standardisation would really assist consumers.25

25 Ms Erin Turner, Campaigns Manager, CHOICE, Proof Committee Hansard, 27 August 2015, pp. 55–56.

26 Mr Stephen Henry Mickenbecker, Group Executive, Ratings and Financial Services, CANSTAR Pty Ltd, Proof Committee Hansard, 22 September 2015, p. 37.

Would a minimum repayment solve a problem? It could induce a level of awareness for the consumer because it is a trigger—it is one of those market triggers. Because being on the wrong card and paying a very high rate is still the bigger issue, I think. It forces people to go backwards faster and further. But I think it is a nice market trigger that says that if my minimum repayment is looking really ugly because the interest rate is too high, then maybe it will induce me to look for a better deal.26

27 Westpac, Submission 21, p. 9. There appears to be a wide variation in some of the figures given to the committee in this regard, to such an extent that this perhaps suggests different approaches to measurement rather than variations from provider-to-provider. For instance, while Westpac reported that 4 per cent of its customers 'make the minimum repayment continuously over a 12 month period', NAB told the committee that only 2 per cent of customers had made the minimum payment or less in any month in the past 12 months, and that only 0.17 per cent of low-rate cardholders and 0.04 per cent of standard rate cardholders had paid minimum repayments or less every month for the last 12 months (Mr Antony James Cahill, Group Executive, Product and Markets, NAB, Proof Committee Hansard, 16 October 2015, p. 26). The ABA suggested that the proportion of customers who only pay the minimum payment in any given month was in the order of 3 to 4 per cent (Mr Anthony Pearson, Chief Economist and Executive Director, Industry Policy, ABA, Proof Committee Hansard, 22 September 2015, p. 9).

28 Mr David Robert Lindberg, Chief Executive, Commercial and Business Bank, Westpac Group, Proof Committee Hansard, 16 October 2015, p. 15.

29 Westpac, Submission 21, p. 10; Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, p. 26.

30 Mr Anthony Pearson, Chief Economist and Executive Director, Industry Policy, Australian Bankers' Association, Proof Committee Hansard, 22 September 2015, p. 15.

31 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, p. 1.

32 Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, p. 30.

[T]he number of people we are talking about—I am quoting from memory, but I think this is a ballpark figure—I think we said three to four per cent make the minimum repayment in any month, but the number of people who only ever make the minimum repayment, month by month, in a year is very tiny. The industry data suggests it is less than one per cent. There are not that many people out there who only ever make the minimum repayment, and, for most people making minimum repayments, a couple of months later they are back paying more than that.30

5.32 Although the banks suggested few cardholders were in fact only making minimum repayments, they nonetheless indicated they would either support or welcome further consideration of a requirement for higher repayments. CBA suggested a minimum repayment standard would 'help customers pay down their debt in a timely and responsible manner'.31 NAB told the committee that while the matter was complex, 'from our perspective minimum repayments is a topic and an area that we are more than happy to enter into a discussion on'.32 ANZ also indicated it would

5.33 Some of the discussion during the inquiry focused on minimum repayment reforms introduced in the United Kingdom in 2011. As a result of these reforms, all card accounts opened from April 2011 have a minimum repayment of at least the total of any interest, fees and charges, plus 1 per cent of the outstanding balance.34 Coles spoke in support of a higher minimum repayment, and referred in this regard to the UK reforms:

33 Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 67.

35 Mr Richard Wormald, General Manager, Coles Financial Services, Coles, Proof Committee Hansard, 16 October 2015, p. 46.

36 Mr David Robert Lindberg, Chief Executive, Commercial and Business Bank, Westpac Group, Proof Committee Hansard, 16 October 2015, p. 16.

We also have looked at the UK position, and we would be supportive of changes to repayment terms. We think it would be sensible for customers because, at the end of the day, credit cards are designed for short-term borrowing; they are not really designed for long-term borrowing.35

…something stronger and more targeted: that all credit card issuers provide an option for customers to pay off their debt within a period of time chosen by the customer—for example, one, three or five years. This would become a new feature of the product in our industry. As an alternative, issuers can proactively offer to targeted customers another product that allows for faster repayment of long-term debt, such as a personal loan. All customers should have an easy way to move balances into a shorter amortisation period. This creates an effective payment plan for the customer. We believe that this should be a point of mandatory conduct for all credit card issuers.36

37 Mr David Robert Lindberg, Chief Executive, Commercial and Business Bank, Westpac Group, Proof Committee Hansard, 16 October 2015, p. 16.

38 Mr Michael Saadat, Senior Executive Leader, Australian Securities and Investments Commission, Proof Committee Hansard, 27 August 2015, p. 30.

39 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, pp. 1, 3.

40 Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 67.

41 Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 65.

5.36 A number of witnesses, including those advocating higher minimum repayments, warned that policymakers needed to tread carefully in designing and implementing reform in this area. For example, ASIC warned that if the end result was to exclude certain consumers from accessing credit cards, this could simply push them into even more expensive and riskier forms of borrowing.38

5.37 CBA also cautioned that any shift to higher repayments would need to be managed in such a way that it did not inadvertently hurt vulnerable customers or, indeed, push them into financial hardship, observing that when it had itself increased its minimum repayments in 2008 from 1.5 per cent to 2 per cent, this had created difficulties for a small number of customers. The bank maintained that these issues were far from insurmountable.39

5.38 ANZ indicated that while it would support higher repayments, 'we need to be careful that it does not affect the people you do not really want to impact'.40 It emphasised that that implementation of any higher repayment would be critical. This was particularly so given the risk that people might be driven to payday lenders and the like:

If you make it too onerous you have got to remember that some people are a little more on the fringe there, and if you suddenly jack it up you are going to cause some issues for people.41

42 Mr Trevor Power, Principal Adviser, Financial Systems and Services Division, Department of the Treasury, Proof Committee Hansard, 22 September 2015, p. 58.

43 Ms Erin Turner, Campaigns Manager, CHOICE, Proof Committee Hansard, 27 August 2015, p. 56.

44 Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, pp. 61–65.

Ultimately, in terms of outcomes and what we are looking for, it is not to push people into worse products it is to get the big banks to offer better products for consumers.43

5.42 ANZ explained that if disadvantaged and vulnerable consumers were prevented from accessing the credit card market entirely, this risked reinforcing their financial exclusion and could force them into even risker forms of borrowing, such as payday lending. ANZ told the committee financial counsellors argue that access to small-balance credit is often critical in helping vulnerable people manage unexpected costs or get through short periods of particular financial pressure. ANZ advised that in an effort to help vulnerable consumers better manage their expenditure, it had begun work on a low-rate, no-fee, low-limit and high-repayment card. This product, it suggested, could help vulnerable customers avoid or work through periods of financial hardship, and steer clear of payday lenders.44

5.46 Balance transfer offers, which allow a cardholder to transfer existing credit card debt to a new card at a discounted interest rate for a specified 'honeymoon' period, are a longstanding and common feature of the Australian credit card market. While the interest rate and terms of duration for balance transfers vary widely, zero per cent offers for an extended period are not uncommon. A September 2015 CANSTAR analysis found that at least 46 cards were seeking to attract new customers with balance transfer offers of zero per cent for 12 months or longer.45

5.47 The same CANSTAR analysis cautioned cardholders considering a balance transfer to check the interest rate that would apply to any outstanding amount on a balance transfer at the expiry of the honeymoon period (the 'revert rate'). CANSTAR noted that for the 46 cards it had identified that were offering zero per cent balance transfers, the revert rate ranged anywhere from 10.99 per cent to 21.99 per cent.46

CHOICE indicated in its submission that the average revert rate for balance transfer offers, which it called the 'sting in the tail', was in fact 20.09 per cent.47

47 CHOICE, Submission 10, p. 10.

48 Mr Michael Saadat, Senior Executive Leader, Australian Securities and Investments Commission, Proof Committee Hansard, 27 August 2015, p. 23.

49 Mr Scott Pape, Chief Executive Officer, Barefoot Investor, Proof Committee Hansard, 22 September 2015, p. 9.

50 Mr Paul Clitheroe, Chairman, Money Magazine, Proof Committee Hansard, 27 August 2015, p. 38.

Optimistic present biased consumers may take up these offers because they believe they will take advantage of the introductory period to pay off their existing balances, when in fact their financial situation and imperfect self-control makes it likely that they will continue to borrow at a much higher interest rate. Behavioural biases such as overconfidence and present bias are known to influence how consumers make decisions about financial offers.48

5.50 Mr Pape made a similar point, emphasising that without any change in behaviour on the part of the cardholder, balance transfers—or, as he termed them, 'credit card roulette'—simply placed the cardholder at risk of falling deeper into debt.49

5.51 Similarly, Mr Clitheroe told the committee that balance transfer offers presented a 'debt trap' to consumers who failed to change their behaviour upon accepting an offer. If a cardholder was transferring a balance, he suggested, this was likely indicative of an inability to pay off the balance. As such, Mr Clitheroe suggested that a balance transfer should trigger a process in which the card provider, as a responsible lender, seeks to engage with and support the consumer to change their financial behaviour.50

5.52 Ms Lane from the Financial Rights Legal Centre also noted that cardholders often took up a balance transfer, only to further add to their debt on their new card.

5.53 The Consumer Credit Legal Service (WA) Inc., a community legal centre that regularly works with disadvantaged and vulnerable consumers struggling with credit card debt, took an even stronger position against balance transfers. It argued that balance transfer offers:

51 Ms Katherine Lane, Principal Solicitor, Financial Rights Legal Centre, Proof Committee Hansard, 27 August 2015, p. 2.

52 Consumer Credit Legal Service (WA) Inc., Submission 12, p. 7.

53 Consumer Action Law Centre and Financial Rights Legal Centre, Submission 13, p. 13.

54 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, p. 1.

…take advantage of consumers with low levels of financial literacy, who do not understand or consider the actual impact of interest rates until it is too late. Further, while banks are able to offer honeymoon interest period credit cards to lure in vulnerable consumers, there is little incentive for these banks to reduce credit card interest rates in order to become more competitive.52

5.54 A joint submission from the Consumer Action Law Centre and the Financial Rights Legal Centre recommended that zero per cent balance transfer offers should be offered for a minimum of two years, and 'for interest-free periods to apply not only to the balance transfer but to new purchases'. They recommended that card providers should:

…be required to set the minimum repayment amount on the basis that the consumer will repay the transferred balance within the 'teaser' period. In the alternative, there should be restrictions on using the card for new purchases until the transferred debt is repaid.53

The experience here, and in other markets around the world, is that customers increase their debt and many do not pay off the debt before the end of the offer period. It has been our view that such arrangements are not the right thing for our customers. We believe the committee should consider a total ban on zero per cent balance transfers, a move that would have our full support.54

5.57 Balance transfer offers are widely seen by card providers as a means of attracting new customers and increasing their market share. Mr Graham Hodges, ANZ's Deputy CEO, confirmed that balance transfers were a loss leader for the bank, but were nonetheless seen as a valuable means of attracting and retaining customers.56 The call by CBA—the bank with the largest share of the credit card market in Australia—to ban zero per cent balance transfers was met with some scepticism by some other card providers. In particular, Mr Cahill from NAB told the committee that it was 'interesting that the bank with the largest market share does not support zero balance transfers'. Balance transfers, Mr Cahill argued, were very much a part of the 'competitive mix' in a market that was 'highly competitive'.57

5.58 Mr Cahill also challenged the view that customers utilising balance transfers offers were financially vulnerable or likely to be worse off as a result of having accepted an offer. According to Mr Cahill, balance transfer customers were in fact 'four times less likely to move into delinquency that a standard credit card holder'.58 In light of this finding, NAB took the view that:

55 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, p. 2.

56 Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 66.

57 Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, pp. 27–28.

58 Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, p. 28.

59 Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, p. 33.

60 Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, pp. 65–66; ANZ, Submission 27, p. 7.

…zero dollar balance transfer can be an extremely useful tool for customers. It allows them to consolidate debt and get their finances under control. We do not believe it leaves the customers…in financial stress. So we support zero balance transfers as part of a competitive industry.59

5.59 ANZ also took issue with the notion balance transfer offers represented a 'debt trap', telling the committee that about 70 per cent of its clients on balance transfers (which made up 15 per cent of its total outstanding balances) paid off the balance in full by the end of the balance transfer period. (This figure, it noted, included those people who transferred their outstanding balance elsewhere.)60 Mr Graham Hodges, ANZ's Deputy CEO, argued that balance transfers were a 'legitimate area for

61 Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 66.

62 Mr David Robert Lindberg, Chief Executive, Commercial and Business Bank, Westpac Group, Proof Committee Hansard, 16 October 2015, p. 16.

63 Mr David Robert Lindberg, Chief Executive, Commercial and Business Bank, Westpac Group, Proof Committee Hansard, 16 October 2015, p. 23. Westpac suggested such limits should be considered alongside its aforementioned suggestion that customers be encouraged to set an amortisation period on their credit card debt.

Balance transfers are an effective way to consolidate and get on top of debt. In my experience, however, they are being used too often to extend debt, and all too often debt continues to build, even during the transfer period. We should encourage customers to face their outstanding debts sooner. This may reduce industry balances, but we believe it is the right thing to do for customers.62

That is why we are suggesting that we do something to limit balance transfers. We gave real consideration to whether we should make a recommendation to this committee to stop them altogether. We decided that that would not be in the best interests of customers because there are so many who use it appropriately. So we tried to balance the two by saying, 'Let's have some limits.'63

5.62 The committee shares the concerns expressed by a range of witnesses that balance transfer offers can present a 'debt trap' for consumers. In the worst instances, a consumer may take out a new card in order to take advantage of a seemingly compelling balance transfer offer, and not only to fail to pay off the balance in the honeymoon period but also run up further debt on their old card (which they have not cancelled) and their new card. Equally, the committee notes that balance transfers can be used to a consumer's benefit, and do appear to be an important part of the competitive mix in the Australian credit card market.

Where consumers have low levels of financial literacy or suffer from behavioural biases, high credit card interest rates can contribute to debt traps for those on lower incomes.64

64 Mr Michael Willcock, Acting Deputy Secretary, Markets Group, Department of the Treasury, Proof Committee Hansard, 22 September 2015, p. 55.

65 ANZ, Submission 27, p. 3; Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 61.

66 Ms Diane Tate, Executive Director, Retail Policy, Australian Bankers' Association, Proof Committee Hansard, 22 September 2015, p. 14.

5.66 There are a range of financial literacy programs and informational tools relevant to credit cards that are currently available to consumers and provided by both industry and government. The banks have their own programs and initiatives to help improve general financial literacy, including the use of credit cards. For example, ANZ told the committee that it had invested over $34 million over the last ten years in financial literacy programs such as MoneyMinded and Saver Plus, which were delivered in partnership with government and community organisations. The programs, ANZ reported, 'have a demonstrated track record of improving the basic budgeting, saving and money management skills of lower income participants, including the use of credit cards'.65

5.67 The ABA advised the committee that individual banks and the industry as a whole (through the ABA) was already making 'a very significant investment into financial-literacy programs'. According to the ABA, the major banks typically invested between $90 million to $300 million per year in financial literacy and financial inclusion programs.66 The ABA advised the committee that, in addition to

5.68 ASIC's MoneySmart website also provides information and other resources to customers to assist them in the selection and management of credit cards. In addition to information about how to avoid fees and charges, the website provides a credit card calculator to help consumers calculate how much they could save be making higher repayments.68

5.69 More broadly, ASIC has national responsibility for co-ordinating financial literacy, and works to this end with the Australian Government Financial Literacy Board. As part of this role, ASIC developed and published the National Financial Literacy Strategy 2014–17. According to a foreword by the then Parliamentary Secretary to the Treasurer, the Hon Steven Ciobo MP, the strategy 'provides a practical framework for action for stakeholders across the government, business, community and education sectors over the next three years'.69

67 Australian Bankers' Association, Submission 15, p. 2.

68 Australian Securities and Investments Commission, Submission 16, p. 6.

69 Australian Securities and Investments Commission, National Financial Literacy Strategy 2014–17 (September 2014), p. 1.

70 Mr Matt Symons, Chief Executive Officer and Co-founder, SocietyOne Australia Pty Ltd, Proof Committee Hansard, 22 September 2015, p. 28.

…whether there are not things that we could be doing that are not so much just general literacy and awareness raising but really more laser targeted efforts at people who potentially have these carry-forward balances. We could apprise them of options other than the ones that they have today.70

71 Mr Scott Pape, Chief Executive Officer, Barefoot Investor, Proof Committee Hansard, 3 September 2015, p. 1.

72 Mr Scott Pape, Chief Executive Officer, Barefoot Investor, Proof Committee Hansard, 3 September 2015, p. 1.

73 Mr Scott Pape, Chief Executive Officer, Barefoot Investor, Proof Committee Hansard, 22 September 2015, p. 1.

74 Mr Scott Pape, Chief Executive Officer, Barefoot Investor, Proof Committee Hansard, 22 September 2015, p. 3.

75 Mr Scott Pape, Chief Executive Officer, Barefoot Investor, Proof Committee Hansard, 22 September 2015, p. 4.

At schools, kids learn some basic life lessons. They are taught to avoid the sun because it can cause skin cancer and they are taught that smoking is bad for them because it can cause heart disease and lung cancer, yet they are not taught about the dangers of credit cards and how they can cause financial cancer. Get that message across and young people may start to see the truth. If you spend less than you earn, credit cards are irrelevant.72

5.73 Mr Pape was particularly critical of the banks taking a lead role in educating children about finance. He contended that having CBA teach children about money through its Dollarmites program was akin to having 'Ronald McDonald teaching our kids about nutrition'.73 Mr Pape added that when it came to teaching financial literacy in schools, programs such as ASIC's MoneySmart Schools initiative were better placed to provide 'independent, unbiased financial literacy and education'.74 He added that financial literacy is:

…a core life skill. It is the one thing that, when you get out of school, and even before you get out of school, you will be tested on every day of your life. It is far too important not to be a core part of the schooling process. It is far too important to allow banks to dictate and hand out their marketing material in schools.75

76 Ms Pam Mutton, Financial Counsellor, Bentleigh Bayside Community Health, Proof Committee Hansard, 3 September 2015, p. 15.

77 Ms Pam Mutton, Financial Counsellor, Bentleigh Bayside Community Health, Proof Committee Hansard, 3 September 2015, p. 16.

80 Australian Securities and Investments Commission, National Financial Literacy Strategy 2014–17 (September 2014), p. 18.

81 Commonwealth Bank of Australia, webpage, 'Financial education', https://www.commbank.com.au/about-us/who-we-are/in-the-community/financial-education.html, accessed 3 December 2015; Commonwealth Bank of Australia, Submission 23.1, p. 1.

I think it needs to be across the legislative framework and the actual institutions need to take some responsibility. At the institutional end, if they learn to have some responsibility about the information they are providing to their consumers from a very young age, then they will take that through their corporate ideologies, and ASIC underpins that. 77

5.76 ASIC, it should be noted, already runs a MoneySmart Schools Program, which delivers financial literacy and education in schools. According to ASIC's website, 42 schools across the nation are currently registered as MoneySmart Schools.78 ASIC's MoneySmart Teaching program also provides cost-free professional development and resources for teachers to enable them to effectively teach young people about money. ASIC has indicated that it hopes to provide professional development to more than 20,000 teachers across Australia by 2017.79

5.77 It should be emphasised that the teaching of financial literacy in schools is by no means limited to ASIC's MoneySmart programs. On the contrary, the teaching of consumer and financial literacy is part of the Australian Curriculum, and is guided by the nationally endorsed education learning framework, the National Consumer and Financial Literacy Framework.80 Nonetheless, it might be noted that while there are currently around 42 schools nationally registered as MoneySmart Schools, the CBA's School Banking program (of which the Dollarmites account is only one component), is currently delivered to around 275,000 students nationally, and CBA is currently investing a further $50 million to expand the program and expects it will reach 500,000 students in 2016.81

5.78 CBA refuted the criticisms of the School Banking program, telling the committee that the program was intended to 'help children achieve their educational potential', was offered on an opt-in basis to both schools and parents, and was loss-making. The main purpose of the program, according to CBA, 'is to provide young children with a basic understanding of core financial values and money management skills'. CBA also strongly rejected 'any suggestion that School Banking encourages poor financial management practices or encourages children to adopt credit cards'.82

5.79 CBA added that it did not 'capture data as part of our school banking program and integrate it into the rest of our banking program'. Rather, the data captured through the School Banking program was maintained in a separate database. CBA advised the committee that unless a customer had an existing home loan, they did not market credit cards to 18 to 21 year olds.83 They also stated that when a customer turned 18, there was no flag to indicate they had become a CBA customer through the School Banking program.84

82 Commonwealth Bank of Australia, Submission 23.1, p. 1.

83 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, p. 11.

84 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of Australia, Proof Committee Hansard, 16 October 2015, pp. 8–9.

Consumer Action's free telephone financial counselling service, MoneyHelp, receives at least 15 calls per day from people struggling with credit card debt. Over 50 per cent of our callers have credit card debt exceeding $10,000, over 28 per cent have debts exceeding $20,000 and nearly every week we get a call from someone with credit card debt exceeding $100,000. However, the number of people contacting MoneyHelp for assistance is likely to be only a small proportion of those who are struggling with credit card debt.85

85 Ms Katherine Temple, Senior Policy Officer, Consumer Action Law Centre, Proof Committee Hansard, 3 September 2015, p. 11.

86 Ms Katherine Temple, Senior Policy Officer, Consumer Action Law Centre, Proof Committee Hansard, 3 September 2015, p. 11.

87 Mr David Robert Lindberg, Chief Executive, Commercial and Business Bank, Westpac Group, Proof Committee Hansard, 16 October 2015, p. 15.

…can lead to and exacerbate the marginalisation of struggling consumers. It can result in significant financial hardship and, in some cases, bankruptcy and the loss of the family home. At an acute level, credit card debt can lead to family violence, breakdown and a deterioration in health, including mental health. It can also have a long-term impact on the capacity to provide for health, retirement and education. These are serious and profound impacts. Taking appropriate steps, including regulation, should be an absolute priority for policymakers.86

5.85 Westpac told the committee that it had 'proactively offered' 277,000 credit card holders personal loans where the bank believed it might be a more appropriate product. Cardholders in this category included those who are only making the minimum repayment each month for a prolonged period of time.87

5.86 Similarly, NAB told the committee that it sought to 'proactively identify customers showing signs of financial stress'. When customers did enter hardship, NAB told the committee, they were provided with 'support through a world-class assistance program that was developed in partnership with the Kildonan UnitingCare'.88 NAB indicated that less than one per cent of all credit card customers had entered hardship in the previous 12 months, and that the overwhelming majority of these customers had returned to commercial terms within a short period (89 per cent within 30 days, and 95 per cent within 90 days).89 NAB's advice was consistent with industry data referred to by the ABA, which indicates:

88 Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, p. 26.

89 Mr Antony James Cahill, Group Executive, Product and Markets, National Australia Bank, Proof Committee Hansard, 16 October 2015, p. 26.

90 Mr Anthony Pearson, Chief Economist and Executive Director, Industry Policy, Australian Bankers' Association, Proof Committee Hansard, 22 September 2015, p. 10.

91 ANZ, Submission 27, p. 17.

92 Mr Graham Hodges, Deputy Chief Executive Officer, ANZ, Proof Committee Hansard, 16 October 2015, p. 61.

93 Mrs Rachel Stocks, Managing Director, American Express Australia Ltd, Proof Committee Hansard, 22 September 2015, pp. 39–40.

…less than one per cent of all customers, not just credit card customers, are in a hardship arrangement with their bank. Most customers experiencing financial difficulty have their financial situation restored within three to six months.90

5.87 ANZ advised that it had a well-defined process for customers experiencing hardship. This process, ANZ explained, might include discussions with customers about how to minimise the level of interest paid on current debt, and fixed payment plans that might assist in this regard.91 Appearing before the committee, ANZ further advised that:

…0.3 per cent of our credit card customers have sought assistance through our hardship program. Nine out of 10 of those customers that are in hardship are there because of unexpected events and, primarily, loss of income from unemployment or divorce or illness, not because of financial over-commitment at the time the card was issued.92

It is part of our service ethos. If it is clear that a card member is in difficulty—for example, they are revolving more than they have in the past or their spend patterns are changing dramatically—we contact them proactively and offer support if required. We do not wait until we are asked.93

In 2013 the banking industry implemented its financial hardship initiative in consultation with Financial Counselling Australia and other organisations to help vulnerable and disadvantaged Australians. We released an industry guideline going beyond legal requirements to help these customers. This year the banking industry further strengthened this initiative. Consumers can now get more information about the type of support that is available, including when a debt reduction or debt waiver may be appropriate. Banks also provide a range of resources, including the Doing it tough? website, to give consumers access to information about assistance and the contacts for banks' hardships teams. Australia's banks provide a range of products and services to consumers, including credit cards, and it is in both parties' interests that people's financial obligations can be met.94

94 Mr Anthony Pearson, Chief Economist and Executive Director, Industry Policy, Australian Bankers' Association, Proof Committee Hansard, 22 September 2015, p. 10.

95 Ms Pam Mutton, Financial Counsellor, Bentleigh Bayside Community Health, Proof Committee Hansard, 3 September 2015, p. 14.

96 Ms Katherine Temple, Senior Policy Officer, Consumer Action Law Centre, Proof Committee Hansard, 3 September 2015, p. 15.

5.90 The Consumer Action Law Centre welcomed the fact that the banks had put real effort into training their staff in the management of customers experiencing hardship. However, the Centre suggested that, in general, a conversation about hardship still needed to be initiated by a customer, and a customer often needed to explicitly state that they were experiencing hardship before hardship processes could commence.95 The Centre argued that this was a particular problem for cardholders who might be making minimum repayments on time, yet still struggling to manage their credit card debt. Such customers, it noted, were unlikely to:

… self-identify as being in hardship. The system is set up so that, if you make your minimum repayments, which could mean it will take decades before you pay off your debt, you are still 'paying your bills on time'.96

97 Mr Ross Greenwood, Business and Finance Editor, Nine Network, Proof Committee Hansard, 27 August 2015, p. 44.

98 Consumer Action Law Centre and Financial Rights Legal Centre, Submission 13, p. 6.

99 Ms Erin Turner, Campaigns Manager, CHOICE, Proof Committee Hansard, 27 August 2015, p. 56.

5.92 While hardship processes and support from card providers are very important, the committee also heard from a number of witnesses about the critical role played by the financial counsellors. A joint submission by the Consumer Action Law Centre and the Financial Rights Legal Centre recommended increased funding for the 'promotion and delivery of financial counselling and support services to assist those struggling with credit card debt'.98 CHOICE also told the committee:

We desperately need greater funding for financial counsellors. This is a bit of an 'ambulance at the bottom of the cliff' problem, but it is currently a very underfunded ambulance that is dealing with a very big problem.99

6.6 While interchange fees are collected by banks, they are set by credit card issuing institutions (Visa and MasterCard) according to categories of transaction within a schedule of interchange rates.2 For card schemes subject to RBA regulation, interchange rates cannot exceed a weighted average of 0.5 per cent. However, the specific rates applying to each transaction will depend on factors including: the type of merchant (with larger 'strategic' merchants often receiving discounts); the type of card (with premium, high-feature rewards cards typically attracting higher interchange fees); the nature of the transaction (whether it is SecureCode, contactless, and so on); and the value of the transaction. Individual interchange rates can range from around 0.2 per cent for transactions with large 'strategic' merchants to 2 per cent for transactions using the highest level of premium card. Transactions with 'strategic' merchants will typically attract relatively low interchange fees regardless of the type of card used, whereas for transactions with merchants not deemed 'strategic' (usually smaller merchants) the use of premium cards will generally attract higher interchange fees.3

6.7 MasterCard told the committee that the interchange fee 'pays for fraud losses and fraud preventions; it pays for the 55-day interest-free period immediately after the cardholder makes a purchase; and, importantly, it pays for the credit loss when a transaction goes bad'.4 The RBA noted that interchange fees are also used to finance rewards programs.5

1 Reserve Bank of Australia, Submission 20, p. 11. For a more detailed explanation, see Reserve Bank of Australia, Review of Card Payments Regulation: Issues Paper (March 2015), pp. 6-8.

2 Reserve Bank of Australia, Submission 20, p. 12. As explained later in this chapter, while interchange fees are not applied in three-party card schemes such as American Express and Diner's Club, interchange-like fees do apply for American Express companion cards, but these fees are not currently regulated by the RBA.

3 Reserve Bank of Australia, Submission 20, p. 7.

4 Mr David Masters, Head of Public Policy, Asia Pacific, MasterCard, Proof Committee Hansard, 22 September 2015, p. 46.

5 Reserve Bank of Australia, Submission 20, p. 12.

6.10 The RBA is empowered to 'designate' and regulate payment schemes under the Payment Systems (Regulation) Act 1998, and has a mandate to 'promote efficiency and competition in payments systems consistent with the overall stability of the financial system'. Consistent with this mandate, the RBA's Payment Systems Board (PSB) regulates card payment schemes in relation to matters such as interchange fees, surcharging and scheme access.6

6.12 The committee heard testimony that the inconsistency in the regulatory treatment of the systems has undermined the competitive neutrality of Australia's payments system. This inconsistency is in part due to historical factors. When first regulated, Visa and MasterCard were both operated as member associations of banks, and the RBA was concerned that access arrangements 'were more restrictive than necessary to ensure the stability of those systems'.7 However, as the RBA explained in a 2014 paper on payment card Access Regimes:

6 Dr Malcolm Edey, Assistant Governor, Financial System, Reserve Bank of Australia, Proof Committee Hansard, 27 August 2015, p. 10.

7 Reserve Bank of Australia, Submission 20, p. 7.

8 Reserve Bank of Australia, Payment Card Access Regimes: Conclusions (March 2014), p. 1.

The environment has now changed significantly. Most importantly, MasterCard and Visa have now both changed corporate structure to become publicly listed companies rather than member associations of banks. This suggests that the schemes are likely to be more open to new types of participation, while the emergence of new business models is creating stronger interest in direct membership.8

6.13 On 15 October 2015, the RBA designated the American Express companion card system. As the RBA explained in its accompanying media release, designation does not impose regulation, but rather is 'the first of a number of steps the Bank must take to exercise any of its regulatory powers'.9

6.15 Starting in 2003, the RBA introduced a series of reforms aimed at improving the efficiency and competition in the Australian card payments system. These reforms included the regulation of interchange fees for designated card schemes. In order to reduce interchange fees on these schemes, the RBA set the abovementioned standard which provides that interchange fees cannot exceed a weighted average of 50 basis points. The reforms also enabled merchants to apply surcharges on card transactions 'so that cardholders were more likely to face prices that reflected the cost of the card they were using'.10 The RBA also took steps to improve access to the scheme by entities wishing to issue cards or provide card payment services to merchants.11 In a submission to a 2007–08 Payment Systems Board review of the reforms, the RBA concluded that the reforms had improved transparency and led to more appropriate price signals to consumers.12

6.16 CHOICE noted in its submission that as a result of the 2003 reforms, average interchange fees for MasterCard and Visa were reduced from an average of 0.95 per cent to 0.5 per cent. According to CHOICE, this has 'had a predictable flow-on effect to merchant service fees which have reduced, on average, from 1.44% for MasterCard or Visa transactions in March 2003 to 0.84% now'.13

10 Reserve Bank of Australia, Submission 20, p. 12.

11 Reserve Bank of Australia, Submission 20, p. 2; Reserve Bank of Australia, Review of Card Payments Regulation: Issues Paper (March 2015), p. 5.

12 Reserve Bank of Australia, Submission 20, p. 8.

13 CHOICE, Submission 10 (supplementary), p. 2.

14 Reserve Bank of Australia, Submission 20, p. 12.

6.18 In its submission, the RBA argued that interchange payments, along with the loyalty programs they finance, ultimately 'increase the costs of payments for merchants and accordingly drive up the final prices of goods and services for all consumers, including for consumers who do not use credit cards'.14 The RBA pointed out that competition in payment card networks can actually have the effect of driving interchange fees higher:

Where the market structure is such that there are two payment networks whose cards are accepted very widely (i.e. merchants accept cards from both networks), and where consumers may hold one network's card but not necessarily both, competition tends to involve offering incentives for a consumer to hold and use a particular network's cards (loyalty or rewards programs, typically). A network that increases the interchange fee paid by the merchant's bank to the cardholder's bank enables the cardholder's bank to pay more generous incentives, and can increase use of its cards. However, the competitive response from the other network is to increase the interchange rates applicable to its cards.15

15 Reserve Bank of Australia, Submission 20, pp. 11–12.

16 CHOICE, Submission 10 (supplementary), p. 1.

17 CHOICE, Submission 10 (supplementary), p. 4.

18 CHOICE, Submission 10 (supplementary), p. 8.

19 CHOICE, Submission 10 (supplementary), p. 6.

There is pressure for interchange fees to increase as card schemes compete for banks to issue their brand of card. The higher the interchange rate, the more attractive it is for a bank to issue a certain scheme's card.16

6.20 CHOICE argued that lower interchange fees would result in lower merchant fees, and ultimately lower costs to the consumers, even if these cost reductions were too small to directly observe.17 In summarising its position, CHOICE wrote:

The interchange debate is about who pays for our payments system. Do we want a high-cost payment system with some of the funds going towards 'special' features like rewards points that only high-spending customers can benefit from? Or do we want a lower-cost system that will reduce costs for all merchants and should lead to lower costs for consumers across the economy?18

6.21 CHOICE acknowledged that reduced interchange fees would likely result in a reduction in the value of rewards programs. However, CHOICE suggested that this was not in itself a bad thing: rewards programs, although overwhelmingly operating to benefit higher income earners, were in effect paid for by all consumers because the costs of higher interchange were passed through the system to the consumer.19

20 Mr David Masters, Head of Public Policy, Asia Pacific, MasterCard, Proof Committee Hansard, 22 September 2015, pp. 49, 54; Mr Stephen Karpin, Group Country Manager, Australia, New Zealand and South Pacific, Visa Inc, Proof Committee Hansard, 16 October 2015, p. 71.

21 CHOICE, Submission 10 (supplementary), p. 47.

22 Mr David Masters, Head of Public Policy, Asia Pacific, MasterCard, Proof Committee Hansard, 22 September 2015, p. 47.

23 Mr David Masters, Head of Public Policy, Asia Pacific, MasterCard, Proof Committee Hansard, 22 September 2015, p. 47.

24 Mr Christopher Zinn, private capacity, Proof Committee Hansard, 27 August 2015, p. 49.

If interchange is set too low, as it is in Australia frankly, the economics of the system are broken and issuers find other ways to recover the costs of issuing cards. If it is set too high, retailers and businesses simply would not accept our products. So our interest is in getting the level right so that it is not too high and not too low, but is set at the correct level so that the payment system here in Australia can operate as efficiently as others around the world, and do so in a way that ensures consumers are protected from increased fees—and effectively paying for the value that merchants receive.21

6.23 MasterCard contended that the RBA's regulatory intervention in 2003 had broken 'what was until then an efficient value chain'. MasterCard added that this had created economic pressure through the system, including on interest rates, and had not reduced consumer prices as the RBA and others had claimed.22 It argued for the removal of interchange regulation, or failing that, redefining the RBA's remit so that it was required to 'look at any future regulation through the lens of the consumer, which it is not required to do in its remit today'. As discussed further below, MasterCard also suggested that if interchange regulation was not removed, then it should at least apply equally to all card schemes, including American Express.23

6.24 Mr Zinn argued that there was no evidence or research 'to show that the merchants have passed on any benefit from having a lower interchange fee where that has been regulated'.24 The Australian Taxpayers' Alliance (ATA) pointed to three reasons the lower merchant service fees resulting from lower interchange fees were not passed through to consumers:

25 Mr Matthew Sinclair, Advisor, Australian Taxpayers' Alliance, Proof Committee Hansard, 16 October 2015, pp. 36-37.

26 Mr Stephen Karpin, Group Country Manager, Australia, New Zealand and South Pacific, Visa Inc, Proof Committee Hansard, 16 October 2015, p. 69.

27 Australian Payments Clearing Association, Submission 22, p. 1.

28 Australian Taxpayers' Alliance & the International Alliance for Electronic Payments, Submission 8, p. 2.

…provides for a greater range of product choice for cardholders and it also presents the flexibility to foster better merchant acceptance, expanding electronic payment acceptance, enhancing security of payments and accepting credit from those who might otherwise not get access to it in the event that interchange were lower.26

Australia has low interchange fees compared to other developed credit card markets, such as those in North America. Further, APCA believes the Australian payments industry is exhibiting high levels of competition and innovation, with the rapid uptake of contactless payments and the introduction of new mobile-based and online payment offerings. Drastic change to the economics of retail payments runs the risk of disrupting existing market dynamics and innovation, with costs ultimately borne by cardholders and merchants.27

6.27 A joint submission from ATA and the International Alliance for Electronic Payments (IAEP) suggested that the interchange fees are 'the subject of increasingly stringent regulation that is restricting the development of the credit card market and harming consumer welfare'. The ATA and IAEP claimed that interchange fees deliver significant benefits to merchants, in the form of increased sales, a guarantee of payment, and a shifting of credit risk to financial institutions. These benefits, they argued, are reduced by regulation. The ATA and IAEP characterised the RBA's regulation of interchange fees as an unjustifiable 'interference in a functioning market'. If interchange fees were subject to lower limits, the ATA and IAEP argued, this would lead to increased interest rates and fees, and reduced interest-free periods. Smaller card providers would also have 'reduced capacity to offer low-cost cards'.28

6.28 COBA argued against any changes that would lower the limit on interchange fees, and asserted this would reduce the capacity of smaller card issuers to offer low-rate cards. In the event interchange limits were lowered, COBA wrote that card issuers would 'be forced to absorb the reduction in income or recover it from card holders in the form of higher rates or higher fees'.29

6.29 CHOICE conceded that it was 'difficult to accurately assess the claims that fees will rise and that low interest cards will not be able to be provided if interchange is lowered'. However, it observed that low-rate cards remained available in foreign markets where interchange fees had been lowered. More broadly, CHOICE concluded that it was 'spurious to suggest that reducing interchange is somehow going to create new costs for consumers; the costs already exist, they are simply submerged in business-to-business transactions over which consumers have little visibility or opportunity to respond'.30

29 Customer Owned Banking Association, Submission 19, p. 10.

30 CHOICE, Submission 10 (supplementary), p. 8.

31 MasterCard, Submission 2 (attachment 4), p. 3.

32 The Treasury, Financial System Inquiry: Interim Report (July 2014), section 2, p. 26.

33 The Treasury, Financial System Inquiry: Interim Report (July 2014), section 2, p. 26.

6.30 While interchange fees in designated four-party schemes (MasterCard and Visa) are subject to regulation by the RBA, three-party schemes (most notably American Express and Diners Club) are not subject to interchange regulation.31 The FSI Interim Report explained that in three-party schemes, the scheme takes the role of acquirer and issuer. As 'no interchange fees are involved, these schemes are not covered by interchange regulation'.32 However, three-party scheme companion cards, which are typically operated through the American Express scheme and issued by banks, operate much like four-party schemes, and the service fees that companion card schemes pay to issuers are economically equivalent to interchange fees in four-party payment schemes.33 Despite the existence of interchange-like fees, American Express companion cards are not currently subject to interchange regulation, although as noted earlier the system was designated on 15 October 2015.34

35 Reserve Bank of Australia, Review of Card Payments Regulation: Consultation Paper (December 2015), p. 9.

36 Reserve Bank of Australia, Review of Card Payments Regulation: Consultation Paper (December 2015), p. 10.

37 Ms Luisa Megale, Vice President Asia, International Public Affairs and Communications, American Express, Proof Committee Hansard, 22 September 2015, p. 41.

38 Mr David Masters, Head of Public Policy, Asia Pacific, MasterCard, Proof Committee Hansard, 22 September 2015, p. 47.

39 Mr David Masters, Head of Public Policy, Asia Pacific, MasterCard, Proof Committee Hansard, 22 September 2015, p. 48.

…argued that fee arrangements for companion cards were negotiated bilaterally and therefore were of a different nature to multilateral interchange fees, so should remain outside the regulatory framework. More generally, it was argued that concerns about 'competitive neutrality' had been overstated because American Express had a much smaller share of the cards market than the two largest four-party card schemes; and because American Express cards are not considered 'must take' cards by many merchants, and/or are more often subject to a surcharge.36

6.32 The views reported in the RBA's recent consultation paper align with the evidence received by the committee on this subject. American Express's 'strong view' was that American Express branded cards should not be subject to interchange fee regulation.37 In contrast, MasterCard argued that if interchange regulation was not removed (something it argued for) then the regulations should at least apply equally to all schemes, including American Express.38 Mr David Masters, a representative of MasterCard, explained the company's concerns regarding the apparent lack of neutrality in the application of interchange regulation:

The great frustration for me is that the absence of American Express being included in the regulation has meant that reward points are higher on those products because their version of interchange within the GNS business [Global Network Services—that is, American Express companion cards] is higher than ours, which effectively means you have this perverse scenario in Australia where the most expensive card for a retailer to accept is the card that a cardholder is virtually incentivised to pay with. That is broken regulation.39

40 Mr Stephen Karpin, Group Country Manager, Australia, New Zealand and South Pacific, Visa Inc, Proof Committee Hansard, 16 October 2015, p. 69.

41 Mr Stephen Karpin, Group Country Manager, Australia, New Zealand and South Pacific, Visa Inc, Proof Committee Hansard, 16 October 2015, p. 70.

42 Reserve Bank of Australia, Submission 20, p. 14.

43 Mr David Masters, Head of Public Policy, Asia Pacific, MasterCard, Proof Committee Hansard, 22 September 2015, p. 48.

44 Mr Stephen Karpin, Group Country Manager, Australia, New Zealand and South Pacific, Visa Inc, Proof Committee Hansard, 16 October 2015, p. 69.

45 Ms Luisa Megale, Vice President Asia, International Public Affairs and Communications, American Express, Proof Committee Hansard, 22 September 2015, p. 40.

6.34 Visa added that American Express companion cards were a four-party model analogous to Visa and MasterCard cards. American Express had grown its market share significantly in recent years, and this growth was largely attributable to the current regulatory imbalance in the market.41

6.35 As noted above, merchants have some ability to recoup the cost of merchant fees through credit card surcharges. The RBA argued that the ability to surcharge 'is important to promote efficiency in the payment system and is also a means by which merchants can exert some downward pressure on the cost of payments'. However, like several other witnesses, the RBA noted its concern that some firms in particular industries may be surcharging excessively, and indicated that the matter was part of its current review of the Card Payments Regulation (which is discussed further below).42

6.36 MasterCard called the effect of surcharging on consumers 'abhorrent'.43 Visa indicated that its preference was for surcharging to be banned. In the event it was not banned, Visa recommended that there should be 'clear limits related to cost recovery only, backed with the enforcement of a government agency'.44

6.37 American Express referred to surcharging as a 'tax on payment at point of sale', and contended that surcharges had 'done absolutely nothing to benefit consumer outcomes'.45 While surcharging is justified as a way for merchants to recoup the cost of accepting a credit card payment, a range of witnesses noted that merchants also enjoyed substantial benefits by being able to use credit cards. Referring to the specific example of the hotel industry, where surcharging is common, American Express observed:

Hotels would not survive without taking that swipe [on a credit card] up-front as a security against you trashing their room or skipping out in the middle of the night. So they get a huge benefit from a credit card.46

46 Ms Luisa Megale, Vice President Asia, International Public Affairs and Communications, American Express, Proof Committee Hansard, 22 September 2015, p. 45.

47 Qantas, Submission 32, p. 2. For fees, see http://www.qantas.com.au/travel/airlines/schedule-of-fees/au/en.

49 Mr Michael Michael, private capacity, Proof Committee Hansard, 11 September 2015, pp. 1–3.

50 Mr Andrew James Parker, Group Executive, Government and International Affairs, Qantas Airways Ltd, Proof Committee Hansard, 11 September 2015, pp. 8–9.

51 Mr Andrew James Parker, Group Executive, Government and International Affairs, Qantas Airways Ltd, Proof Committee Hansard, 11 September 2015, p. 9.

6.38 Critics of surcharges often focus on surcharging in specific industries, and the Australian airline industry has been the subject of particularly strong criticism in this regard. Qantas imposes a flat credit card surcharge 'as a means of recovering a substantial part of its cost of card acceptance'. According to Qantas, Jetstar does not levy credit card surcharges, but rather a 'Booking and Service Fee' which is 'not linked to the cost of card acceptance'.47 Virgin Australia charges a 'Booking and Service Fee' for bookings made using a credit card, debit card or PayPal. It claims the fee 'covers a range of costs, activities, fees and charges in relation to the booking, including (among other things) the reasonable costs of accepting card payments'.48

6.39 Mr Klaus Bartosch, who has led an online campaign and petition against airline credit card surcharges, presented evidence to the committee that he claimed showed the airlines were 'profiteering' on credit card surcharges. He argued for an outright ban rather than a legislated cap on surcharges.49

6.40 Qantas claimed that it recovers only 81 per cent of its reasonable cost of card acceptance, as defined by the RBA, through its card surcharges. Qantas stressed that the costs of accepting credit cards went 'beyond merchant service fees, which vary between card types, and include people costs, processing costs, infrastructure, equipment, fraud, fraud prevention and other measures'. Qantas also noted that it offers passengers a range of other booking options that enable them to avoid paying the surcharge.50

6.41 Qantas advised that it charged a flat credit card surcharge, as opposed to a percentage of the purchase price, because of the administrative simplicity of the approach and the increased transparency it provider to customers. Qantas also indicated that while merchant service fees were percentage based, other costs involved in processing credit card payments were fixed.51

6.42 Similarly, Virgin Australia maintained that its use of a flat fee reflected the fact that its card processing costs were both fixed and variable, and, moreover, that a flat fee is the 'simplest and easiest mechanism for consumers to understand and also for the company to administer'. Virgin Australia also advised the committee that the revenue collected through its 'Booking and Service Fee' was less than the cost of accepting card payments.52

52 Mr Adam Thatcher, General Counsel, Group Executive Corporate Risk, Virgin Australia Airlines Pty Ltd, Proof Committee Hansard, 11 September 2015, p. 18.

53 The Treasury, Financial System Inquiry: Final Report (November 2014), p. xxiv.

54 The Treasury, Financial System Inquiry: Final Report (November 2014), p. 175.

Improve surcharging regulation by expanding its application and ensuring customers using lower-cost payment methods cannot be over-surcharged by allowing more prescriptive limits on surcharging.53

…the current reasonable cost surcharge rules are difficult for system providers to enforce, potentially complex for merchants to comply with and can cause frustration for consumers, as evidenced by the more than 5,000 submissions the Inquiry received on the matter. The rules are complex because each merchant needs to calculate its acceptance costs, which can involve subjective judgements about a number of factors. The rules are difficult to enforce because system providers have limited visibility of these calculations.54

55 Australian Government, Improving Australia's Financial System: Government response to the Financial System Inquiry (2015), p. 6.

56 Australian Government, Improving Australia's Financial System: Government response to the Financial System Inquiry (2015), p. 16.

57 Explanatory Memorandum, Competition and Consumer Amendment (Payment Surcharges) Bill 2015, p. 3.

6.46 The government further indicated that it expected the Payment Systems Board to complete its work on interchange fees and customer surcharging by mid-2016 (the Payment System Board's review is outlined below).56

6.47 On 3 December 2015, the government introduced the Competition and Consumer Amendment (Payment Surcharges) Bill 2015 into the Parliament. Consistent with the commitment given by the government in its response to the FSI Final Report, the bill will:

The amendments also ensure that the Australian Competition and Consumer Commission (ACCC) is the primary enforcement agency for the ban and that it has appropriate powers of enforcement.57

• the decline in transparency for some end users of the card systems, in part due to the increased complexity and the wider range of interchange fee categories;

• whether there is scope for interchange fees to fall further, consistent with falls in overall resource costs and as was contemplated in the conclusions to the 2007–08 Review; and

• widespread perceptions that card surcharges remain excessive in certain industries.58

6.50 On 3 December, the RBA released a Consultation Paper, which sets out the preliminary views of the RBA and new draft standards in relation to the regulation of surcharges on card payments and interchange payments in card systems. The RBA has invited written submissions on its Consultation Paper by 3 February 2016, and has indicated that it does not expect the Board will make any formal decision on changes to interchange standards before its May 2016 meeting. However, the RBA suggests it may be a position to make an earlier decision in relation to the surcharging standards.59 The RBA's preliminary views and the draft standards are summarised below.

58 Reserve Bank of Australia, Review of Card Payments Regulation – Issues Paper (March 2015), http://www.rba.gov.au/payments-system/reforms/review-of-card-payments-regulation/review-of-card-payments-regulation-issues-paper.html.

60 Reserve Bank of Australia, Submission 20, p. 13.

6.51 As noted above, interchange fees vary widely, with transactions with larger 'strategic' merchants often subject to significant discounts. Higher interchange fees have a corresponding effect on fees levied on merchants by their financial institution. As the RBA explained in its submission, 'the cost of the high interchange rates on premium or commercial cards falls entirely on small merchants and other merchants that do not benefit from special rates.60

6.52 The RBA has not proposed any change to the current system of weighted-average interchange benchmark of 50 basis points. However, it does propose supplementing the benchmark with caps on individual interchange fees, and proposes that no credit card interchange fee be able to exceed 0.8 per cent. These changes, it suggests, 'are expected to significantly reduce the extent to which small and medium-sized merchants are disadvantaged relative to a group of preferred merchants in the MasterCard and Visa interchange systems'.61

63 Reserve Bank of Australia, Review of Card Payments Regulation: Consultation Paper (December 2015), p. 8.

64 Reserve Bank of Australia, Review of Card Payments Regulation: Consultation Paper (December 2015), p. 37.

65 Reserve Bank of Australia, Review of Card Payments Regulation: Consultation Paper (December 2015), pp. 33-34.

…in a small number of cases in particular industries, surcharge levels on some transactions appear to be well in excess of the merchants' likely acceptance costs. This is particularly evident for certain lower-value transactions on which fixed-rate surcharges are levied, as in the airline industry.63

…moving away from a limit on surcharges based on 'the reasonable cost of acceptance' to one based on fees paid by a merchant to its acquirer (or payment facilitator), and obliging the provision to merchants of information on average acceptance costs for each system. This will be accompanied by the Government's amendments to the Competition and Consumer Act 2010, which will ban excessive surcharging and provide enforcement powers to the ACCC.64

6.56 The RBA has further suggested that the information provided by banks to merchants on card acceptance costs should be expressed in percentage terms, unless the cost for a particular payment method was genuinely fixed for all transaction values. This, it argued, 'should eliminate the practice—currently common in the airline industry—of charging the same dollar surcharge on transactions with very different costs to the merchant'.65

6.60 Finally, the committee notes that the RBA is responsible for payments regulation under the Payments Systems (Regulation) Act 1998, but given the RBA's independence, legislators do not have a direct influence on its regulatory decisions about the payments system. The committee would appreciate an additional perspective about the value and competitive neutrality of payments regulations, and recommends that the government consider a Productivity Commission inquiry into regulation of the payments system, with a particular focus on interchange fees.

1.1 Mr Ross Greenwood, Business and Finance Editor, Nine Network, hits the nail on the head when he describes a system where 'some of the poorest and most vulnerable in our community subsidise the wealthiest in our community'.1 The system adopted by credit card providers has in practice provided more benefits to those who are well off and has often come at a heavy price for those who are less well off.

1.2 The Committee heard that for some, quite possibly those who grew up with positive financial role modelling and those fortunate enough to receive some level of financial education, paying down the complete outstanding balance on a credit card at the end of each month results in a useful and often free service. As Mr Greenwood states 'a good customer pays nothing for their credit card'2 and is also rewarded with points or other benefits associated with the loyalty schemes of their providers.

1 Mr Ross Greenwood, Business and Finance Editor, Nine Network, Proof Committee Hansard, 27 August 2015, p. 37.

2 Mr Ross Greenwood, Business and Finance Editor, Nine Network, Proof Committee Hansard, 27 August 2015, p. 37.

3 Mr Ross Greenwood, Business and Finance Editor, Nine Network, Proof Committee Hansard, 27 August 2015, p. 37.

[T]he point is that the person who is suddenly in that position—who gets the offer through the mail and whose car has just broken down but who has to go to work—in the real world has to say, 'I've got to fix the car; I've got to put new tyres on the car; I've got to do whatever I do.' It is sheer desperation.3

1.5 Mr David Koch, Finance Editor, Seven Network, highlighted the predatory behaviour of banks, informing the Committee that 'the stats say you are more likely to get divorced than you are to change banks'.5 With this knowledge, banks entice new customers with interest free periods at a loss, knowing that once the customer is reeled in, they will potentially stay with the bank for life.

4 Mr Ross Greenwood, Business and Finance Editor, Nine Network, Proof Committee Hansard, 27 August 2015, p. 37.

5 Mr David Koch, Finance Editor, Seven Network, Proof Committee Hansard, 27 August 2015, p. 38.

6 Proof Committee Hansard, 27 August 2015, p. 52.

7 Mr David Koch, Finance Editor, Seven Network, Proof Committee Hansard, 27 August 2015, p. 39.

Senator XENOPHON: I have a question to David Koch. You talk about lower interest rates for the good risks. Firstly, how easy would it be, with algorithms, to objectively rate the risk and set the rate? Secondly, is the flip side of that higher interest rates for bad risks, or should those bad risks not have the same access to credit cards or at all?

Mr Koch: The information is readily available on every single Australian through their credit report and their credit score. It means a financial institution would actually have to treat a credit card customer as an individual to make a decision, rather than one of five million customers— 'You've all got to pay the same rate and we're just going to hose out increases in credit card limits because that is what we get rewarded for internally: the more customers that borrow more, the bigger the profits are going to be.' Getting that information to build a risk-based pricing system is pretty easy these days. If an insurance company can do it with your premiums, your own bank can, which has your own financial life on the screen in front of them. But it means you are going to have to focus. This is why I believe that there should be no unsolicited credit cards or increases in limits. When a customer comes to you and says, 'I would like a credit card,' they have made a decision and you have got to make, as a financial institution, an individual decision based on that customer. I think then we start to get a bit of a marrying of the minds.

Senator XENOPHON: So it is not so hard.6

1.7 Mr Koch aptly states that a credit card is a 'dream merchant'7—they offer easy money, enticing and enabling Australians to spend beyond their means. Is this responsible lending?

…credit cards are a wonderful thing (and) lower fees and charges are great but at the end of the day we as a community of people need to say that the big institutions have all the marketing power and the poor little consumer wants all of this stuff and has no idea of the consequences.8

8 Mr Paul Clitheroe, Chairman, Money Magazine, Proof Committee Hansard, 27 August 2015, p. 43.

9 Mr Alan Kirkland, Chief Executive Officer, CHOICE, Proof Committee Hansard, 27 August 2015, p. 56.

10 Mr Paul Clitheroe, Chairman, Money Magazine, Proof Committee Hansard, 27 August 2015, p. 46.

…the evidence from the caseworker organisations is that although a lot of disadvantaged people end up with long-term debt that is not the intention when they first engage with credit cards; it is just that it turns into long-term debt because they are given too high a credit-limit increase that builds up over time. They are not sent the signals, through their statements, that alert them to the risk early in the interactions with their credit card account. If we can protect people at the front end then we can stop that, what is overwhelmingly short-term debt initially, turning into long-term debt.9

1.12 Mr Koch and Mr Greenwood suggest consumer warnings, such as those found in gambling venues and on cigarette packaging. Mr Christopher Zinn, a consumer advocate suggests calling credit cards 'debt cards', 'because frankly that is what they are'.10