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It's rare to see much positive news about retail banking these days, but for all their faults most big banks have recently taken action in an area where they have long been slammed: credit cards. No doubt in response to community and political pressure, Westpac and Commonwealth Bank have this year started offering cards with lower interest rates, while ANZ Bank cut its rates for existing customers, too. The humble credit card has attracted a large amount of scrutiny from regulators and bank critics in recent years. Several are also rolling out consumer-friendly features to help people get on top of debt, such as alerts when payments are due, or the ability to convert revolving debts into instalment loans that are paid off sooner. This is notable, because credit cards are a source of long-running gripes of consumer advocates. So, it got me thinking. Just how significant are these shifts? Is it a sign banks are changing their ways in response to community concerns, as they claim, or just part of a public relations campaign? Trying to answer this raises questions about just how pro-customer – or paternalistic, depending on your perspective – we should expect banks to be. In a market where consumers often behave irrationally, should banks be trying to help us out, or waiting for us to slip up so they can maximise profits? The humble credit card has attracted a large amount of scrutiny from regulators and government in recent years. There's been a Senate inquiry, the government is placing new curbs on credit limits, and the corporate watchdog is now reviewing the use of "zero per cent" balance transfers. The concern is not so much the size of $50 billion in credit card debt. That sounds like a lot, but it's about 3 per cent of the $1.6 trillion in mortgage debt, it is barely growing in aggregate, and is a fairly small burden for most households. Rather, the worry is the way in which cards tend to prey on common quirks in financial decision-making, known as "behavioural biases". For example, cards tend to lure people with perks such as frequent flyer points. This exploits the way most of us assume we'll never pay interest, and therefore tend to ignore the rates. As it turns out, almost two-thirds of cards do rack up interest, despite our best intentions. When interest is charged, it's often at rates near 20 per cent a year, which seem completely divorced from the bank's cost of funds. The minimum repayments are so small that it's possible to spend years paying the debt off, at huge profit to the bank. Most people manage their card debts without too much trouble, but Treasury last year said there was a "significant minority" of people for whom credit cards impose a "large burden on their financial and general wellbeing". Given all this, the banks' recent changes are worth noting. Earlier this month, Commonwealth Bank became the latest lender to announce a new low-card with a rate of just below 10 per cent, after Westpac did the same thing earlier in the year. Both banks, and others, have also started to allow customers to pay down their debts in fixed instalments, which should lower interest costs, and CBA can send alerts reminding people to pay when the bill it is due. ANZ Bank took the unusual step of cutting credit card interest rates in February – and unlike rivals, the lower rates applied to existing customers, not only those who took out new cards. Much of this, of course, is designed to help banks recover their battered reputation. But even if that's part of their motive, will these moves make much difference for customers, and deal with the concerns of critics? Let's start with the new low-rate cards. These are clearly better for the people who pay card interest. But how likely are they to help customers who already have high debts on plastic? Well, it may have no impact on these people unless they switch their account to new card. But from what we know about credit card behaviour, this may not happen. If many customers tend to ignore high interest rates when they were signing up for a card, will they now make the active choice to move to a low-rate product because a big bank offers one? Maybe, but I doubt it. Allowing customers to convert credit card debts to instalment loans is also a positive change for consumers. But once again, it relies on people making the conscious decision to act, when we know consumers don't always behave rationally in the card market. Interestingly, there are tentative signs banks are thinking about going further, and encouraging people to act a bit more rationally, even if this doesn't make them as much money. Westpac's chief executive Brian Hartzer this month said the bank had so much data on consumers, it could suggest some consumers switch to lower rate products. Its new card could be "part of that discussion," he said. CBA's alerts, which remind you to pay your bill are also actively encouraging more sensible financial behaviour, rather than leaving consumers to figure it out for themselves. Such changes are a good start in dealing with the complaints about credit cards. But for the most part, customers will still need to overcome those "biases" that make cards problematic in the first place if they are to benefit from most of the banks' credit card changes this year. That leaves me suspecting the banks' changes on cards are more about dampening negative publicity, while protecting the business model. Maybe that's to be expected. These are profit-making businesses – albeit ones that profess to put customers first. Still, it would also premature for banks to be patting themselves on the back. |
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