Chapter 1
Productivity Commission and the ABS rank Australians as
having between Level 1 (low) and Level 5 (high) for
Numeracy and Literacy Skills.
A person assessed at Level 5 possess up to five times the skills within the
particular domain (eg Numeracy, Literacy, Prose etc) than a person assessed at Level
1.
Level 3 or above is required
"to meet the complex demands of
everyday life and work in the emerging knowledge-based economy"
ASIC
2010 report notes
"These findings
have implications for our regulatory regime, which relies upon disclosure as
a critical element of our consumer protection system."
St. George and Westpac test Credit Cardholders with even Level 5
Numeracy and Literacy Skills
by expecting all their Credit Cardholders to read/comprehend voluminous
Conditions of Use
in a tiny font.
These results, when considered together with Australian Bureau of
Statistics‘ research into Australians‘ general document literacy and
numeracy,15
in particular
their ability to meet the complex demands of a knowledge-based economy,
suggest that about one in two Australians do not have the skills required to
make informed choices in their interactions with the financial services
sector.16 There is also
an identifiable age link, with document proficiency tending to decrease with
age.
14 For
example the 2008 ANZ study of financial literacy found that ‗67% of
respondents said that they understood the principle of compound interest,
but only 28% were
rated with a good level‘ of comprehension when they solved the problem‘,
ANZ Banking Group Limited,
ANZ survey of adult financial literacy in Australia, (The Social Research Centre) ANZ Banking Group, Melbourne, 2008, p. 19.
15
As part of an
international study, the ABS measured skills in document literacy, prose
literacy, numeracy and problem solving and found that approximately 7
million (46%) of Australians (and 7.9 million (53%) of Australians aged 15
to 74) had proficiency less than the minimum required for individuals to
meet the complex demands of everyday life and work emerging in the
knowledge-based economy‘ for document literacy and numeracy respectively‘,
Australian Bureau of Statistics,
Adult literacy and life
skills survey results, cat. no. 4228.0, ABS, Canberra, 2006, p.
5.
16
These findings
have implications for our regulatory regime, which relies upon disclosure as
a critical element of our consumer protection system.
"The ABS research groups literacy and numeracy
into six skill levels (where below Level 1 is lowest and Level 5 is
highest), and problem solving in technology-rich environments (PSTRE) into
four skill levels (where Below Level 1 is lowest and Level 3 is highest).33
The Productivity Commission’s analysis of these results highlights that many
Australians have relatively low literacy and numeracy skills and this limits
the range and type of tasks that they can do in comparison with those with
relatively higher skills.34
Groups with relatively low literacy and numeracy skills include:
‘people
with low levels of education; older persons; people not working; and
immigrants with a non-English speaking background’.
35
Behavioural indicators
Research tells us that
Australians have differing attitudes to money and varying levels of
financial knowledge and proficiency.22 People may perform well on some
aspects of financial literacy, but poorly on others.23
The latest report on
Australians’ financial literacy, the 2011 ANZ Survey of Adult Financial
Literacy in Australia (ANZ Survey), is the fourth in a series of
national snapshots conducted by the ANZ Banking Group since 2003.24
Many people underestimate the
extent of their own knowledge gaps. So their behaviour, even in simple
day-to-day money management, may not be consistent with how confident they
are in their abilities. As discussed on page 8, individual financial
decision-making behaviour may also be influenced by personal or
environmental circumstances.
The 2011 ANZ Survey also highlighted a number
of areas of behavioural vulnerability, particularly in keeping track of
finances and planning ahead:
one third (36%) found dealing with money
stressful, even when things were going well
Results of the 2011 ANZ Survey confirm the complex and variable nature of
individual financial decision-making. A range of factors were found that may
help explain differences in financial literacy levels, such as financial
attitudes, age, financial knowledge and numeracy, household income, and
education and occupation.29
The Productivity Commission’s analysis of these results highlights that
many Australians have relatively low literacy and numeracy skills and this
limits the range and type of tasks that they can do in comparison with those
with relatively higher skills.34 Groups with relatively low
literacy and numeracy skills include: ‘people with low levels of education;
older persons; people not working; and immigrants with a non-English
speaking background’.35
Research shows that
Australian women typically have lower numeracy levels, find dealing with
money stressful or overwhelming and have more difficulty with
retirement-related investment decisions than men.63"
The above
extract of page 13 of the
National Financial Literacy Strategy
2014–17
notes that according to the ABS 21.5% of the Australian population do not
posses the Numeracy Skills to "shopping around
for the best deal on a credit card"
or
making timely credit card or
mortgage repayments.
"A necessary part of financial literacy is
knowing how to track your expenses and live within your means.
Data from
Roy Morgan Research in 2012 shows that, within the 16–24 age group, one in
10 carry forward more than $2,000 in credit card debt each month, suggesting
difficulties in managing money.49"
"Feedback from the 2013 Consultation also
identified the need for a mechanism to share relevant findings from existing
national surveys (for example, focusing on the savings and credit card
behaviour of Australians)."
These results, when considered together with Australian Bureau of
Statistics‘ research into Australians‘ general document literacy and
numeracy,
15
in particular their
ability to meet the complex demands of a knowledge-based economy, suggest
that about one in two Australians do not have the skills required to make
informed choices in their interactions with the financial services sector.16
There is also an identifiable age link, with document
proficiency tending to decrease with age.
The above published reports from the
Productivity Commission, ABS and ASIC is patent evidence that a
“community service
obligation” has existed for at least 20 years for
the (small 'g') government to take stringent action because during that
post-deregulation era Credit Card Issuershave -
Relying upon the Productivity Commission and the
further ABS above rankings for the
domains/categories of
Numeracy and Literacy Skills, less than half of the top Level 5
Credit Cardholders (approx 5% of
Credit Cardholders) could
read and comprehend the follow three Conditions of Use booklets from St. George,
ANZ and Westpac:
'Introduction' "The credit card
contract governs the operation of the credit card account and your use of a
credit card. It is important that you read and understand the credit card
contract. The credit card contract is set out in your Letter of Offer and Parts
A and B of this booklet."
"The
following summary is designed to highlight some of the important information
about your credit card account and to help you identify where to find further
details within this booklet. The summary is not a substitute for the terms of
Parts A and B of this booklet, which
you should still read and understand."
Part A of the booklet has 51 pages. Part B has 22 pages.
Further in 'Introduction' is:
"Finally, you should also read the notice ‘Things
you should know about your proposed credit contract’,
which is included in this booklet following Parts A and B." '
'Things you should know about
your proposed credit contract’ is 7 pages. Hence, ANZ tells its
Credit Cardholders to read the entire 97 pages of its booklet.
Clause (4) 'Allowing
use by others' includes:
"(b) The account holder is responsible to ANZ for the operation
by an additional cardholder of the credit card account and any
other account linked to the credit card account. If an
additional cardholder does not comply with the credit card
contract, the account holder will be liable to ANZ. The account
holder should therefore ensure that each additional cardholder
receives a copy of the credit card contract and reads and
understands it."
The word "interest' appears 216 times in the booklet. The word 'fee' or
'fees' appears 104 times.
Westpac has two
separate Credit Card booklets both "Effective as at 28 Oct 2016":
- "Combined
Conditions of Use and Credit Guide' for Credit Cards"
in Arial 11 font:
The word 'interest' appears in the 'Contents' once and 98 more times throughout
the 63 pages. The word 'fee' or 'fees' appears 90 times. The word
'Contract' appears 81 times.
Sub
clause (c) of clause 1.1 'Introduction' notes:
"These Conditions of Use do not, on
their own, contain all the terms applying to your Credit Card, so it
is important that you read all of the documents comprising the
Credit Card Contract carefully and retain them for future
reference."
Clause 17. 'Do I have any other rights and obligations?':
"Yes. The law will give you other
rights and obligations. You should also READ YOUR CONTRACT
carefully."
- "Ignite
by Westpac - Consumer Credit Card Conditions of Use"in
HelveticaNeue-Light 9 font.
The
word 'interest' appears in the 'Contents' once and 92 more times throughout
the 43 pages. The word 'fee' or 'fees' appears in the
'Contents' once and 74 more times throughout the 43 pages. The below statement appears on the front cover of "Ignite
by Westpac - Consumer Credit Card Conditions of Use": "This User
Guide forms part of your Credit Card Contract, along with the information
set out on the reverse of your welcome letter which advises you of your credit
limit and other prescribed information we are required to give you by law."
Clause 17 is "Do I have any other rights and obligations? Yes.
The law will give you other rights and obligations. You should also READ YOUR
CONTRACT carefully."
CBA's Credit
Cards 'Conditions
of Use' booklet in Arial 9 font is only 21 pages.
The word 'interest' appears 44 times. The word 'fee' or 'fees' appears 20
times.
Clause 1.
of the booklet titled 'Your contract with us" notes:
"Please read both these Conditions of Use and the Schedule of Credit
Card Particulars in your letter of offer, which together make up
your contract and include the information we must give you."
Chapter
2. 'User Pays Principle' is evident in the price of every commodity in the
market place, except Credit Cards
'Supply and Demand' is arguably
the most fundamental concept in economics and the foundation of any free
enterprise market economy. The 'User Pays Principle' is
the omnipresent pricing mechanism to achieve the most equitable distribution of resources in
any such market economy. It
promotes responsibility and accountability and encourages 'Supply'. 'User Pays' occurs when consumers pay the 'full
cost' of
the goods or services that they consume - if
you want to acquire a good or service in the market place, you pay the market
price be it petrol, alcohol, groceries, paying the rent, engaging a plumber or
visiting the GP.
This deep-seated
fundamental of the 'User' paying the market price for a 'good' or 'service'
applies in all sectors of any open market
economy, even in the banking
sector
(eg. housing loan, personal loan, corporate loan, syndicated infrastructure
loan, overdraft, buying a bank cheque,
issuing a personal cheque, buying a money box etc.). But
the 'User Pays Principle'
does not Credit Cards.
Chapter
3. Basic Credit Card of
55+ years ago now includes 'Sweets', 'Sours'
and
'Spiders'
The ubiquitous Credit Card is
the solitary 'service' instrument omnipresent throughout the industrialised world that has morphed -
* from a simple Charge Card
some 65
years ago where the monthly Total Amount Owing
had to be repaid in full at the end of each month in order to be allowed to
continue using the
Charge Card
Product
Differentiation is a fundamental of micro-economics - making a homologous
product (low barriers to entry) different from your competitors' similar
homologous product to attract sales. (c) to (g) above is a shining example
of Product Differentiation for the 'core purpose' of the humble plastic namely a quick swipe
to
establishes the Purchaser's 'ability-to-pay' to pay.
The term, Grace
Period, is used in North America and Europe to describe what Australians call
the Interest Free
Period.
The first universalCredit Card,
which could be used at a variety of establishments, was introduced by the
Diners' Club Inc., in 1950. Another majorCredit
Cardof
this type, known as a travel and entertainmentcard,
was established by the American Express Company in 1958. Diners Club and American Express' decision to provide a
Grace Periodas an inducement/lurewhen mass marketing their 'new fangled' Credit
Cards in the early 1960's has proven to be a marketing 'master stroke'.
A lot ofArgy Bargy
periodicallyamongst the following
lobby groups oversupply/demand impacts
and cost-based benchmarking of services/funding costs have contributed to
"competitiveness and efficiency
in pricing" on the Wholesale Supply Side of the
Debit Card and
Credit Card Systems in Australia:
* Visa,
MasterCard, Amex, Diners Club
* eftpos
*
ePal - part-owned by the Four
Pillars and also Coles and Woolworths
* Australian
Payments Clearing Association
*
AMA,
The
Pharmacy Guild, Retail Traders Association,Australian Newsagents Federation,
other Merchant
special interest groups *
TYRO Payments Limited
(b) does not
contain a powerful lobby
group to represent the interests of
Credit Cardholders (unlike the Wholesale Supply Side)to ensure equitable 'User Pay' pricing.
A Credit Card is
the only style unsecured personal loan that does not charge the customer a 'loan limit fee'
and a usage fee based on the loan
outstanding unilaterally for each usage.
the Bank’s payments
system policy
is
directed to the greatest advantage of the
people of Australia; and
the powers of the Bank
under the
Payment Systems (Regulation) Act 1998 and the Payment
Systems and Netting Act 1998 are
exercised in a way that, in the Board's
opinion, will best contribute to:
promoting competition in the market for
payment services, consistent with the
overall stability of the financial
system.
"Based on estimates of the overall cost of funds for banks, it is
possible to calculate the spreads on different lending rates (Graph 17).11 The
data indicate that the interest rate on bank credit card portfolios is around 9
percentage points above the cost of funds, while the spread for those borrowers
who are paying interest is about 14¾ percentage points. These spreads rose
significantly in the global financial crisis (when funding rates fell
significantly but credit card rates fell by much less) and have remained at that
level or drifted modestly higher since.
The observation that issuers compete
actively for customers yet credit card interest rates are high and do not
closely follow changes in funding costs is consistent with international
experience and has been studied by academics. The most well-known paper
addressing this issue is a study by Ausubel (1991) for the United States. The
study notes the apparent paradox that a market with few barriers to entry and
the presence of 4 000 competitors could be characterised by very sticky interest
rates and card issuers making much higher rates of return on their credit card
lending than on other lines of business. Based on the work of Ausubel and
others, it seems reasonable to explain
the apparent paradox as resulting to a large extent from the existence of a
significant number of consumers who are either not well informed or (for various
behavioural reasons) are reluctant to switch banks or seek a lower rate.
At the same time, banks may have little incentive to lower interest rates, given
that rates are not a determining factor for many individuals who may (possibly
mistakenly) not expect to build up significant balances, while in the case of
other individuals, banks may worry that lower rates may attract lower-quality
borrowers.
Below is an
extract from 'Summary' in THE OFFICE OF REGULATION REVIEW dated mid-1990s which
commented that should bank fees and charges change in the future
the most efficient approach would be to
provide specific groups of customers with fee-free basic banking services, with
the Commonwealth Government reimbursing the banks for the costs of doing so:
"The structure of
bank fees and charges could change in the future. In that case, the argument
for government intervention may become stronger. However, any such
intervention would not be without cost. On balance, the ORR considers that,
if the
government chose to intervene, the most efficient approach would take the
form of a “community service obligation” on banks to provide specific groups
of customers with fee-free basic banking services, with the Commonwealth
Government reimbursing the banks for the costs of doing so."
"The Inquiry noted that there is currently no process for regularly assessing
the state of competition in the financial system, nor a requirement for
regulators to demonstrate that they have given consideration to the trade-offs
between competition and their other objectives, creating the risk that
competition issues may be ignored.
The Inquiry recommended reviewing the state of competition in the financial
system, as well as improving the way in which regulators report how they balance
competition against their core objectives and to include explicit consideration
of competition in ASIC’s mandate. The review would examine and report on whether
there are barriers which are inappropriately limiting competition or imposing
barriers to foreign or domestic market entrants. "
Five extracts that evidence that Financially Savvy Users Don't Pay - some Are Paid
"Within the latter group, there is
a third group which directly contributes very
little to the costs of credit card schemes –
these are the
Credit Cardholders
(known as ‘Transactors’) who settle their credit card
account in full each month. Although they
normally pay an annual fee, they pay no
transactions fees, enjoy the benefit of an
interest-free period and in many cases earn
loyalty points for each transaction."
"As an aside it is necessary to deal with so-called travel and
entertainment charge-card schemes branded Amex and Diners. The affront to the
community inherent in these schemes should be dealt with resolutely.
The
distinguishing practical function of these schemes is to convert inflated
business expenses into untaxed personal income, delivered to the card holders as
flyer points to use at their discretion personally. Both these schemes would
cease to exist if and when the ATO required recipients of the flyer-point
income-in-kind to declare it as income and pay tax on it.
That is all that needs to be said about these rackets – never get intrigued
into debates about 3-party and 4-party schemes."
This disparity between 30% and two thirds indicates that a small portion of
Credit Cardholders are carrying very high
Credit Card Debt Accruing Interest.
Graph 6 below evidences that
higher-income households use credit cards much
more frequently that debit cards; however debit card use is more common for
lower-income households.
The above Australian
calc of
AUD$6,095 average debt is per Credit Card of the 5,280,000 (33% of all Credit Cards)
held by
Revolvers
of the 16.09 million Credit Cards owned by Australians. The above ave of
USD$7,453
from the
McKinsey Report
represents agg. debt per
Credit Cardholder
amongst the
'Financially stressed'.
"Recommendation 9
- The government should consider expanding financial literacy programs
such as the Australian Securities and Investments Commission's MoneySmart
Schools Program."
·"The
rate on credit cards is found to be the most sticky, followed by personal loan
rates, the housing loan rate and the small business overdraft rate.
·In
contrast, the rates on personal loans and credit cards do not appear to be more
flexible in the deregulated period."
The RBA would likely
retort that it de-regulated loan and deposit interest rates following the
recommendations in the Campbell Report. Chapter 17 below notes:
"The tide of utilitarianism rose
slowly, and a lengthy campaign was necessary before the financial
deregulation of 1854, which abolished the British interest rate cap.
However, one act of deregulation cannot quell an argument that has been going on for millennia. Over the following century the tide gradually turned towards re-regulation, culminating with detailed requirements imposed on the financial sector (particularly the banks) during and immediately after the Second World War. We now trace the gradual lead-up to this second phase of regulation."
"Obviously this is a pretty radical
act, and it will be fought," he replied. "But I think the American people
are disgusted with the financial industry. They want change.
You could argue that an interest rate of 15% or 18% is more than enough to
accommodate any amount of risk on the lender's part.
If a loan appears
riskier than that, don't make it.
What we have to ask as a nation is
whether it's ethical to charge people 30% interest rates," Sanders said.
"This is loan sharking. Let's call it what it is."
Hence, the above
"Recommendation 9
- The government should consider expanding financial literacy programs
such as the Australian Securities and Investments Commission's
MoneySmart
Schools Program" totally ignores
assisting the
33% of
Credit Cardholders that are
Revolvers'
that carry 100% of the
$33.1 billion
of interest bearing
debt.
The average credit card interest rate at 31 May 2015 was 17.61%. Instead
of falling in line with the cash rate, the average credit card interest
rate has risen by 0.2% over the last four
years from 17.41% in June 2011.
1
1
Based on an analysis
by Mozo of interest rate changes of over 170 credit cards between 2011
and 2015. Unless otherwise noted, all data in section oneis based on
figures supplied by Mozo.
The graph above compares the average credit card interest rate on all
cards to the interest rate if cards responded to RBA announcements. If
credit card interest rates had moved in line with RBA cash rate
announcements, as they largely had before 2011, the expected average
interest rate in May 2015 would have been 14.70%.
Few card providers respond to cash rate announcements
Very few card providers have passed on any reduction in interest rates
as a result of changes in the cash rate since late 2011. An analysis of
over 55 major card providers from November 2011 to May 2015 found that
at most 16% of card providers made any change to interest rates in the
month after a reduction in the cash rate (see table below). Rate
decreases varied by as little as 0.1% right up to several percentage
points, suggesting that not all changes were linked to cash movements."
The spread between the wholesale
cost of funds and Standard Credit Card
"For example, at the end of June 1985
interest rates were in the range 17.25% to 19%."
* December 1987 - spread
2½%
Based on the immediately below two Light Blue RBA graphs titled "Simple
Measures Of Bank Margins" that appear in RBA's "Bank Interest Rate Margins
dated 1992,
that 2½
years after "the jail door was thrown
open in April 1985 and the money lenders were released", namely in Dec 1987, the variance between the then
overnight cash rate and the Standard Credit
Card Purchase
Interest Rate
was 2½% (13½%
minus 11%).
The
Interactive hover
mouse on that RBA webpageCash Rate displays the
Cash Rate at 15.5% in July 1990.
The below RBA Graph 6 'Credit Card Interest Rates' (sourced from
Developments in the Card Payments Market - Mar 2015)
shows the Standard Credit Cards
Purchase
Interest Rate @ 23.5%
on 1 July 1992 and spread of
12.5% (23.5% minus 15.5% = 8%).
*
Sept 1990 - spread 9.5%
The
Interactive hover
mouse on that RBA webpageCash Rate displays the
Cash Rate at 14% in Sept 1990.
The below RBA Graph 6 'Credit Card Interest Rates' (sourced from
Developments in the Card Payments Market - Mar 2015)
shows the Standard Credit Cards
Purchase
Interest Rate @ 23.5%
on 1 Sept. 1992 and spread of
12.5% (23.5% minus 14% = 9.5%).
*
January 1991 - spread 11.5%
The
Interactive hover
mouse on that RBA webpageCash Rate displays the
Cash Rate at 12% in Jan 1991.
The below RBA Graph 6 'Credit Card Interest Rates' (sourced from
Developments in the Card Payments Market - Mar 2015)
shows the Standard Credit Cards
Purchase
Interest Rate @ 23.5%
on 1 Jan 1991 and spread of
12.5% (23.5% minus 12% = 11.5%).
When Messrs.
Lowe and Rohling wrote their Discussion
Paper,
LOAN RATE STICKINESS: THEORY AND EVIDENCE
in June 1992 - seemingly on a topic of some significance -
the Interactive hover
mouse on that RBA webpageCash Rate displays the
Cash Rate at
6.5% in June 1992.
The below RBA Graph 6 'Credit Card Interest Rates' (sourced from
Developments in the Card Payments Market - Mar 2015) displays the
Standard Credit Cards
Purchase
Interest Rate @ 23% in
June 1992 with a spread of 16.5%.
Little wonder Messrs Lowe/Rohling
wrote their Discussion Paper highlighting that the Credit
Cards
Purchase
Interest Rate had been markedly
sticky or stucky, because the spread had blown
out from 12.5% to 16.5% in 11 months because credit card interest rates
were 'stuck'.
* July 2001 - spread 11.5%
The
Interactive hover
mouse on that RBA webpageCash Rate
displays the Cash Rate at 5% in July 2001.
According
to a 2013 RBA survey, only around 30 per cent of credit card users reported that
they pay interest on their credit card balances (the ‘Revolvers’)."
"Within the latter group, there is
a third group which directly contributes very
little to the costs of credit card schemes –
these are the
Credit Cardholders
(known as ‘Transactors’)
who settle their credit card
account in full each month. Although they
normally pay an annual fee,they pay no
transactions fees, enjoy the benefit of an
interest-free period and in many cases earn
loyalty points for each transaction."
[Above two extracts sourced from
"Five extracts that evidence that Financially Savvy Users Don't Pay - some Are Paid"
above in this Chapter 5].
The Board has been given the backing
of strong regulatory powers,
unique
among central banks."
*
"The Reserve Bank
is the principal regulator of
the payments system
through the PSB."
A.
powers to gather financial
information from ADIs; and
B.
responsibilities to
'inter alia'
"best
contribute to.......... the
economic prosperity and welfare of the
people of Australia",
are more
extensive/inflexible
than the -
1.
Bank of England,
that was not
nationalized as
Britain's central bank
until 1946, which is a
corporation wholly owned
by the UK government -
the 'Corporate governance: Board responsibilities' –
SS5/16 (Short form) and the (Long
form)focus on the Corporates it
regulates with no
apparent obligation to
best contribute to the
peoples of Britain; and
"The Federal Reserve
advances supervision,
community reinvestment,
and research to increase
understanding of the
impacts of financial
services policies and
practices on consumers
and communities."
One can only ponder whether "Loan
Rate Stickiness" is still
a concern of the Reserve Bank, but it was in 1992 - at least to the two
authors:
The '16.5% Differential'
[between the
Overnight Cash Rate of 1.5% (as at 27 Dec 2016) and the 18% 'Cap On Credit CardInterest Rates'
(forPurchases and Cash Advances)] could be
'locked in'. Whereupon if the
Overnight Cash Rateincreased to say 3%, the 'Cap On Credit CardInterest Rates' would increase to 19.5%
('16.5% Differential' + 3%).
If credit card
scheme restrictions were to remain largely unchanged, the main beneficiaries
of the arrangements would continue to be:
(i)
credit card Transactors who settle their credit card account in full each
month; and
(ii) credit card
Scheme Members and the
Schemes
themselves.
Credit card Transactors make
only a very small contribution to the revenues earned by credit card issuers
(Table 5 below). Transactors pay, at most, an annual fee to hold a
credit card, but receive interest-free credit and may be eligible for
loyalty points which accrue in proportion to the value spent on their credit
card. Around one quarter of credit card balances outstanding do not
attract interest.
Based on information provided to the Joint Study by
card Scheme Members,
revenues received from Transactors from annual fees fall short of the cost
of providing the interest-free period and loyalty points by around $90
million a year. That is, Transactors are subsidised by this amount
each year.
A continuation of current price
incentives would be expected to increase the size of the transfer from the
community to credit card
Scheme Members. Credit card 'Issuing' and 'Acquiring' are
currently very profitable activities in Australia. Information
provided to the Joint Study by card scheme members showed that the provision
of credit card services
generates
revenues well above average costs, especially for financial institutions
which are both significant card issuers and acquirers.The margins are
particularly wide in credit card acquiring (Table 6). Although card
scheme members were generally unable to supply suitable capital data,
indicative figuring by the Reserve Bank – based on the main risks against
which capital would be held – suggested that the margins in credit card
issuing and acquiring were well above what would be required to provide a
competitive rate of return on capital.
The
designated credit card schemes would also continue to benefit from current
arrangements. MasterCard and Visa earn revenue from credit card activities
in Australia through their operational role in providing switching
facilities to participants. The schemes typically charge their members a
flat fee per transaction for processing transactions through their switch, a
source of income which has risen significantly over recent years in line
with the strong growth in the number of credit card transactions."
"the
worst financial scams and unscrupulous market conduct in the country"
(Predatory
Advertising) on a daily basis
within some web and newspaper
advertisements for
Credit Card Products that have patently
proved very costly for
Credit Cardholders with poorFinancial Literacy
Skills.
Federal and State Govt's that fund $43m annually
-
* should obtain from senior Financial Counsellors descriptions of
misleading, deceptive or
Unconscionable
Credit Card
advertisements; and
* pass those descriptions onto
Australia's Three Financial Regulatorsthat should ensure that those offending Credit Card
Issuersareharshly fined
Ms Katherine Temple, a policy officer with the Consumer
Action Law Centre in Melbourne, provided the
Senate
Economics
References Committee
with some insight into
its work with people struggling with
Credit Card DebtAccruing Interest, and by extension the
scale and severity of the problem in the community:
"Queensland is the host
state and custodian of the national consumer credit regulatory regime.It is also the home
base of some of the worst financial scams and unscrupulous market conduct in
the country. Many of these scams spread south and west much faster than the
cane toad has so far been able."
"A key responsibility the financial counselling community shoulders in
responding to its client base is to ensure the experiences those people
report are recorded and appropriately considered in service design and policy, social action
and law reform activities. Sadly, the otherwise rich data pool that the
450 odd financial counsellors working around Australia have access to, is also
fragmented. Representatives from the Commonwealth Financial Counselling Program
are here today. I congratulate them on evolving efforts to collect and produce
more useful data. The conversation around data collection and usage does require
greater engagement with and of the financial counselling community and all of
the various funding sources around the country."
7th
extract:
SMH article "Middle class hit by debt"
notes thatTony Devlin, a senior
Financial Counsellor at
Salvation Army's
"Moneycare" service, has
interviewed hundreds of level 1 and level 2 Australians who have incurred huge
debts on multiple credit cards. "There are far more middle-income earners seeking a way out of the desperate
cycle of huge mortgage repayments and mounting credit card debt.........And
people try to keep the ship afloat by using more credit cards."
The Writerspoke to Tony Devlin on Wed 7 Dec '11. Tony told
him
"It is not uncommon to meet
people in financial trouble who had significant debts on between
6 and 10 credit cards."
A. assist agencies
(charities/not-for-profits/community
organisations) that
offer
financial counselling services to provide a high quality of service; and
B. set out the essential requirements an agency
should meet if it wishes to offer financial counselling services.
Below are
extracts from the above FCA booklet which relate to
Financial Counsellors
maintaining records whereby useful data/information can be provided back to their 'funders':
1. Financial counsellors
also work to prevent financial difficulty through community education and by
providing input to government and industry policy development processes.
2. The agency
keeps
complete and legible records in relation to each matter where it provides
financial counselling services.
3.
The agency submits reports to its
funders in the required format and within the required time frames.
4. The agency
collects and
analyses data concerning:
(a) Demographic information about the
clients who use the service.
(b) Systemic issues that are identified in
the course of service delivery.
5. The agency participates
in evaluation concerning the effectiveness of its financial counselling
services.
A shocker of misrepresentation and deceit was that some Credit Card Issuers were offering a Zero Balance Transfer
(for say one or two years) and then -
i) applying monthly repayments of
Purchases
to
reduce the Zero Balance
Transfer amount; and
ii) charging 20% circa on those
Purchases
from date of each Purchase
and in some cases, withdrawing the Interest free Period for one or two months.
(A.) descriptions
of
misleading, deceptive or unconscionable
web and newspaper Credit Card advertisements (Predatory
Advertising)
and pass those advertisements
onto
Australia' Three Financial Regulators
that should ensure that offending
Credit Card
Issuersare
prosecuted,
with ASIC (or another) imposing hefty monetary fines and public exposing
the practice; and
The U.S. Federal Reserve's annualReport to the Congress
on the Profitability of Credit Card Operations of Depository Institutions - June 2016
includes the below Table 2 which
shows that 'USA Credit Card Banks' in 2015 had Net Interest Income of 8.73% and
Net Non-Interest Income of -1.94% of average quarterly assets.
USA Credit Card Banks are defined as commercial
banks with average assets greater than or equal to $200 million with minimum 50
percent of assets in consumer lending and 90 percent of consumer lending in the
form of revolving credit.
The below two 'pie charts' appears in a journal report titled
"Who Pays for Credit Cards?"dated 2001 which displays a break-up of
Card Issuers'
Revenues for the
aggregate of Visa, MasterCard and Discover Credit Cards in the USA. It shows
that U.S. Interest Revenues of 75% and associated Penalty Fees Revenue (Late
Payment Fees and Overlimit Fees)
of 6.3% and Cash Advance Fees of 5.4% aggregate to 86.7% of U.S. Card Issuers' Annual Revenue.
Interchange Fees charged to Merchants were only 10.7%.
'Chargeoffs' are bad debts written-off or
sold to a collections agency.
It is a sad reflection of any unsecured personal loan lending product
that almost one third of operating 'Costs' is debt written off annually.
No other lending
product could survive with writing off one third of lent money annually.
This lending product can only be maintained because of the extraordinary
quantum of interest/fees based revenue stream evident in below
Revenues
'pie chart'.
Below are extracts from 'Estimating
the Volume of Payments-Driven Revenues' dated 2003 published by
POLICY STUDIES presented by
Federal Reserve Bank of Chicago which relate to Figure 1 on LHS that breaks up
the revenues from US Banks that issued Visa and MasterCards in 1999:
The pie chart shows that net U.S. Interest Revenues from Credit Cards of 71%, Penalty
Fees Revenue (Late
Payment Fees and Overlimit Fees)
of 7% and Cash Advance Fees of 5% aggregate to 84% of U.S.
Card Issuers' Annual Revenue. Interchange Fees
charged to Merchants are only 14. Notwithstanding that
Interchange Fees are levied at a materially
higher amount in the USA,
Interchange Fees account for
less than 11% of aggregate U.S. Card Issuers' Revenue in the first above
pie-chart.
"A
third of Americans do not own a credit card, according to our
survey. Of those who use them, here's how much money they owe"
The disturbing disclosure from the above two 'Revenue' pie
charts is that the aggregate of Interest, Cash Advance Fees, and Penalty Fees
(Late Payment and Overlimit) aggregate from a high of 86.7% down to 84% of aggregate
Credit Card Issuers 'Revenue'.
Annual Fees do not exceed 2% of 'Revenue' in either above pie chart.
The above graph appeared in the USA
Financial Times on Dec. 23, 2016 article discussing credit cards. One of the
charts (“Different business models”) shows a breakdown of spread revenue vs.
non-spread revenue for six major Credit Card Issuers in the USA.
Patently the top five Credit Card Issuers are deriving "The Lion's Share" of Revenue from the implicit
interest margin between "where they borrow money and the interest rates they
charge out" on Purchases and Cash Advances on some credit cards.
Fee
income is relatively minor, except for Amex, BoA and perhaps Capital One.”
Section 8 of the Fair Credit and Charge Card Disclosure Act of 1988 directs the
U.S. Federal Reserve Board to transmit annually to the U.S. Congress a written
report about the profitability of credit card operations of depository
institutions. Last August the
Board of Governors of the
Federal Reserve System presented its 26th "Report
to the Congress on the Profitability of Credit Card Operations of Depository
Institutions".
The Reserve Bank's webpage "Accountability"
provides a section titled 'Accountability to Parliament' which notes that the
Governor of the Reserve Bank has provided every few years since 1998 to the Commonwealth Parliament a Statement on the
Conduct of Monetary Policy.
A precedent is therefore in place with the U.S. Federal Reserve reporting
annually in writing to the U.S. Congress on various aspects of Credit Cards
Profitability, for the Reserve Bank to similarly report annually to the
Commonwealth Parliament on various aspects of Credit Cards profitability which
would include Credit Card Issuers complying with
Section 3.4.8
Changes to benchmark compliance.
"The
Reserve Bank’s policy-making role is one of the four different roles of the Bank in the
payments system (see ‘Box 8A: The Roles of the Reserve Bank in the Payments
System’).
The Reserve Bank is the principal
regulator of the payments system through the PSB. Payments Policy
Department has responsibility for providing advice to the PSB."
"The Payment Systems (Regulation) Act 1998 gives the Reserve Bank of Australia
'extensive powers' to gather information from a
payment system or from individual participants."
"The Payments
System Board was established by the Commonwealth
Govt. in 1998 so as to best contribute to:
.......... and
promoting competition in the market for payment
services."
(i) same
style 'pie charts' for "Card Issuers'
Revenue" [that quantifies at least seven revenue sources] and "Card Issuers'
Costs" [that quantifies at least five costs, which include Rewards Programs] that is displayed in
Chapter 8;
CEOs would like you to believe that Credit Card Products have very high
bad debt write-offs, but do they? What annual write-off amount is high for
a Pillar Bank?
LNP's Scott
Buchholz asked how much revenue Westpac's credit card business
generates.
"Where would you
allocate the profit to?"
"We don't have a credit card business,"
Westpac's CEO, Mr Hartzer responded that credit
cards fell within multiple business units.
After a brief
circular exchange Committee Chair David Coleman intervened by asking Mr Hartzer
to confirm he wasn't answering the question.
"What I'm saying is
that we're not able to
answer that question because we don't have a credit card business per se,"
Mr Hartzer said.
David Coleman
noted the Committee might be in-touch about this issue.
Labor’s
Matt Keogh is curious about the profitability of credit cards and asked ANZ
CEO
, Shane
Elliot, who responded:
“I’m not sure that we disclose that,
but I’ll give you a rough idea. It would be, after tax, a couple of hundred
million dollars,”
Elliott acknowledged that it is a large amount of money,
albeit a small share of the banks’ overall earnings.
The Australian - 6 Oct 2016 reported that Commonwealth Bank's chief
executive, Ian Narev, resisted providing returns across products, claiming
these are commercially sensitive for competitive reasons.
"Commonwealth Bank boss, Ian Narev, has defended the
bank’s exorbitant credit card interest rates, insisting it’s high-risk debt, AAP writes.
Mr. Narev was grilled today over credit card rates. He was asked why the cash advance rate on the
bank’s low rate card was more than 21 per cent, when the official cash rate is
just 1.5 per cent. “To me, that’s gouging, that’s excessive,” coalition
backbencher Scott Buchholz said. “It is a highly profitable part of the business,
how is that fair?”
Mr. Narev said he understood the concerns, but
argued the bank did not encourage its customers to take on high amounts of
high-risk debt.
“I said we came in here with a spirit of openness
and listen to suggestions and we will,” Mr. Narev replied."
Shane Elliot has given Liberal MP Scott Buchholz an
illustrative breakdown of costs in the credit cards business (re
the pie chart on RHS "Costs" in Chapter 8 above):
"If the credit card
section were a stand-alone business, he says -
*
25 per cent of the cost would be the cost of funds.
*
another quarter would be features - insurance, reward points etc
*
while about a third are the administrative systems needed.
*
the balance, slightly less than 20 per cent, is lost through bad debts and
fraud."
ANZ CEO, Shane Elliot, responded to a question about
the profitability of credit cards,
“I’m not sure that we disclose that, but I’ll give you a rough idea. It would
be, after tax, a couple of hundred million dollars,”
Elliott says, acknowledging it is a large amount of money
albeit a small share of the banks’ overall earnings.
ANZ
to consider slicing credit card rates: ANZ Banking Group will consider
cutting interest rates on its credit cards and introducing a pricing regime
based on "borrower risk".
Shane Elliott, CEO ANZ said:
The bank is currently looking at
changing the parameters for credit cards to ensure people can avoid
financial hardship.
“It’s the right thing for us as well ... It’s not in our
interest to have customers with products they can’t service,”
he says.
Pressed by Liberal MP Scott Buchholz whether there was
“ample opportunity”
for card rates to be lower, Mr. Elliott said:
“As a general proposition, I think you’re right.”
“I think there’s an opportunity for us frankly
to take a bit of leadership on this and do something better on not just the
interest rate but also the fee structure on cards,”
Shane Elliott said.
He also said ANZ would look to
harness big data to discover low-risk customers that could be offered lower
interest rates.
Andrew Thorburn, CEO NAB said
"The credit
card business has some of the 'highest losses in our portfolio' and one third of
their customers were on a 13.99 per cent 'low rate' card."
The Four Pillars
bad debt
write-off rates would be lower and discourage
"its customers to take on high amounts of high-risk debt", if
all Credit Card Issuers in
Australia were regulated to -
A) limit school leavers
from 18 years
to a Charge Card for the initial six months,
thereby necessitating the Total Amount Owing
to be repaid at the end of each monthly cycle, in order to establish/improve their
Credit Rating;
C) require all
Credit Cardholders to pay a minimum of
25% of the Total Amount Owing
each month,
wherebyCardholders could contact their
Credit Card Issuer and request their Credit Card Issuer to reduce the monthly
limit to 5% for up to two years dependant upon the normal parameters governing
an Unsecured Personal Loan
application.
"Value simplicity and transparency in fees, rates and terms, but their
biggest need is for something that NO credit card offers: a mechanism
allowing them to impose their own spending limits which would enable them to
carry a credit card for larger purchases that take time to pay off, without
fearing they might be tempted to use it for non-essentials."
The
below three graphs seek to identify write-offs on Credit Cards by the major
Australian Credit Card Issuers.
The above graph from
Reserve Bank's Credit
Losses at Australian Banks: 1980–2013 shows annual net write-offs for
Credit Cards for three of the Four Pillars
in 2013 was 3.1% of Debt Outstanding.
The above RBA graph seems to infer that
for every $100 funded by a Credit Card Issuer to a Credit Cardholder, the Credit
Card Issuer will not get $3.10 back in 2013. But are Credit Card Issuers
making 17% on ave. before costs on the remaining 96.9% Credit Cardholders?
The above Morgan Stanley Research graph estimates that 'Impairment Charges as %
of Non-Housing Loans' will increase -
*
from 0.39 per cent of total non-mortgage loan books in 2015
*
to 0.57 per cent upwards to 0.73 per cent in 2017.
The above
Morgan Stanley graph
seems to infer that for every $100 funded by a Credit Card Issuer to a Credit
Cardholder, the Credit Card Issuer will not get back $0.73 in 2017.
Chapter
11. The
Four Pillars announces large profits year after year. CEO's of the
Four
Pillars are paid 'phone number salaries'
whereas 20 years earlier they were not
"Ponder the consequences of banks, mainly the
Four Pillars, now holding
some $1,000 billion -- that’s one trillion dollars – in transaction deposit
accounts on which no interest of material consequence is paid to depositors but
which, invested by banks, returns market-rate revenue to banks."
Based on stats in Reserve Bank reports and information from some of the 44
charities/community organisations that provide
Financial Counselling(Chapter 7 above), over half a million Australian
Credit Cardholdersare suffering Extreme Financial And Emotional Distress
due to Credit Cards Debt sometimes exceeding $150,000
(across a dozen or so Credit Cards) that also may affect their family and close friends, causing
diminished productivity and creating a further burden on social welfare budgets,
as appraised by the Productivity Commission
and Dept. of Social Services.
A costly flaw in the judgment by Australia's
Three Regulators for Financial Services and
Senate Committees is the assumption/belief that all
"... individuals
are
expected to assume personal responsibility for the financial decisions they
make,....."
;namely that
all individuals possess the capacity
to "assume personal
responsibility for the financial decisions they make."
"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
makeinformeddecisions
about credit card debt."
The above extract
says that "...individuals
are expected to assume personal responsibility for the financial decisions they
make, ...".
Then it says "the
credit card market is structured in such a way as to make it extremely difficult
for individuals to makeinformeddecisions
about credit card debt."
These two parts of the above extracted single sentence
are incongruous, contradictory and paradoxical. How can all individuals
".... assume
personal responsibility ...."
and then
"... the
credit card market is structured in such a way as to make it extremely difficult
for individuals to makeinformeddecisions......"when
the range of those skills are separated into five 'skills' quintiles?
Individuals identified by theProductivity Commission and the ABS as possessing only
Level 1 and Level 2 Financial Literacy Skills are unskilled ...to makeinformeddecisions
about credit card debt that is structured in such a way as to make it extremely
difficult for individuals to makeinformeddecisions."
The current arrangement of Credit Card Issuers seeking data from one or two of
Three Credit
Rating Agencies is not working as the credit data is not complete,
unless data from all three
Credit Reporting Agencies is sourced
* RBA's key areas
of focus included capacity for richer
information with payments.
On
current scheduling the New Payments Platform will deliver a fast payments
service with rich information and addressing capabilities in the second
half of 2017
* Chapter Five: 'Philosophy of Financial Regulation'
"Third, regulation can help achieve social
objectives such as, for example, 'community service obligations' which typically
take the form of price controls."
* Chapter Nine: 'Stability and Payments'
"There is scope for increased competition in the payments system which will help
to lower its costs of operation. However, this must be balanced against
the need to maintain stability in the financial system. The payments system provides one central
way in which instability can be generated. The RBA should retain overall
responsibility for the stability of the financial system, the provision of
emergency liquidity assistance and for regulating the payments system."
* Chapter Eleven: Promoting Increased Efficiency
"Cross-subsidies are derived from
historical product bundling [evident in (a) to (g) of
Chapter 3 above], earlier
difficulties with apportioning costs, and community expectations that
institutions should meet community service obligations. The unwinding of
such cross-subsidies can increase efficiency in the financial system."
* the Reserve Bank Board’s
obligations with respect to monetary policy are laid
out in Sections 10(2) and 11(1) of the Act. Section
10(2) of the Act, which is often referred to as the
Bank’s ‘charter’, says:
(A) report annually
to the Australian Parliament on each of the
Four Pillars
Net Revenue and Net Costs break-up of their cumulative
Credit Card Products;
and
(B) report annually
to the Australian Parliament whether any Credit Card
Issuer/s is -
Chapter 17. Reserve Bank possessed and exercised 'extensive powers'
under
Section 50
of the
Banking Act 1959
to regulate/cap bank
deposit/investment interest rates from 1969 to 1980.
Reserve Bank must regulate interest rates and fees according to
User Pays Principle
to bring Credit Card Products into line with
all other 'goods' and 'services, incl. other
banking lending products because Australians with low Financial Literacy
Capacity have been exploited by some Credit Card
Issuers
The below four quotes from "Overview
of Financial Services Post-Deregulation"by (Dr) Diana
Beal, Director, Centre for Australian Financial Institutions, University of
Southern Queensland,
evidence that the Reserve Bank
rigorously regulated bank deposit rates until 1980 when restrictions on interest rates
were dismantled after adopting Campbell Committee recommendations:
"Interest-rate
ceilings on deposit accounts restricted the banks’ ability to attract funds
particularly during the 1970s when inflation was rampant. In the June
quarter of 1975, inflation rose to 16.9% pa. At the same time, interest
payable on amounts held in savings accounts offered by savings banks, for
example, was restricted to 3.75% from 1969 to 1980 (Foster, 1996). In contrast, the
interest rates offered by non-bank financial institutions (NBFIs) were not
controlled and they were able to pay around 10% on passbook accounts."
"Banks in 1980 still operated in a highly regulated environment which was an
artefact of previous economic and social conditions. Indeed, an extensive
collection of controls remained from regulation introduced under the
National Security Regulations in 1941."
"Interest rate ceilings on trading bank and savings bank deposits were
dismantled from 1980; some limits on minimum and maximum terms on fixed
deposits remained."
"The maximum interest rate payable on small
balances in savings accounts was fixed by regulation at 3.75% from 1969
to 1980."
The
Writerworked for CBA for 37 years
commencing in 1970 where he worked in four branches 'til 1974 whence bank
interest rates were rigidly controlled by the Reserve Bank and uncontrolled upon
the NBFIs.
"Looking
back in time, Australian banks collapsed in almost every decade of the 19th
century. In 1893 after the failure of fraudulent land banks in Victoria
triggered a wholesale run on banks. In the space of six weeks, 12 banks closed
their doors. Those banks accounted for two-thirds of the total banking assets in
Australia. That crisis increased pressure - which had been building for some time - for the
formation of a central bank. The Commonwealth Bank was formed by the Federal
Government in 1911 to issue notes which would be backed by the resources of the
nation.Banking became more tightly controlled during World War II, with the central
bank dictating overdraft rates and, later, statutory reserve deposit ratios and
liquid asset ratios.To avoid a patent conflict of interest, the Commonwealth Bank's 'central banking
powers' were transferred to the newly formed Reserve Bank of Australia in 1959."
Between 1960 and
1980 the Reserve Bank diligently regulated commercial Australian bank interest
rates relying on
thebelow Section 50
of the
Banking Act 1959 as amended:
(1) The Reserve Bank may, with
the approval of the Treasurer, make regulations:
(a) making provision for
or in relation to the control of
rates of interest payable to or by ADIs,
or toor by
other persons in the course of any banking business carried on by them;
(b) making provision for
or in relation to the control of rates of discount chargeable by ADIs, or by
other persons in the course of any banking business carried on by them;
(c) providing that
interest shall not be payable in respect of an amount deposited with an ADI,
or with another person in the course of banking business carried on by the
person, and repayable on demand or after the end of a period specified in
the regulations; and
(d) prescribing
penalties, for offences against the regulations, not exceeding:
(i) if
the offender is a natural person--a fine of $5,000; or
(ii) if
the offender is a body corporate--a fine of $25,000.
Until 1980, banks could not
offer more than 3¾% on a passbook account and 6½% interest on a Savings Investment Account (minimum account
balance of $500, deposits and withdrawals must be $100 or greater, and 7 days
written notice had to be given to the bank for all withdrawals). Leading up
to 1980, building societies (unregulated) were offering materially higher interest rates and attracting bank customers
'in droves'.
"the RBA should retain overall
responsibility for the stability of the financial system, the provision of
emergency liquidity assistance and for regulating the payments system."
A). The 'iron
fist control' that the Reserve Bank had over commercial bank interest rates,
both deposit and lending, until deregulation in 1980, whereupon when the jail
gate was no longer locked; and
B). It was apparent
to the Reserve Bank as early as 1992 that deregulation wasn't going to evidence
banks lowering loan rates when the cost of funds fell.
"April 1985.
In the case of overdrafts the maximum rate on all overdrafts was set by the Reserve Bank prior to February 1972". At that
time interest rates on overdrafts drawn on limits over $50,000 became
a matter for negotiation between the banks and their customers while
those drawn under limits less than $50,000 remained regulated. In February
1976 the threshold level was increased to $100,000 and in April 1985 all regulations were lifted.
From 1966, when personal loans were introduced, the maximum rate
that banks could charge was set by the Reserve Bank. Once again, in
April 1985, the controls were removed.
At the same time, the maximum interest rate that could be charged on credit cards was
deregulated. Prior to this time the maximum rate had been set at 18 per cent per
annum.
The period of housing loan rate regulation extended beyond that
for the other lending rates. Until 1973, the maximum rate that could be
charged on housing loans was the same as that on overdrafts although
banks typically charged a
lower rate. In October 1973 banks agreed to a "consultative maximum" on housing loans which was below the overdraft rate. This was formalised in December 1980 when the maximum rate that could be charged on owner-occupied housing was
set one percent below the maximum overdraft rate. The ceiling on new owner-occupied housing loans was finally removed in April 1986.
In the deregulated period, data on certain
actual lending rates is readily available. For example, the actual rate charged on credit card
loans is directly observable and is the same for all classes of
borrowers.
In contrast,
the rates on personal loans and credit cards do not appear to be
more flexible in the deregulated period.
For credit cards, personal loans, owner-occupied housing loans and the standard overdraft rate, changes in the banks' marginal cost of funds have not been translated one for
one into the contemporaneous lending rates."
Prior to Aug 1993, Credit Card Issuers were restricted from
charging an Annual Fee on Credit Cards as the various State Credit Acts
prohibited most Credit Card Issuers from charging annual fees if they charged
interest on credit card purchases (e.g. Credit Act 1984 (NSW) s 54).
Following a recommendation from the Prices Surveillance Authority’s 1992 'Inquiry
Into Credit Card Interest Rates', State legislatures issued exemption orders
which allowed all financial institutions to charge both interest and fees on
credit cards from 1 August 1993.
"But of course the PSB does have a regulatory mandate,
and it has used its powers
to regulate a number of aspects of card payments where it judged that there was
a public interest case to do so. Probably the aspects of this regulation that
have attracted the most attention have been those related to interchange and surcharging....."
There is a patent
"... public interest case to ..."
re-introduce interest rate caps on credit card interest rates that applied until 1985 -
as called for in Chapter 5.
"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."
"Increasingly, central banks are being given
explicit authority for payments system safety and
stability, but the Board's legislative responsibility and
powers to promote efficiency and competition in the
payments system are unique.
This responsibility has broadened the Bank's
traditional focus on the high-value wholesale
payment systems which underpin stability, to
encompass the retail and commercial systems where
large transaction volumes provide scope for
efficiency gains."
"Regulation of all markets for goods and services can be
categorised according to three broad purposes. First, regulation is to help
ensure that markets work efficiently and competitively, and thus to overcome
sources of market failure. Second, regulation can prescribe particular
standards or qualities of service, especially where the consumption of goods
and services carries risks, so that safety is a focus of concern.
Third, regulation can
help achieve social objectives such as, for example, 'community service obligations' which typically take the form of price controls."
The Reserve Bank retains the same 'extensive powers' that it relied upon from 1969 to
1980, to again cap interest rates on Australian Credit Card Issuers. The Reserve Bank presently regulates the
Overnight Cash Rate. If the
Reserve Bank no longer has such regulatory powers, then those
'extensive powers' must have been
transferred to APRA, ASIC or possibly ACCC. If that is the case, then the
Reserve Bank would be able to provide a written explanation of the particular
legislation/s and legislative process for transfer of the interest rate
regulating powers and the MOI with the other regulator that accepted and
acknowledged subrogation of interest rate regulation to it.
The Campbell Committee recommended
deregulating interest rates. It did not recommend reducing the
'extensive powers'
bestowed upon the Reserve Bank by Parliamentary Acts.
Below is a quotation from Westpac's submission to the Wallis
Inquiry, submitted by the then CEO, Bob Joss,
that may have anticipated that after deregulation several Credit Card Issuers
wouldrun amuck:
The contents of this report are confidential. Data relating to
the business of the Australian Retailers Association (ARA) or its members and
contained within this submission is confidential
and is not to be released into the
public domain."
"Executive Summary
The thrust of this paper by the
Australian Retailers Association (ARA) can be summarised by a quotation from the
RBA / ACCC paper ‘Debit And Credit Card Schemes in Australia – A Study of
Interchange Fees And Access’; Page 52 states:
“ Simple economics shows that when a service is under priced, it tends to be
over-used”.
This statement in our view distills the essence of credit card
pricing and use both here and internationally. From inception, the Merchant
community has been paying a disproportionate share of the cost of credit cards.
Consumers have been paying less than the true cost of services provided to them
by
Credit Card Issuers. This we believe
was the result of credit cards at inception not having a viable economic
rationale for the consumer and Credit Card Issuers and
Acquirers structuring the
product economics in order to enhance take up. Had credit cards been priced in a
competitive environment, then it is highly likely that they would not have
gained such a major global presence.
1. interchange
between Card Issuers and
Card Acquirers
should be completely abolished and replaced with activity bases fees or fees for
service;
2. credit card
interchange is passed on to Merchants via the
Merchant Service Fee. Our own
experiences have seen interchange put to us as a ‘floor’ to the Merchant service
fee rate advanced by Acquirers;
3.
Merchant Service Fees should be
completely abolished and replaced with market negotiated activity based fees;
4.
the current credit card scheme no surcharging or non-discrimination rule be
abolished across all card types, and that Merchants
and the market not be
restricted (subject to competition law) from setting their own pricing policies.
We would encourage the RBA to take this opportunity to address a
major inequity in the Australian payments environment."
Below are pertinent arguments:
Argument 1 - The risk of extending credit to cardholders:
"The magnitude of credit card
annual percentage rates (APR) is well above other unsecured lending
rates."
Argument 2 - The cost of the
Issuerprocessing the transaction
"It is therefore reasonable for the
Issuer
to seek cost recovery and a competitive margin for this service – from the cardholder with whom a
relationship exists and for whom a service is being performed. Such a
fee for service should reflect the exact nature of the services offered
by the Issuer
to the cardholder.
The fee should be ‘internal’ to that relationship.
We would therefore argue that the cost of the
Issuer processing
a credit card transaction does not warrant an
Cardholder
who is seeking to effect payment to the
Merchant via a credit card. It is at the
Cardholder's
discretion to
select a payment method. The
Cardholder
initiates the entire credit card processing cycle
and should bear the costs of the party (the
Issuer) acting directly
on their behalf;"
Argument 3 - Costs associated with the interest free period
attached to credit cards
"We agree that the interest free period encourages potential
Cardholders
to take up card products and existing cardholders to utilise their
cards. It is very useful and beneficial for consumers to delay payment for goods
and services for some 55 days.
We would point
out that certain credit cards have zero interest free days, yet still attract identical interchange and
Merchant Service Feelevels.
The interest free period is again, a
Card Issuer / card holder
relationship cost.
The introduction and length of interest free periods was
determined by credit
Card Issuers to facilitate credit card take up and usage – both
revenue generating activities for themselves. We find it implausible
that
Issuers sought to introduce interest free periods for any reason other than to
increase their own income levels."
Argument 4 - The cost associated with providing a payment
guarantee to merchants
"We would expressly reject that any credit losses resulting to
the
Issuer from this process (card holders lodging bogus charge backs and then
not paying when proof of purchase is provided), should be passed back to
the
AnInterchange Feeis charged by the Card Issuer to the Merchant for putting the Merchant in
funds 'same day' of a
Purchase by a Credit Cardholder or a Debit Cardholder.
Credit Cards that offer the highest Rewards Programs charge the highest
Interchange Fees and
charge the highest Annual Fees which are attractive to small and large
companies, as well as sole traders, that can charge Annual Fees
as a legitimate tax deduction. Rewards under
Rewards Programsare not assessed as taxable income by the ATO.
"The tendency for interchange rates to rise to high levels is most apparent in unregulated
jurisdictions like the United States
where credit card interchange rates in the MasterCard system are as high as 3.25 per cent plus
10 cents, implying that – after scheme fees and acquirer margin – some merchants may pay over 3½
per cent in merchant service fees for high rewards cards."
"The
new interchange standards will result in a reduction in payment costs to
merchants, which will place downward pressure on the costs of goods and
services for all consumers, regardless of the payment method they use.The
weighted-average benchmark for credit cards has been maintained at 0.50 per
cent, while the benchmark for debit cards has been reduced
from 12 cents to 8 cents. The weighted-average benchmarks will
be supplemented by ceilings on individual interchange rates which will
reduce payment costs for smaller merchants.Commercial
cards will continue to be included in the benchmarks, but the Board has
decided for the present against making transactions on foreign-issued cards
subject to the same regulation as domestic cards. Schemes will be required
to comply with the benchmarks on a quarterly frequency, based on
weighted-average interchange fees over the most recent four-quarter period.
These tighter compliance requirements will ensure that the regulatory
benchmarks are an effective cap on average interchange rates. The new
interchange standards will largely take effect from 1 July 2017."
Regulation is needed to limit
interchange fees because competitive forces in the payments card market do
not have the usual effect of bringing costs down. Where merchants feel
unable to decline particular cards (because consumers expect to be able to
pay with that card and may take their business elsewhere if they cannot),
card schemes tend to have strong incentives to raise interchange rates.
Evidence from a range of countries suggests that competition between
well-established payment card schemes can lead to the perverse result of
increasing the price of payment services to merchants (and therefore to
higher retail prices for consumers). The conclusion of the Reserve Bank in
Australia, and by other regulators internationally, is that regulation is
needed to contain the upward pressure on interchange fees. Previous attempts
at self-regulatory responses to this issue have not proved feasible."
"Option 3
:
Regulatory
– modifying the regulatory regime, retaining the existing
weighted-average interchange benchmark for credit cards but enforcing it
more effectively with more frequently observed (quarterly) compliance, and
supplementing it with maximum caps on interchange rates. Companion cards
would be regulated in the same way as cards in the four-party schemes. The
weighted-average benchmark for debit cards would be reduced, consistent with
changes in average transaction values, and maximum caps would also apply to
debit card rates. Prepaid cards would be brought formally into line with
debit card interchange regulation. Permitted surcharge levels would be
defined more narrowly to ensure more effective enforcement against excessive
surcharging. Payments card acquirers would have to provide periodic
statements with more detailed costs of acceptance to merchants."
the
(RBA's
"interchange fee reforms have brought down the average
interchange fees paid in the international systems and have
reduced the gap between interchange fees in the credit card,
scheme debit card and eftpos systems (Graph 8.5). The broader
effects of the interchange reforms are discussed below."
The Reserve Bank has followed the lead of the US central bank in
regulating excessive Surcharging. Interchange Fees charged to Merchants have also
been reduced, but seemingly more due to effective lobbying by merchant
associations with the other three parties within the
Post-reform benchmarks, the Credit Cardholder's bank now receives only about
a $0.50c Interchange Fee on a $100 Merchant sale instead of $0.98c
approx..
The Merchant's bank, known as the Card Acquirer, now receives
nothing on a eftpos transaction where previously it received $0.20c.
The weighted-average credit benchmark of
0.50 per cent will be maintained.
The weighted-average interchange fee
benchmark for debit cards will be reduced to 8 cents per transaction,
which will apply jointly to debit and prepaid cards in each scheme.
Interchange fee caps will be supplemented
by ceilings on individual interchange rates: 0.80 per cent for credit; and
15 cents, or 0.20 per cent if the interchange fee is specified in percentage
terms, for debit and prepaid.
To prevent interchange fees drifting upwards in the manner that they have
previously, compliance with the benchmark
will be observed quarterly rather than every three years.
A scheme will be required to reset its interchange schedule in the event
that its average interchange fee over the previous four-quarter period
exceeds the benchmark.
Commercial cards will continue to be included in the benchmark and will be
subject to the ceilings above.
The new interchange benchmarks will take
effect from 1 July 2017."
"When the
benchmarks for credit card interchange fees were introduced in 2003, the
Board’s aim was to limit the tendency for competition between schemes to
drive up interchange fees. By setting the benchmarks in weighted average
terms, the Bank allowed schemes significant flexibility to set different
interchange fees for different transactions, some of which could be over the
benchmark. Schemes have taken
advantage of this, and of the current infrequent compliance arrangements, to
develop commercial strategies that encourage issuers to maximise interchange
revenue. The result has been that actual average interchange fees have
tended to be higher than the regulatory benchmark and have drifted further
above the benchmark between the three yearly compliance points.
Accordingly, the benchmark has not represented an effective cap on average
interchange fees."
Chapter 20.
Transactors
accepting to no longer enjoy a
Free Rider
at
Persistent Revolvers
expense
has no parallel in recent revolutions,
"Occupation
Movements" or
civil unrest protests.
Brexit and anti-establishment feelings that evidenced Donald Trump come from
"a 100 to one outside", draw no symmetries
with
Transactors accepting
to start paying the operating cost of their Lines of Credit
The gap between rich
and poor is widening and regulators are unwilling to act despite mounting
empirical evidence Courageous regulation is
required by the Commonwealth Govt. and
Australia's Three Financial Services Regulators
that have a fundamental obligation to protect Australians that are vulnerable to
Unconscionable Conduct,
Predatory Advertising and
Usurious Interest Rates
(i) pay 17% Interest (average) on 100% of their
Credit Card DebtAccruing Interestoften on multiple Credit Cards, occasionally on aggregate outstanding debit
balances that exceed $100,000 according to
anecdotal evidence from Credit Card Distress Authorities
which includeFinancial Counsellors;
(B)
felt by the Dept of Social Services that pays fortnightly pension support for many
Credit Cardholders
that are no longer capable of "going to work" which
may be
funded
for many years.
Four significant global upheavals that changed
the status quo:
When the natives get restless upheaval has happened!!!snapshots the 'Causes' and 'Effects' of six renowned national
revolutions in the 20th century where a ruling honored minority was
overthrownby a
disgruntled majority that was feed up with being mistreated.
Occupy Wall Streetmovements came to prominence in the
Western
world in 2011. Mass gatherings
occupied Wall Street and many other large investment and commercial bank H. O.s.
in major U.S. cities and across Europe to protest against
socialandeconomic
inequality, greed, corruption and the perceived undueinfluence
of corporationson
government. Occupy Wall Streetwas also a disadvantaged
majority protesting against a
privileged
minority.
Brexit unraveled
sets out the plausible reasons why 51.9% of Britain and
Northern Island voted in June 2016 to leave the European Union which surprised
many in the rest of
the world. As Chancellor of Germany,Angela Merkel, has also evidenced, altruism
for the plight of less fortunate Eastern European Nations didn't carry sway for
long.
Make America great again!!!explains how a successful business with no political pedigree,
and questionable business and social ethics,
surprisingly won a U.S. Presidential Election. A majority of American
voters showed themselves to be anti-establishment.
None of the four above significant
upheavals/surprises bear any resemblance to Australians galvonising to solve the above (A) and (B) resultant problems
due to 67% of
Financially Literate
Credit Cardholders,
Transactors,
paying
nothing for enjoying the considerable benefits of their
Revolving Line Of Credittherebyhappily
"stealing" from
the 12.5% of Credit Cardholders that arePersistent Revolvers
that are payingan average of $2,727 annually in penalty interest
per Credit Card held - see (x) above with some Persistent Revolvers
payingover $100,000 in
Interest and Penalty Fees annually.
The World Economic
Forum ("WEF") publishes a comprehensive
series of reports which examine the
broad range of global issues. WEF
seeks to address with stakeholders its
mission to improve the state of the
world. The WEF's
Global Risks Sixth Edition
for their annual conference
highlighted the below mega social trend with
the potential to inject significant
disruption into global systems:
"Economic
disparity and
global
governance failures both
influence the evolution of many
other global risks and inhibit our
capacity to respond effectively to
them".
Chapter
21. Human behaviour has been forced to
change after learning from their mistakes
The Writer recalls
when he was a late teenager on occasions travelling on a Sunday with his older
brother to The Newport Arms Hotel on
Sydney's northern beaches to have a few beers and drive home some 15 miles.
The
Writerevidenced some hotel patrons "as full as googs" late
Sunday arvo getting behind the
wheel of their motor vehicles and driving off. The Newport Arms Hotel
was open on a Sunday because it was outside the "20 Miles Limit".
From the advent of
the motor car in the 1930s until 1968 a "20 Miles Limit" applied to hotels
trading in NSW on Sundays. Hotels within
20 miles of the CBD could not trade on a Sunday. Hotels beyond the "20 Miles Limit" could sell alcohol
over the bar on a Sunday, so that motor vehicle travelers, which included the
driver, could
enjoy a drink/s.The
Argus Newspaper
contained an article datedThurs,
18 Aug 1955(pg
5) which included:
"The,
Rev. Palmer Phillips, who led the deputation, asks that the bona fide
travel limit be extended from 20 miles to 100 miles. Sunday motorists
will soon find it harder to obtain a beer during their day's outing.
Mr. Rylah, Chief Secretary, said the Government was concerned at the amount
of Sunday drinking and driving. The Rev. J. Robertson McCue said drink
was a greater danger than the atom bomb. "We are losing more people on
the roads now than all the wars in history," he said.
As a young chap, the
Writer was taught that "sunshine is good for your health".
Two of his cousins were brothers who had
pale Celtic complexions.
They both were surf lifesavers at Whale Beach and died 6 months apart in their late 40s from melanoma.
Skol, which was the sun lotion of that era, attracted sun
penetration.
Coppertone was no better.
Nowadays, we are regularly warned about sun damage and skin cancer. School
children often wear hats when playing in the playground.
Movies in the '40s and '50s regularly evidenced Clark Gable,
Lucille Ball, Humphrey Bogart, Yul Brynner,
Spencer Tracy,'et al' smoking
often incessantly during movies/films shown at 'picture theatres'. These five famous
actors, plus a welter of other less known actors, that were paid by the
cigarette companies to smoke on screen, died painful deaths from throat,
larynx, mouth,or
lung cancer. Fifty years later, there
are countless warnings about the perils of receiving too much sun and not to
smoke cigarettes.
Until the 1850s in Britain, homosexuality carried the death sentence and people
who turned a blind eye or were an accessory to homosexuality risked being
transported to Australia. One such man wasWilliam
Bonill,who
was accused of letting two men,James
PrattandJohn
Smith,
have sex in his room. Pratt and Smith were executed while Bonill was
sentenced to 14 years jail. Australian law emulated the
Motherland.
In 1932, an Australian tabloid,The
Arrow, described the growth of the "pervert population" of Brisbane, largely
men aged 18 to 25, whose activities presented "a scandal of evil almost
unprecedented". The article called for police action to suppress and end
their gatherings. It reported clandestine weddings between gay men there:
"In the last two
weeks there have been two 'weddings'—ghastly, horrifying spectacles of painted
men and primping lads united in a sacrilegious blasphemy that they call the
'bonds of matrimony'."
In 1951, theNew South WalesCrimes
Act was amended to ensure that homosexuality remained a criminal act "with or
without the consent of the person".
In 1979,
Victoria had a maximum penalty of 20 years jail for homosexual acts between
males.
Homosexuality remained a crime in NSW until 1984.
The last gay man was arrested on 14 Dec 1984 inHobart,
Tasmania, when he was found having sexual conduct with another man on the side
of the road in a car. He was sentenced to eight months jail.
On 4 March
1990, The Sun Herald reported an alarming rate of violence experienced by the
homosexual community in Sydney indicating that 'packs' - of up to 15 youths -
were responsible for 30 attacks each week. The Age published an article on 29
May 1990 noting that between January and March of 1990 one murder and more than
30 bashings had been reported in Sydney's inner city area
LGBT
rightsinAustraliahave
gradually progressed since the late-20th century. Anti-discrimination laws
now protect LGBT people in many areas of employment and service access.
Same sex couples enjoy many of the same rights and benefits as other couples.
More importantly, LGBT citizens are respected/treated as equal by approx. 80% of
the Australian population. We have come a long way forward. Alas, a
lot of Asia and Russia have not followed suit.
Thirty years ago, Year 12 HSC results were dominated by boys. Today, girls
dominate boys in Year 12 HSC results. In recent years, woman have made
tremendous advances in Australian Rules, Swimming, Rugby, Cricket 'et al'.
There are more females aged between 15 and 25 jogging regularly than males.
Women hold several senior positions in the Australian Armed Forces and the State
and Federal police forces.
Until the 1960s. the wedding ceremony obligated the bride to "love, honour and
obey" her husband. Today, the wife often opts not to take the husband's
surname.
The Vietnam War was initially a conflict between North and South
Vietnam. The United States was concerned that, should North Vietnam prevail and
turn Vietnam into a communist state, neighboring countries such as Laos,
Cambodia and Thailand were likely to succumb in what was called the ‘Domino
Theory’. Proponents of "McCarthyism" contended that other Asian countries
like Myanmar (Burma), Malaya and Indonesia (right on Australia's northern tip)
would follow into communism.
As an ally of the United States and with its own interest in seeing the
South-East Asian region free of communism, Australia was an enthusiastic
supporter of American policy in Vietnam. Australian popular opinion through
most of the 1960's was "All the way with LBJ."
Australian troops began fighting in South Vietnam in 1966.
A
lmost60,000
Australians,
including ground troops and air force and navy personnel, served in Vietnam.
521Australians
died as a result of the
Vietnam
war and over 3,000 were wounded.
After 1968 the United States began
downsizing its armed forces in Vietnam.
Carriage of the war was left to South Vietnam from late 1972.
The
remaining Australian
combat troops in Vietnam, being a platoon guarding the Australian embassy in
Saigon, were withdrawn inJune
1973.
South Vietnam fell to the North in 1975.
The
‘Domino Effect’ never eventuated. Communism never came.
Vietnamese people are some of
the most peaceful people in
the world.
According to an analysis by thePew
Research Center,
in 2010 about -
45.3% of the Vietnamese adhere toindigenous
religions;
16.4% toBuddhism;
8.2% toChristianity;
0.4% to other faiths; and
29.6% of the population isn't religious.
Inhabitants in adjoining countries are equally peaceful. Most merely want
to be left alone to farm to feed their family.
* Lao :
TheravadaBuddhismis
a dominant influence in Lao culture.
* Cambodian:
Various factors contribute to the Cambodian culture includingTheravada
Buddhism,Hinduism,French
colonialism,Angkorian
culture,
andmodern globalisation.
Cambodia is ruled by King Norodom Sihamoni
*
Indonesia:
Remains strongly influenced by a multitude of religions, including Hinduism,
Buddhism, Confucianism, Islam and Christianity.
The only "Winner" out of the Vietnam War were the ammunitions and military
aircraft companies (McDonnell Douglas,
Bell
UH-1 Iroquois, Lockheed, Boeing) that played a considerable role
in swaying public opinion that communism was a threat.
In Iraq 30 years later, "Weapons of Mass Destruction" had similar motives
for
the Neoconservatives - Messrs Cheney (Halliburton),
Wolfowitz and Rumsfeld 'et al'. The USA would never have invaded
Iraq if 9/11 had not been perpetrated by a shrewd foe intent on destabilizing
the USA. WMD's were not found. The 'Coalition of the Willing'
galvanized three traditional opponents, Sunnis, Shiites and Kurds, to have a
common enemy. Obliterating parts of Afghanistan, Iraq and Pakistan, upset
some of the locals (ISIS, Boko Harum 'et al' ) to slay the
Western Infidels.
Fifty years ago,
children "should be seen but not heard". Nowadays, children are encouraged
to be self-confident and assertive, because those skills are integral to
survival in a competitive social environment.
Australians are no longer allowed to imbibe alcohol and then drive a motor
vehicle.
Australians are regularly warned about sun damage to skin cancer. School
children often wear hats when playing in the playground.
Australians, in some states, have limited access to ATMs at casinos.
Australians cannot obtain a driver's licence in most states until aged 17
years because they are deemed to lack the maturity to drive unsupervised
below that age.
Australians are not allowed to vote until aged 18 because they are
considered to not possess the judgment to cast a thoughtful vote.
Australians are not allowed to imbibe alcohol in a hotel, licensed club etc.
under 18, because they are deemed to have not yet reached an age where they
can handle alcohol responsibly, and thus are more likely to harm or even
kill themselves and/or others.
Australians no longer execute or jail other Australians that engage in same sex
relationships. LGBT citizens are respected as equal by approx. 80% of the
Australian population.
Australian women are
now treated as equal regarding remuneration within the Federal and state public service agencies.
Australia's indigenous population now receives the respect and recognition as
one of the world's oldest races.
Australian's are materially more skeptical, post Vietnam and Iraq, about
the proponents of going to war and their self-interests.
Australian
women are no longer subservient to Australian men in the home.
Australian
children are now encouraged to develop their full communicative potential in
order to survive in a competitive social environment.
Australians
have re-thought human behaviour that was
patently flawed.
Some re-thinking required regulatory authorities to take action eg. drinking and
not driving. Health authority budgets have been stretched by now providing cigarette
smoking warnings. Associated government and regulatory authorities have played a big role.
Credit Cards are the only ever-present 'service' product in the Western world that does not observe the
'User Pays Principle',
as the majority of 'Users', known as Transactors, do not pay the
costs that they incur. Revolverspay for them, often at material personal distress to those
Credit Cardholders,
their families and close friends, evidencing foregone productivity and creating a
material burden on social welfare budgets. Government and regulatory authorities have failed to play a
demonstrative role in righting the on-going wrong of Transactorsenjoying a Free
Ride.
