Credit Cards – Page 5 – Digital Finance Analytics (DFA) Blog

Senate Inquiry Says Credit Card Industry Needs Reform

The Senate Inquiry report of Credit Cards was published today. They have made 11 recommendations, which could have some impact on the sector, but they have rejected regulation of card rates. They suggest a focus on easier switching, better disclosure, affordability assessments and tweaks to minimum payments. They also flag the potential for an alternative longer-term credit product.

Two important points come though. First, card rates have not followed cash rates down.

Second, less affluent households, who revolve consistently and maintain high debt balances cross-subside more affluent households who do not. You can read about our analysis of card economics here.

In addition, many who do borrow on a card do not understand the true rates of interest they are paying.

Here are the recommendations:

Credit card advertising and marketing material should disclose clearly the cost of a credit card for a consumer, including the card’s headline interest rate and ongoing annual fee.
Credit card monthly statements should include prominent reminders about a credit card’s headline interest rate and ongoing annual fee.
The government to work with key stakeholders to develop a system that informs consumers about their own credit card usage and associated costs. Initially, historic usage and cost data could be provided in monthly statements. Over time, it would be desirable to provide customer-specific, online, machine readable records that would allow credit card users to compare credit cards using online comparison engines.
The government should undertake a review into technical and systems innovations that might help facilitate switching in the credit card market, and as part of this review consider the feasibility of account number portability for credit card accounts.
Card providers should be required to provide consumers with the ability to close a credit card through an online process (‘click-and-close’).
The responsible lending obligations, as they apply to credit card lending, be amended so that serviceability is assessed on the basis of the borrower’s ability to pay off their debt over a reasonable period. The government should consult with industry, consumer groups and other interested stakeholders to determine what constitutes a ‘reasonable period’ in this regard.
The government consider introducing a credit card minimum repayment requirement and alternative means of reducing the use of credit cards as long-term debt facilities.
Credit card providers should be required to make reasonable attempts to contact a cardholder when a balance transfer period is about to expire and the outstanding balance has not been repaid. In doing so, the provider should be required to initiate a discussion about the suitability of the customer’s current credit card and, where appropriate, provide advice on alternative products.
The government should consider expanding financial literacy programs such as the Australian Securities and Investments Commission’s MoneySmart Schools Program.
Credit card providers should be required to make reasonable attempts to contact a cardholder in cases where a cardholder has only made the minimum payment for 12 consecutive months on interest bearing balances, and thereby initiate a discussion about product suitability and alternative lending products.
The government consider a Productivity Commission inquiry into the value and competitive neutrality of payments regulations, with a particular focus on interchange fees.

There are some separate comments and recommendations from Nick Xenophon, who suggests consideration should be given, in conjunction with consumer groups and experts, to providing appropriate warnings on credit card statements and credit card advertisements.

Finally, Coalition Senators expressed some concerns about the potential impact of some of the recommendations, as being overbearing.

Government to act against businesses exploiting credit card charges

From The Conversation.

The Turnbull government will ban businesses from charging consumers excessive surcharges on their credit cards, and move to inject more competition into the superannuation industry, responding to the Financial Systems Inquiry headed by businessman David Murray.

Under planned legislation, the surcharges will not be allowed to be more than the cost to the business of accepting payment by card.

The Australian Competition and Consumer Commission (ACCC) will enforce the regulations to ensure consumers are treated fairly and not overcharged.

The government is also promising action to improve the standards of financial advice, an area that in recent years has been subject to extensive malpractice and controversy, amid deep concern especially from retirees.

The government’s response to the Murray inquiry, which reported last year, was announced by Prime Minister Malcolm Turnbull, Treasurer Scott Morrison, and Assistant Treasurer Kelly O’Dwyer at a joint news conference. Most recommendations have been accepted, and several measures have been added.

The report and response cover the resilience of the financial system; superannuation and retirement incomes; innovation; consumer measures; and the regulatory system. Measures to improve the resilience of the banking system are already in train.

Turnbull said the surcharge issue “has been the subject of considerable consumer concern”.

“Quite plainly, where a merchant says if you use a credit card it’s an extra 2% or 3%, that carries with it an absolutely crystal clear, irrefutable representation that the merchant is seeking to recover his or her costs,” he said.

“In some cases they may be, in other cases they’re not.

“We think that consumers are entitled to a very fair deal here … in other words, to get exactly what they are being represented to be getting, which is an additional charge that recovers no more than the merchant’s costs.”

Morrison said that in some cases surcharges could be more than 10%. In future merchants would have to pass the “fair dinkum test” – “the fair dinkum cost of what someone is actually absorbing and passing on”.

To improve the financial advice industry, advisers will have to have a degree, pass an examination, undertake continuous professional development, subscribe to a code of ethics and undertake a professional year before they can advise clients. There will be some transitional arrangements as the tougher requirements are put in place.

“These higher standards will, for the first time, place financial advising on a similar footing to other professions and in doing so increase consumer trust and confidence in the sector”, the ministers said in a statement.

The Abbott government had its regulations watering down the Labor government’s more stringent rules thwarted by the Senate.

The superannuation measures are to improve competition, efficiency and transparency – which the government says will improve after-fee returns for fund members. The Coalition believes that industry funds have too much of an advantage under present arrangements.

The Productivity Commission will be asked to develop and release criteria to assess the efficiency and competitiveness of the superannuation system. It will “develop alternative models for a formal competitive process for allocating default fund members to products”.

The government says it will work with industry to provide retirees with more flexible and reliable retirement income products and “to extend the choice of fund arrangements to more employees as recommended by the inquiry”.

Last month legislation was introduced to alter super funds’ governance arrangements, requiring at least one-third of trustee boards to be independent directors, including an independent chair.

Morrison said the government was putting “Australians in the driver’s seat of their own money and no-one else, and that’s as it should be.

“It does end the closed shop when it comes to mandatory superannuation contributions and how they are directed off into funds, and it will give Australians greater choice about where they invest their own money for their own retirement.”

Morrison described the Murray report as “a common sense report. It has common sense recommendations, a health check on where our financial system is at.”

In terms of the financial system itself, it makes it stronger by embedding deeper protections within the system, whether it’s on capital adequacy, improved governance and standards right across the system and empowering our regulators to be able to enforce the protections that are in that system, protect consumers and Australians and our economy at the end of the day.

“It does provide Australians with greater choice and greater control over their own money, whether it’s their superannuation or anything else.”

Turnbull acknowledged work done by former treasurer Joe Hockey and former assistant treasurer Josh Frydenberg but stressed “this response is a response of the Turnbull government to this inquiry”.

Author: Michelle Grattan, Professorial Fellow, University of Canberra

RBA Opening Statement to the Inquiry into Credit Card Interest Rates

RBA Assistant Governor (Financial System) Malcolm Edey’s Opening Statement to the Senate Economics References Committee Inquiry into Matters Relating to Credit Card Interest Rates touches on some important points. The RBA’s full submission is one of 23 made, and is worth reading. The terms of reference for the inquiry are wide ranging. Borrowings on cards are worth more than $41bn.

The economic effect of matters including the difference between cash rates and credit card interest rates, with particular reference to:

the Reserve Bank of Australia‘s cash rate announcement and associated changes in credit card interest rates;

the costs to banks, credit providers, and payments systems, including those related to:

borrowings,

credit risk and default rates, and credit risk pricing,

various credit card loyalty programs, and

consumer protection measures, including reforms introduced following the global financial crisis,

transaction costs, including interchange fees, on the payments industry;

the costs to consumers, including those related to:

how and when interest is applied,

minimum monthly payment levels,

various credit card loyalty programs of other users, and

card fees, including ATM and POS fees;

what impact competition and price signals have on the credit card market;

how the enforcement of responsible lending laws and the national consumer credit regime affect consumer costs;

how consumer choice of credit card products can be improved, with reference to practices in other jurisdictions; and

any other related matters.

The RBA has also made a number of comments on the cards industry in its recent paper. Now, here are today’s opening comments.

I know the Committee is interested in a number of different aspects of credit card pricing and regulation, and we’ve tried to address those aspects that come within our field of expertise and responsibility in our submission.

As we explain in the submission, credit cards have both a payment and a credit function. The regulatory powers and mandate of the Reserve Bank Payments System Board relate to the payment function. The Board has a mandate to use its powers to promote efficiency and competition in payment systems, consistent with overall stability of the financial system. To that end, the Board has for a number of years regulated card payment systems by setting standards in relation to such matters as interchange fees, surcharging and access.

As you know, the Board is currently undertaking a comprehensive review of those aspects of card payments regulation. I’ll be happy to answer any questions you might have today about how that review is proceeding.

I know the Committee is also very interested in the credit function, and particularly the interest rates on credit cards. That is not something that we regulate, but we have set out in our submission an overview of some of the key facts.

If I may, I’ll just make a few high-level observations about that before we go to questions.

Credit card products vary a lot in the interest rates that they charge. Some of those rates are very high. They’re higher than I think can be easily explained.

Interest rates of the order of 20 per cent on credit cards are not uncommon. The average rate for borrowers who incur interest on credit cards is currently about 17 per cent. After deducting banks’ cost of funds and the cost of credit losses, that would equate to an interest rate margin of more than 10 percentage points.

My advice if you’re in that situation is to shop around. Despite the prevalence of high-rate cards, this is a market where there is some significant competition. There are a lot of card products that offer lower rates and special deals for balance transfers. In many cases, card holders should be able to lower their interest rates by taking advantage of those offers, if they are willing to shop around.

That of course raises questions about why more cardholders don’t take advantage of the lower rates that are on offer, whether there are obstacles to competition and whether there might be some role for regulatory action.

Some cardholders might be unable to switch, for example if they have poor credit histories. That is something that can be looked into, along with the related question of whether there are unreasonable obstacles to switching. Other cardholders might not be aware of the options available, or might have other reasons for not pursuing them. We discuss some of those issues in our submission.

The answers to these questions are not necessarily straightforward, and I think these are areas where the financial regulators can usefully do further work. When I appeared at this Committee in June I indicated that the Bank would consult with other regulators in this area, and we have begun doing that. We will be continuing those discussions at a more senior level at the next meeting of the Council of Financial Regulators next month.

I don’t want to pre-empt what might come out of those discussions, but some of the questions that might be considered are: whether there is a case for improved disclosure in this area; whether there is a need for stronger risk assessment requirements for credit card lending; and to what extent any actions in these areas would fall within the regulators’ existing powers and mandates.

DFA last year highlighted the flows of value within the credit card system, and our analysis suggested that card interest rates ARE too high. Actually the credit card business relies on those who continue to revolve to maintain the value of business. We think that unbundling the payment mechanism from the credit mechanism, and the loyalty element is critical to get to grips with what is going on. We also hope the inquiry considers alternative payment mechanisms as part of the review.

ASIC Welcomes Improved Credit Card Travel Insurance Disclosure

Following an ASIC review, credit card issuers and insurers have made improvements to disclosure for travel insurance provided through credit cards.

ASIC’s review of 17 credit card brands, issued by a range of credit card issuers, including the big four Australian banks, followed complaints made to ASIC from the general public and disputes data published by the Financial Ombudsman Service (FOS). These complaints included uncertainty around who was covered by the policy, the extent of exclusions and eligibility requirements.

Following the review, the credit card issuers and their insurers have agreed to make the following improvements:

clarify when the insurance cover is ‘activated,’ particularly where a minimum spend threshold needs to be met to activate the insurance cover
clarify if and when the use of reward points to pay for travel costs will activate the insurance cover
clarify whether supplementary cardholders can benefit from the policy
provide clearer and more prominent information about the documentation needed to make a claim.

Credit card issuers have also made improvements to their websites by making it easier to locate the insurance policy terms and conditions, and are now including direct links to the terms and conditions where none were provided previously.

Credit card issuers that also distribute standalone travel insurance have also made changes to their websites to clearly distinguish the standalone travel insurance policy from the credit card policy so that consumers do not mistakenly rely on the wrong policy.

ASIC’s Deputy Chairman Peter Kell, said, ‘As travel insurance may not be at the forefront of the consumer’s mind when obtaining a credit card, improved disclosure will help consumers understand and claim.’

‘Having travel insurance is essential for those heading on an overseas trip, to provide cover for when things go wrong. Credit card issuers and insurers must clearly set out what is and what is not covered by a policy, so that consumers can work out if they are adequately covered.’

Background

The credit card brands reviewed by ASIC included the big four Australian banks, as well as smaller Authorised Deposit-taking Institutions (ADI), and other non-ADI credit card providers. Insurance was provided to the credit card issuers by three major insurers.

Credit card travel insurance is insurance that is available to credit card holders, usually with ‘premium’ credit cards that offer extra benefits with the credit card. It is often described as ‘complimentary’ travel insurance as it is offered as a feature of the credit card with no additional fee, although credit cards that provide ‘complimentary’ travel insurance typically have an annual card fee (ranging from $87 to over $500 per year).

ASIC’s review did not include standalone travel insurance. Standalone and credit card travel insurance can differ, so consumers should consider which product is suitable for their travel needs so that they are adequately covered. Consumers with specific needs (such as pre-existing medical conditions) are especially encouraged to review their insurance coverage.

Standalone travel insurance generally requires the consumer to apply for and pay a premium. Credit card travel insurance requires a minimum spend on the credit card for the cover to be activated. Of the policies reviewed, more than half required the full airfare for travel to be paid on the credit card, while less than half of the policies required a minimum spend of between $250 and $1,000 of prepaid travel costs on the card (such as travel ticket or accommodation costs).

Payments Competition To Increase

The Treasury just released a consultation relating to Banking Amendment (Credit Card) Regulation 2014. Opening up access to non-ADIs is likely to increase competition and innovation in card issuing and acquiring, resulting in downward pressure on fees and charges, and better service to merchants and end users (which include consumers, business and government). Non-ADIs would also not be subject to the ongoing costs associated with supervision by the Australian Prudential Regulation Authority. We discussed the payments revolution recently. This is likley to put the existing players, namly the major banks under increased pressure.

The changes take effect on 1 January 2015. Implementation of the new regulatory framework will require the Payments System Board of the RBA to vary the Credit Card Access Regimes to provide for reporting requirements and disclosure of eligibility and assessment criteria for Scheme membership. The Australian Payments Clearing Association will also need to vary related Bulk Electronic Clearing System rules to allow certain non-ADIs to continue to participate in the system after the removal of the SCCI framework.

The exposure draft legislation would amend the Banking Regulations 1966 (the Regulations) to open up credit card issuing and acquiring to non authorised-deposit-taking institutions (ADIs). The reforms will allow non-ADIs to become credit card issuers and card acquirers in the Visa and MasterCard credit card schemes.

The exposure draft will revoke Regulation 4 of the Regulations, which provides that credit card acquiring and issuing is ‘banking business’ and triggers supervisory requirements of the Australian Prudential Regulation Authority. The exposure draft also makes a number of consequential amendments to the Regulations as a result of the revocation of Regulation 4.

All new entrants will need to meet the same consumer credit regulations that currently apply to banks (including specialist credit card institutions) under the National Consumer Credit Protection Act 2009. The proposed credit card access reforms will not alter these general consumer credit protections. The card schemes will be responsible for determining which entities may become card issuers or acquirers under their schemes, subject to a risk management framework imposed by the Reserve Bank of Australia (RBA).