characterised by regulatory intervention over interchange, and has
marked Australia out as a template for payment regulation
worldwide. However, underlying fundamentals in card trends appear
to be holding up, despite a turbulent economic environment, as
CI reports.
Australia’s payment card
market may not be the largest or most profitable in the world, but
it is certainly one of the most notorious in terms of industry
regulation and intervention, particularly in the area of
interchange. A wave of reforms over the past decade have seen
interchange levels slashed, although much argument has ensued over
whether these reforms have had the desired effect of stimulating
competition, and whether cardholders and merchants are any better
off.
However, Australian consumers do appear to be shifting to debit
cards in ever-greater numbers, perhaps evidence of credit card
reforms resulting in less favourable terms for cardholders – card
fees, such as annual fees, have crept up gradually and loyalty and
rewards programmes are not as attractive to consumers as they once
were, as issuers look to rein in costs by cutting the level of
rewards on offer. Wider economic factors are also having an
impact.
Card numbers and spending
Over the past 12 months, Australia’s economic environment has
been dominated by high interest rates which have curtailed credit
card spending, although rates have been lowered in the last couple
of months. Australians are also struggling with wildly fluctuating
fuel and energy costs, higher food prices and growing levels of
consumer indebtedness, all of which are cutting into discretionary
card spending.
Consumer credit card spending for May 2008 fell to its slowest
annual growth level since 1994 at a time when official interest
rates were at a 12-year high. The average outstanding balance on
credit cards reached A$3,115 ($3,041) in May 2008, an increase of
4.1 percent from the previous year but the slowest annual average
growth rate since 1994.
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By GlobalDataAccording to the August 2008 figures from the Reserve Bank of
Australia (RBA), Australians spent A$17.8 billion on their credit
and charge cards in August, down from $19.03 billion the previous
month, a fall of 6.5 percent. Total credit and charge card balances
outstanding rose 0.33 percent to A$44.6 billion in August, from
A$44.45 billion in July, but credit card repayments fell by 6.2
percent to A$18.16 billion in August, from A$19.35 billion in July.
The number of purchases using credit cards fell by 8.6 percent.
Credit card purchase value decreased by 6.4 percent to A$16.78
billion in August from A$17.92 billion in July.
However, according to the Australian Payment Clearing
Association (APCA), the overall number of cards in circulation rose
by 5 percent in the year to May, while over the past five years,
credit card transactions have grown by 27 percent, with the mean
credit card purchase in May 2008 being A$153, while the mean
electronic funds transfer at point of sale/debit card transaction
was $68. Over the past five years, the value of credit card
purchases has grown by over 40 percent.
With the global credit crunch showing no sign of easing, the
rise in outstanding credit card balances, particularly over the
last year, has caused mounting concern over consumer indebtedness,
with increasing occurrences of homeowners using their credit cards
to pay their mortgages, a classic sign of consumer financial
distress.
Also, the bankruptcy rate this year reached a record high,
confirming the view of the RBA which recently stated Australian
consumer debt now amounts to 160 percent of disposable income,
compared to 60 percent in 1990. However, most of this debt is
housing-related, with the bulk of it taking place in higher income
high net worth households who are better able to meet debt
servicing obligations.
Credit card repayment rates could accelerate slightly and
balances could be reduced even further over the next few months. A
recent economic stimulus package unveiled by the Australian
government is worth around A$10.4 billion, and will be distributed
to Australian citizens in the form of a bonus payment similar to
the US government’s stimulus package which was launched earlier
this year. A survey from the Australian National Retailer
Association found that almost 40 percent of people set to receive a
bonus payment intend to use the money to pay their mortgages or pay
off credit card bills.
Despite interest rates being lowered in September, most credit
card interest rates have not been lowered, and in fact some have
been increased, something which naturally has not gone down well
with consumer advocacy groups. Issuers have defended themselves by
pointing towards the economic turbulence occurring globally and
emphasising that economic downturns will inevitably result in
larger portfolio losses and increased credit risk, – meaning that
they have little wriggle room when setting interest rates on
cards.
Debit and EFTPOS gain in popularity
The introduction and raising of fees on credit cards has
undoubtedly steered more consumers towards debit. The number of
purchases made with EFTPOS debit cards has grown by more than 66
percent over the last five years. Although more purchases are made
with EFTPOS and debit than with credit cards, the average value of
credit card transactions is double that of EFTPOS and debit.
A stark illustrator of changing consumer payment patterns and
reforms to the payment system is that EFTPOS debit card purchase
values have grown by 20 percent between 2007 and 2008 alone.
Internationally scheme-branded debit cards are also rising in
popularity, given that non-scheme branded cards cannot be used to
make online purchases, nor can they be used for overseas purchases
or overseas ATM cash withdrawals. Most Australians have tended to
use an ordinary bank debit cash card to access the EFTPOS system,
but figures from the RBA show that more and more consumers are
switching to scheme debit, which is influencing the market shares
of both Visa and MasterCard.
The EFTPOS system is not the responsibility of any one entity,
but APCA has been working on options for a better business
development framework to promote and develop the system. APCA
expects to establish an EFTPOS ‘scheme’ to operate the EFTPOS
system by the end of 2008. Australian banks are broadly in support
of expanding EFTPOS to incorporate online functionality, stating
that ultimately it is customer demand which will drive any business
decision.
Payment reform and regulation
Since 2002, the RBA has
implemented a series of reforms that has seen credit card
interchange fees for Visa and MasterCard reduced twice, from A$0.95
to A$0.55, and then to A$0.50. It has also reduced interchange fees
on EFTPOS and Visa debit cards during this time. However, the RBA
said that while these reforms have, in its opinion, strengthened
price signals, enhanced transparency and improved access, “close
oversight of retail payment systems remains necessary”.
The RBA’s review of payment systems was published in September
2008, and stated that the RBA believed the reforms had
“significantly improved competition in the Australian payments
system.” According to the RBA, reforms have had the desired effect
of liberalising access and removing restrictions on merchants that
had weakened competition in the system, and had increased
transparency, leading to more appropriate price signals to
consumers. Subsequently, the RBA announced that it would consider
stepping back from regulation of interchange fees, but would only
be prepared to do so if industry players took further steps to
reduce the risk that deregulated interchange fees in the credit
card systems would increase from current levels.
The RBA is now looking at changes to the EFTPOS system to
further boost competition and the ability to compete effectively
with the international card schemes. Also, the ‘honour-all-cards’
rules could be modified to allow merchants to make separate
acceptance decisions for any card for which there is a separate
interchange fee.
However, any changes to the honour-all-cards rule would meet
with stiff opposition from Visa and MasterCard. In its submission
to the RBA’s review, Visa stated that it opposed any dismantling of
the rule.
Meanwhile, MasterCard states that the benefits of the ‘no
surcharge’ rule need to be evaluated on a country-by-country basis,
and that the RBA’s approach undervalues the benefits merchants
receive from accepting credit cards. It is safe to say that Visa
and MasterCard broadly disagree with the RBA’s view that reforms
have been beneficial.
Away from interchange regulation, banks themselves could assume
far greater powers to examine the finances of their customers under
draft legislation that will go before Australia’s Federal
Parliament within the next few months.
Following the proposed changes, companies that undertake credit
history checks for lenders will now be allowed to keep detailed
records on individuals that detail their mortgage repayments,
credit card bills, personal loans and even phone accounts.
While the drafted legislation has come under fire from consumer
groups as well as those concerned about privacy and the erosion of
civil liberties, banks have welcomed news of the new rules, citing
that at present they have no way of checking whether a prospective
customer is lying about their borrowing history.
Card positioning and profitability
Apart from a shift to debit from credit, the reforms have also
had an impact on the profitability of issuers. 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. Since the reforms were implemented, that figure has
slipped considerably, leading to reduced rewards programmes and
more card fees.
Although not quite a saturated market, Australia’s credit card
market is becoming increasingly competitive, with between 500 and
600 credit cards available, with interest rates ranging from 8
percent to 28 percent.
Credit card issuers are somewhat restricted in their ability to
create growth through increasing cardholder numbers, and are
concentrating on generating higher revenues from existing
cardholders.
MAJOR PLAYERS
Commonwealth Bank of Australia (CBA)
For its full-year fiscal 2008 results, published in June 2008,
CBA said that credit card balances had grown by 5 percent compared
to June 2007, driven by targeted customer campaigns and a focus on
cross-sell initiatives, which led to an increase in the number of
new accounts opened.
However, CBA’s overall market share in credit cards has slipped
gradually to 18.2 percent as of June 2008, compared to 18.8 percent
in June 2007. This may partly be explained by the fact that CBA
does not participate in the zero percent balance transfer card
market, whereas its rivals have aggressively pushed forward their
products in this area, resulting in greater market share for
them.
For fiscal 2008, CBA’s credit card outstandings amounted to
A$7.5 billion, compared to A$7.18 billion in 2007. However, as a
percentage of overall loans, advances and other receivables, CBA
credit card outstandings represented 2.4 percent in 2008, compared
to 2.7 percent in the year-ago period.
ANZ
ANZ offers a range of Visa and MasterCard-branded cards,
including a low rate credit card, a low annual fee card, frequent
flyer and rewards credit cards, including gold and platinum rewards
cards.
In November 2007, ANZ launched the Balance Visa card, with the
aim of rewarding customers for every dollar they repay off their
balance rather than every dollar they spend. With this product, ANZ
is rewarding customers for good financial management, in much the
same way as the Discover Motiva card which was launched in the US
earlier in 2007. Customers can choose to receive their rewards from
ANZ Balance Visa in either cashback or shopping vouchers and gift
cards.
In the year to September 2008, ANZ recorded credit card
outstandings of A$7.4 billion, compared to A$6.64 billion in the
year-ago period, or an increase of 12 percent.
National Australia Bank (NAB)
NAB’s full year 2008 fiscal results show that credit card
outstandings in Australia rose to A$5.2 billion as of September
2008, compared to A$4.9 billion in the year-ago period. There has
been an increase in the group’s 90+ days past due retail
delinquency rate of 10 basis points to 0.81 percent from September
2007, and by 3 basis points since March 2008, primarily due to
rising mortgage delinquencies in Australia and New Zealand.
The gross 12-month rolling write-off rate has improved, falling
by 2 basis points from September 2007 to 0.28 percent at September
2008. This improvement follows a strategic decision by NAB to tilt
the retail portfolio away from unsecured personal lending and
credit cards in favour of secured housing lending, and invest in
improved collections techniques. Credit cards comprise 2 percent of
the NAB’s group’s gross loans and acceptances by product.
Westpac
Westpac’s credit card market share has slipped this year, due to
increased competition in an already crowded marketplace.
Westpac also reported that it was seeing lower revolver rates
among its cardholder base. Credit card net interest income was
flat, with below system growth, due primarily to increased
repayments from customers within the interest free period and the
tightening of credit scorecards in prior periods.
Westpac’s credit card outstandings amounted to A$7.5 billion as
of September 2008, compared to A$7.3 billion as of September 2007,
or a growth rate of 3 percent. As for the outlook going forward,
Westpac says that consumer credit quality has been resilient
despite a tougher economic environment. Credit card delinquencies
past 90 days now stand at 82 basis points, up one basis point over
the year.
