Government reforms have had significant effects on the profitability and product structure of the credit card industry in Australia. Following several years of rapidly mounting credit card debt, Australians are gradually making the shift to scheme debit cards. Sarah Williams reports. Although Australia does not have a highly penetrated credit card market, Australians in possession of credit cards have been very happy to use them. However, there is evidence of a flight to debit cards, particularly to international scheme cards. Debit card spending between 2002 and 2006 was double that of credit cards. Credit card applications fell in the first quarter of 2007 for the fourth consecutive quarter.
There are several factors underlying the move from credit. Moves by the Australian government to regulate the credit card industry have resulted in less favourable terms for cardholders, as issuers feel the interchange and profit squeeze and respond by increasing fees and decreasing rewards. There is also considerable concern over levels of consumer indebtedness. And it is a mature market – many of the Australians who want a card have already got one.
Issuers are therefore limited in their ability to create growth through increasing cardholder numbers, and are concentrating on generating higher revenues from existing cardholders. For example, several card issuers have applied a new range of fees and charges. These included increases in ATM fees, overseas cash advances, foreign exchange conversion fees and over-the-counter cash access fees.
The Bankcard credit card scheme was Australia’s first bank-issued credit card. Launched in October 1974, Bankcard at its peak had over 5 million cards in issue and dominated the credit card market in Australia. However, it was not accepted internationally and this, coupled with the fact that it could not compete with the zero- and low-interest rate products being introduced by Visa and MasterCard, led to its demise in 2006.
There were 13.75 million credit/charge card accounts in Australia as of the end of the third quarter of 2007. Credit card transactions totalled just over 1 billion, with a total transaction value of A$148.4 billion ($131 billion) and outstanding balances of that slightly exceeded A$41 billion, according to figures from the central bank, the Reserve Bank of Australia (RBA) (see Figure 1).
Based on issuers’ data, CI estimates that, as of late 2006, Australia had approximately 7 million private-label cards in circulation with outstanding balances totalling around A$18.5 billion.
According to Citibank’s Payment Evolution Report of July 2007, among the seven major economies of Asia-Pacific, Australia had the lowest number of credit cards per capita but ranked highest in terms of card use. The research found that cardholders use their credit cards an average of 5.4 times a week, 12 percent use their card 11 or more times per week and 3.5 percent use their cards more than 20 times per week. The average Australian was found to have used his/her credit card online 5.6 times over the previous six months.
There are growing concerns about the high levels of credit card indebtedness of Australians, particularly regarding consumers aged 18 to 27. According to a recent study conducted by a consumer credit check company, people in this age group applied for almost one-third of the 3.7 million new credit cards in Australia in 2006 and are actively using credit to underwrite their lifestyle, given historically low interest rates.
According to the latest annual report of the Insolvency and Trustee Service of Australia, excessive use of credit and credit cards has contributed to a leap in the number of personal bankruptcy cases. The report says the number of new bankruptcies, debt agreements or personal insolvency cases rose to 31,971 in 2006-2007, up 16.9 percent year on year.
As of the end of September 2007, there were just over 27 million debit card accounts in the country, with the number of transactions totalling over 624 million for a total transaction value of over A$106 billion (see Figure 2). Most Australians have tended to use an ordinary bank debit cash card to access the domestic proprietary EFTPOS (electronic funds transfer at point of sale) system, but over the past two years there has been a shift towards international scheme debit cards.
Scheme debit cards have become so popular that more debit card accounts were opened in 2006 than in the previous three years, according to RBA numbers. The advantages of scheme debit over traditional debit cards are that non-scheme cards cannot be used online, nor can they be used for overseas purchases or cash withdrawals from overseas ATMs. Debit cards are actually capturing a greater share of purchases than credit cards. In the year ending November 2006, debit cards captured 50.87 percent of the number of purchases, according to Australian card industry advisers MWE Consulting.
However, credit cards are still favoured for larger value transactions. As of the third quarter of 2007, a typical credit card sale transaction value was A$148 compared with A$68 for EFTPOS and debit scheme transactions.
The increased use in debit cards is also due to the growth in annual fees that have been levied on credit card accounts since the government reforms on interchange took effect (see below). Scheme debit cards generally have a monthly account fee which is a little higher than for a traditional debit card.
Prepaid cards were introduced to Australia in 2005 with the bopo card, a Visa-branded card issued by Bill Express, a company that also offers bill payment terminals. In the same year, National Australia Bank (NAB) launched Cash Passport, a prepaid, reloadable, PIN-protected, multi-currency travel money product issued by foreign currency service provider Travelex.
It was in 2006 that the prepaid market began to grow. In November of that year, both ANZ and Westpac introduced schemed prepaid cards that can be purchased in branches or online. ANZ offers a Visa Gift Card and Westpac a MasterCard Gift card, both of which can be used online. ANZ also offers prepaid foreign currency travel cards. The main advantage that banks have over bopo is that they enjoy much higher brand awareness. However, crucially, the ANZ/Westpac offerings are not reloadable, whereas bopo is. Several smaller banks offer prepaid products and Virgin Money has plans to launch its own such card in Australia. According to Visa, the prepaid card market in Australia and New Zealand grew from a low base in 2005 to more than 30,000 cards issued in 2006.
In May 2007, the prepaid markets in Australia and New Zealand were boosted by the news that US stored value gift card and prepaid solution provider InComm is expanding its product and technology solutions to the region. In November 2007, Visa teamed up with Melbourne-based prepaid card company SCX Global to launch the country’s first disposable, virtual prepaid card. The Vcard, which is designed for internet and telephone purchases only, is issued by Heritage Building Society.
Commonwealth Bank of Australia was the first bank to roll out MasterCard’s PayPass contactless payment technology through a trial in Sydney that had issued 33,000 cards by April 2007. The initiative was given another push in November 2007 when the two partners gave away 3,000 cards loaded with A$25 at the 2007 MasterCard Masters golf tournament. As of November 2007, only 100 merchants in Australia have PayPass readers but a major roll-out of readers is planned over the next 12 months.
In August 2007, NAB and Telstra teamed with Visa to conduct the first trial of new technology, which will allow customers to authorise payments with the wave of a special mobile phone. This trial of the Visa payWave technology will commence in Melbourne in early 2008.
The Australian government has been proactive in instituting a series of reforms to the cards industry. In 2002, the RBA issued a crucial ruling on credit card interchange that has had many ramifications for the industry. The reforms were broadly aimed at opening up the credit card system and increasing competition, and had three main goals: one, to provide open access to the card associations, namely Visa and MasterCard, enabling non-banks to join and issue association cards; two, to reduce credit card interchange fees, which the RBA determined would drop to 50 basis points effective October 2003; and three, to ban the no-surcharging rule imposed on retailers by the card associations.
In October 2006, the RBA announced new rules aimed at opening the EFTPOS system to new entrants. Under the access regime developed in consultation with the Australian Payments Clearing Association, prices charged by an existing participant in the EFTPOS system for a new connection have been capped. The RBA has set a cap on EFTPOS interchange fees of A$0.05, which applies for three years from 1 November 2006. The minimum interchange fee that can be charged has been set at 80 percent of the cap. The RBA said that the cap is expected to cut interchange fees paid by EFTPOS issuers to acquirers from a current average of around A$0.20 to between A$0.04 and A$0.05 for transactions that do not involve withdrawing cash. The RBA said provisions within the code are aimed at helping to ensure that negotiations over interchange fees are not used to block entry into the EFTPOS system.
In May 2007, the RBA started a review of the card payments system and is looking into zero interchange fees for credit and debit cards, as well as EFTPOS. In response, MasterCard has warned that if the cards market faced further regulation of the interchange fees, MasterCard would be forced to review its investment in the Australian market.
Effects of reforms
There have been a number of direct and indirect effects of these changes. One major overall effect has been a shift from credit card use to debit card use.
The reduction in interchange had implications for the profitability of many issuers. According to the Merchants Payment Coalition, credit card interchange fees now average close to 0.55 percent in Australia. Prior to the reforms, interchange had been a significant source of revenue for credit card issuers in Australia. In 2002, card issuers received about A$750 million in interchange fees (or A$46 per card), representing 18 percent of total revenue. Issuers were forced to examine the profitability of their card operations. The cap on transaction fees has generally led to higher card fees along with less generous rewards/loyalty programmes.
Another effect was that some businesses in the country began implementing surcharges. In the cases of SMEs, they were often applied selectively. As a consequence, merchant acceptances rate for American Express and Diners Club cards were more severely affected than those for Visa and MasterCard. Today, many retail and service providers surcharge some or all credit cards, a practice that often varies by region/local area.
The Australian market is dominated by the four largest banks – ANZ Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation. The government has restricted takeover activity and mergers between these four banks. Foreign banks that have entered the Australian market have found the entrenched nature of the Australian banks difficult to overcome. The four have considerable market share (see Figure 3), although this has been gradually declining.
Although the RBA wanted to encourage non-banks to issue Visa and MasterCard cards, since 2003 no major non-banks have entered the card market as independent individual issuers. The successful market entries have all involved partnerships with existing banks, for example, Virgin Money/Westpac (recently terminated – see below) and Aussie Home Loans/ANZ.
Several players outside the top four have been trying to gain ground. For example, HSBC announced in April 2007 that it is planning to double its credit card market share over the next two years. And new entrants continue to enter the market – Macquarie Bank launched its own credit card earlier this year and the bank has said it expects to have a few hundred thousand branded and white-label cards in issue within the next three years.
Retailers are also entering the credit card fray: in July 2007, department store David Jones said it had selected American Express and Citi as the two preferred contenders for a co-branded credit card. The card, to be introduced in 2008, will partly replace the company’s existing store card.
Other card players in the Australian market include American Express with 1.3 million cards and A$3 billion in receivables, and Citibank subsidiary Diners Club with 420,000 cards and A$450 million in receivables as of March 2007.
Commonwealth Bank of Australia (CBA)
Commonwealth Bank describes itself as the largest retail bank in Australia. It has the largest number of ATMs (3,242) and branches (1,010). In August 2007, the bank announced a 14 percent increase in annual net profit to $4.47 billion. Lack of a low rate credit card offering meant that its growth of 2 percent in cards was well behind market growth of 8.7 percent. In July 2007, the CBA announced that it was moving processing for its 2.5 million credit cards to an external processing bureau to be run by EDS Australia.
National Australia Bank (NAB)
In 2007, NAB announced a programme to extend its ATM network by around 25 percent through its alliance with major retailing group Coles, with 40 percent of new machines to be located in suburbs where there is currently no NAB presence. In 2007, NAB launched Velocity NAB credit cards, which allow customers to earn points for Virgin Blue airline’s loyalty programme. Other NAB cards include the NAB Visa Mini Card and the NAB Low Rate Visa Card. As indicated above, NAB is involved in Australia’s first trial of Visa payWave technology.
ANZ is Australia’s third-largest bank and has launched many initiatives to ward off competition from foreign players and from non-banks joining the market. For example, it has introduced personalised cards, prepaid foreign currency travel cards, Visa debit cards targeted at the young adult market, gift cards and a three-party card scheme. The bank also placed a heavy focus on customer-level communication. It claims that this has paid off and that it now has the highest level of customer satisfaction among the major banks in personal banking and cards divisions.
ANZ has also implemented the Falcon security system to reduce security breaches and has robust risk management systems in place. It uses behavioural scoring, which has resulted in over 40 percent of its credit card applications being rejected.
Westpac has had very strong credit card growth in recent years, especially in terms of balances outstanding, and Figure 3 shows it to be Australia’s largest issuer on that basis. In 2006 the bank revamped its cards product suite, introducing a number of products including the Earth and Altitude platinum cards.
In November 2007, Westpac severed its five-year credit card partnership with Virgin Money. It is believed that Westpac earned a very small margin from the card which, in profit terms, is dependent on having a large number of customers because the fee revenue is much lower than that from higher-priced premium cards. When the arrangement began in 2003, it was seen as an opportunity for Westpac to increase the size of its small credit card business. However, since then, Westpac has become Australia’s largest card provider and as a result the Virgin card has become a less important part of its business. Virgin is now seeking to buy the portfolio.