Snapshot of Question 7:

Will the Four Pillars each introduce a new "lower interest, lower fees, new fees" Credit Card that accords with the User Pays Principle?

Question 7

Shane Elliott, CEO ANZ said:

“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.

Ian Narev, CEO CBA said:

         “I said we came in here with a spirit of openness and listen to suggestions and we will, .....”

Consistent with the above comments from two CEO's, would the Federal Treasurer request the Governor of the Reserve Bank to rely upon its 'extensive powers' to request each of the Four Pillars to introduce a new "lower interest, lower fees, new fees" Credit Card that applies the User Pays Principle with the following features:

1.

        Annual Credit Card Fee of $26.

2.    Purchase Interest Rate @ 1,350 basis points above the RBA Overnight Cash Rate.

3.    Cash Advance Interest Rate @ 1,650 basis points above the RBA Overnight Cash Rate.

4.    Cash Advances limited to 50% of the Credit Limit.

5.    Concessional Interest Rate Period @ 1% up to 50 days charged from the date of each Purchase (to replace the Interest Free Period up to 55 days) to cover the high cost of Fraud, as well as reduce the funding cost upon Persistent Revolvers.  SMS and email notifications and internet banking enable Credit Cardholders to pay their monthly repayments within a few days of notification of their 'Total Monthly Purchases'.   

6.    Purchase Usage Fee of $0.50 for each Purchase.

7.    Lost Card Fee of $20 for -

        *          placing a stop on an account; and

        *          issuing a replacement Credit Card(s).

8.    Minimum Monthly Repayment 25% of the Total Amount Owing each month - Credit Cardholders may contact their Credit Card Issuer and request their Credit Card Issuer to reduce the Minimum Monthly Repayment to as low as 5% (for up to two years dependant upon the normal parameters governing an Unsecured Personal Loan application.

9.    Assign the Credit Limit based on the Credit Score of the Credit Card applicant by obtaining a Credit Report from all three of the Credit Reporting Agencies (Veda, Dun & Bradstreet and Experian) which thereby will establish 'inter alia'  the number of Credit Cards already held by the applicant and the aggregate Credit Limits.

10.  Limit school leavers from 18 years to receive a Provisional Charge Card ("PCC") [not a Credit Card] for the initial six months, thereby necessitating the Total Amount Owing to be repaid at the end of each monthly cycle or be subject to late fees and restrictions on future PCC use, with deferment of receiving a traditional Credit Card until the PCC holder complies with the PCC repayment obligations for 6 months without breach, in order to establish their Credit Rating. Then (after six months of repaying the Total Amount Owing each month in arrears) replace their PCC with a Credit Card with a prudent Card Limit which could be increased no more than once a year based on the Credit Cardholders' Credit Rating?

Grounds for Question 7

Re 1. above, prior to August 1993, the various State Credit Acts prohibited most Credit Card Issuers from charging an annual fee 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.

Re 2. and 3. above, Prior to 1985 the maximum rate that could be charged on credit cards had been set at 18% pa by the Reserve Bank of Australia.  In April 1985, this rate cap was deregulated.
The RBA possessed and exercised 'extensive powers' to regulate/cap bank deposit/investment interest rates from 1969 to 1980.  RBA's 'extensive powers' were never removed, possibly some have been transferred to one of the other two financial services regulators funded by the entities they regulate (self-regulation).  But the 'extensive powers' provided under Acts of Parliament to cap interest rates and fees must still exist within the Three Regulators for Financial Services

Re 4. above, the primary purpose of a Credit Card is to validate the 'Creditability' of the Cardholder when making a Purchase/s.

Re 5. above, Diners Club and American Express' offer of an Interest Free Period as an lure when marketing their 'new fangled' Credit Cards in the early 1960's has proven to be a marketing 'master stroke'.  The attraction of an Interest Free Period has enabled Transactors to contribute very little to the costs of credit card schemes as noted under point 6 of 'Introduction' of RBA's Consultation Document titled Executive Summary - Reform of Credit Card Schemes in Australia: RBA's "A Consultation Document" – December 2001:

 "Within the latter group, there is a third group which directly contributes very little to the costs of credit card schemes – these are the 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."

Re 6. above, Credit Card Issuers incur a funding cost for up to 55 days, which is partially funded by Merchants paying a Merchant Service Fee (Interchange Fee and Acquirer Fee) that pass onto the Cardholder.  Chapter 18 notes that the Australian Retailers Association argued that the contract is between the Card Issuer and the Cardholder (not the Merchant) and the Card Issuer should charge a Cardholder an "activity based fees".

Re 7. above, McKinsey Report -  May 2014 categorizes 'Five Segments' of Credit Cardholders in the USA.  Below is an extract from the 'Third Segment', namely 'Financially stressed':

Re 9. above, Financial Counsellors have assisted distressed Credit Cardholders owning and using over 10 credit cards and have a Total Amount Owing over $150,000.  The ANZ CEO, Shane Elliott, commented: "I think with new technology and new risk management it is going to be easier to offer more targeted [pricing]. I think that is going to come and I think that will be part of the disruption that will come... to allow more risk based pricing in cards."

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