During today’s evidence to the House Standing Economics Committee, Westpac CEO Brian Hartzer confirmed they are planning to launch a no-frills (e.g. no travel insurance) credit card with an interest rate below 10% and a limit of somewhere between $2,000 and $4,000 depending on ability to repay. The launch is expected within the next 2-3 months.
CBA says CommBank customers will soon be able to close their credit card account online in real time giving them even greater control over their financial wellbeing.
In an Australian first, CommBank credit card customers will be able to close their credit card account online in real time giving them even greater control over their financial wellbeing. The fully digital experience will enable customers to close their credit card using the CommBank app or online without the need to go into branch or speak to our contact centre.
Clive van Horen, Executive General Manager Retail Products and Strategy, Commonwealth Bank said this is proof of the bank innovating to help customers have more control of their finances.
“Online credit card closure is another step on the path to providing customers with greater control of their financial wellbeing. We introduced Lock, Block, Limit in 2014 to provide customers with extra security and convenience at their fingertips, in real time. Last year we added spending caps and real time credit limit decreases. Next month customers will receive instant transaction receipts on their phones.
“Soon customers can go online to close their credit card at a time that suits them, simply with the app or NetBank,” Mr van Horen said.
Since launch more than one million cards are using “Lock, Block, Limit” through the CommBank app and NetBank, with this number increasing by around 5,000 each week.
“We are continuing to innovate and giving more control to credit card holders,” Mr van Horen added.
The real time, online credit card close feature will be available to customers later in 2017
Choice, the consumer group, has called for consumers to be able to cancel their credit cards immediately online, rather than jump through the hoops which the banks currently prescribe.
They recently reviewed the cancellation policies of the big four and found a distinct lack of easy cancellation options.
What? No online cancellation?
Instead of being able to cancel your card online and quickly cut ties with the debt monster, the banks force you to call, write a letter or visit a branch in person.
Meanwhile, almost all other banking services – including applying for a credit card and having it approved – are available online these days.
To us, it looks like a blatant attempt to keep you attached to your credit card and keep the debt clock rolling. That’s why we’ve been pushing to have the tactic abolished since August 2015.
Our review comes as the banks are set to face a Parliamentary Inquiry on Friday this week, and it follows attempts by ANZ and Westpac to ward off credit card criticism by promising to cut interest rates on some “low rate” cards.
Jumping through hoops
Here’s what the banks require if you want to cancel your credit card.
- Call or write to ANZ.
- Return the card: “ANZ will only cancel the credit card when the account holder has returned it to ANZ cut diagonally in half (including any chip on the card) or has taken all reasonable steps to return it to ANZ”.
- Any additional funds will be returned by bank cheque.
- Call, write “or otherwise advise NAB in a manner acceptable to NAB”.
- Cut the card diagonally in half.
- Additional funds will be returned by bank cheque. NAB will charge its “usual fee” for issuing the cheque. Cash out is only available for amounts under $5.
- Call, write or visit a Westpac branch.
- Promise to destroy the card.
- Additional funds are paid by bank cheque or directed into another account by direct debit.
No instructions are provided for card cancellations in the CBA credit card ‘conditions of use’ document. Customer service representatives instructed CHOICE to call the credit card team to cancel, which can only be contacted Monday to Friday, 9.00am–5.30pm.
Chasing fees and interest
“In the age of online banking if defies belief that ANZ, NAB, Westpac and Commonwealth all require you to call or email them when seeking to cancel a credit card,” says CHOICE head of campaigns and policy Erin Turner.
“It seems clear that the big banks’ ‘go slow’ on card cancellations is about protecting revenue from interest and fees, with data showing the big banks slug consumers with an average annual fee of $146 compared to just $58 through a mutual or customer-owned banks.
“Unfortunately, getting stuck paying excessive credit card interest is only one of the traps consumers face, with many of us paying excessive annual fees when we fail to cancel a card.”
The national collective credit card debt hovers at a staggering $32 billion or so at the moment (about $4300 per cardholder). If you’re one of those consumers who’ve gotten in over your head, it’s generally a good idea to cancel the offending card once you’ve climbed out of debt.
That would be doubly true if you happen to have a card from one of the big four banks: CBA, ANZ, NAB and Westpac. Their standard interest rates are among the highest. And their so-called low-interest cards aren’t that much better – or at least not better enough.
The ANZ move to cut rates on some of its cards will stimulate more discussion on the economics of the credit card business. It may appear a bold move, but we are not so sure.
Actually all the the various bank and ABA initiatives are not necessarily going to help to rebuild trust in the banks. Like a running sore, the ongoing exposure may well reinforce current negative consumer perceptions. A point event like a specific review might actually draw the poison more effectively! And yes, there are major issues to address.
But, today we look at credit card economics. To do this we use the data provided by the RBA. They show the number of card accounts (not the same as card numbers because some accounts will have multiple cards on them) has been growing, to approach 16.7 million accounts. The number of transactions on these accounts are also growing, with 241m transactions to December 2016.
The average value of a transaction has remained relatively static, with the average purchase around $120 and the average cash withdrawal around $380. But significantly the proportion of account balances which are accruing interest is reducing, with around 40% of accounts being cleared off each month. Households who can clear their cards should do so to avoid interest costs.
The 60% of balances which are revolving incur interest costs. The data shows despite cuts to the RBA cash rate, rates on both low rate and standard rate cards remain high, and indeed, some low rate cards have moved up recently. As a result the average interest margin between the cash rate and the charged rate is higher than it has ever been, on average close to 20%. This puts the ANZ 2% cut on some cards into perspective!
So, now we know the proportion of cards which are revolving, and the margin, we can estimate the real net cost to the average revolving card holder. We estimate the typical account will incur a monthly interest charge of $57 each month they revolve, compared with $10 in 2003. In fact we see a stable cost until 2008, since when it has climbed substantially. This is worth about $80m a month to the banks at the current margins.
To broaden the analysis, banks have also been slugging households with higher credit card fees. Again the RBA says, fees rose 6.6% in 2015 (last year of available data) and they took $1.5 billion in card fees in that year. In the past four years, card fees have risen significantly faster than inflation.
Later we will look at the broader economics of cards, taking account of loyalty schemes and merchant fees. Meantime you can read our earlier analysis of credit card economics by segment. But from a margin view, 2% is hardly a generous concession.
When you’re doing well, a little generosity is appreciated – except if it is too little, which is what consumer advocates and MPs are saying about ANZ’s surprise announcement that it will be trimming interest rates on its credit cards as of February 28.
And make no mistake, ANZ is doing very well indeed.
Last month it announced that profits for the most recent quarter had hit $2 billion, an increase of 31 per cent on the same period last year. More than that, ANZ Banking Group chief Shayne Elliott is upbeat about the burden of bad debts on his outfit’s books and recently scaled back estimates of that red-ink liability.
So given the ANZ’s strong profit result, they can afford to give users of its credit cards a break, right?
Absolutely, says CHOICE’s Tom Godfrey, who doesn’t see the reductions as anything but a very small bone indeed.
Those reductions should have been much larger, Mr Godfrey said, casting the cuts as a case of too little and too late.
“It’s an attempt by ANZ to try and take the heat off themselves and the other banks to show they’re responding to community concerns,” he said, adding that “the big four banks are just not competitive”.
Mr Godfrey noted that the best interest rates – those offered by the credit unions – are under 10 per cent, and he wondered where ANZ’s rival banks found the gall to charge “toxic interest rates” of “around 18 or 19 per cent or higher”. The best credit card rates available in Australia can be as low as 8.9 per cent.
More than 500,000 existing ANZ Low Rate accounts will benefit from the new rates, with the bank estimating that a typical consumer stands to save about $150 a year.
MPs take the credit
The government has praised the bank for the move, with Liberal MP Scott Buchholz saying ANZ has shown “commercial courage” in lowering its rates.
Malcolm Turnbull also claimed credit. Despite his government’s reluctance to conduct a Royal Commission into the banking sector, he said the newly-formed economics committee, before which the bank CEOs appear, had now provided real results.
“I am bringing the banks regularly before the house economics committee and they are being held to account for their actions and you are seeing real results,” Mr Turnbull said on Sunday.
Neither Mr Godfrey’s criticism nor South Australian Senator Nick Xenophon’s faint praise for the move ruffled the head of ANZ’s retail and commercial unit, Fred Ohlsson, who crowed that the reductions mean customers will have “the best rate available from any of the major banks or any of the regional banks owned by the majors”.
ANZ estimates that a typical consumer stands to save about $150 a year under the new rates.
And that’s the whole point, according to Senator Xenophon, who scoffed that ANZ customers have good reason to be even more miserly with their gratitude than the bank has been with its rate cuts.
“The gap between the official cash rate and credit card rates has never been higher,” he said.
“We really need to look at some form of either greater market competition, or the banks need to really explain themselves in gouging consumers in this way,” said Senator Xenophon, who has been a strong backer of Labor leader Bill Shorten’s call for a royal commission into the banking industry.
Mr Buchholz cited the grilling late last year of bank executives who were dragged before a parliamentary inquiry as a prime factor motivating Sunday’s announcement.
“We will have the banks appearing in the next fortnight in Canberra, along with the Australian Banking Association, where I will continue to take a similar line of questioning with those banks that haven’t taken the commercial choice to shift their interest rates yet.”
ANZ has today announced it will reduce purchase interest rates on two credit cards by up to 2.00%pa, which is the lowest these rates have been for customers since 2003.
Effective Thursday 23 February, ANZ will reduce the purchase rate on its Low Rate Platinum card by 2.00%pa to 11.49%pa, and its Low Rate Classic card by 1.00%pa to 12.49%pa.
More than 500,000 existing ANZ Low Rate accounts will benefit from the new rates with the majority of those customers who pay interest every month to save about $150 a year.
Announcing the changes, Group Executive Australia Fred Ohlsson said: “Our customers with Low Rate accounts are typically middle income Australians who predominantly use their credit card for everyday household purchases, such as groceries.
“We’ve listened to customer feedback about credit card rates and decided our Low Rate customers would benefit most from a rate reduction as they are more likely to have ongoing debt from month to month. These changes mean they will have the best rate available from any of the major banks or any of the regional banks owned by the majors,” Mr Ohlsson said.
ANZ’s Low Rate Classic card also offers the lowest annual fee of the major banks for similar cards at $58, and has a minimum credit limit of $1000 making it accessible to a wide range of customers.
The Low Rate Platinum card has an annual fee of $99 and a minimum credit limit of $6000. It also comes with a range of insurances, including overseas travel and medical, and up to nine additional card holders at no extra cost. Both cards feature up to 55 interest free days on purchases.
Key crossbench senator Nick Xenophon welcomed the announcement, but said the banks needed to do more to address the cost of credit cards.
“The gap between the official cash rate and credit card rates has never been higher and I think that we really need to look at some form of either greater market competition, or the banks need to really explain themselves in gouging consumers in this way,” he told ABC TV on Sunday.
ANZ today announced its customers can continue to use their digital wallets when they report their card as lost or stolen with a new service that automatically updates their replacement card details.
As soon as a customer calls to report their debit or credit card as missing, ANZ puts a stop on the original card and automatically uploads the new virtual card details to the customer’s digital wallet.
ANZ Managing Director Products Australia, Katherine Bray said: “Our customers report about 670,000 cards as lost or stolen each year and we know waiting for a new card to arrive can be a real inconvenience.
“Now our customers can keep using their digital wallet, whether it’s Apple Pay or Android Pay, to make purchases while they wait for the new physical card to arrive in the mail.
“For many customers their smartphone is now the primary way they do their banking, including making purchases, so we’re working hard to keep improving their mobile experience with changes like this.”
ANZ has also made it possible for customers to keep their existing Personal Identification Number (PIN), provided it hasn’t been compromised, meaning less change with the same high level of security.
ANZ is the only major Australian bank to offer both Apple Pay and Android Pay with about 8.3 million transactions made across the bank’s digital wallets last year.
Christmas is a time when our credit cards get a workout. Data from the RBA shows a significant hike in the number of transactions leading up to the holidays. We marked these in yellow. But it is worth noting that whilst credit limits are rising, revolving balances are not.
But card use varies by our household segments as used in our surveys.
Using data from our household surveys we find that the relative proportion of households with credit cards varies considerably. Almost all younger households have cards, as do more affluent households. Disadvantaged households are less likely to had access to a credit card.
If we then overlay the average transaction turnover and revolving balances these also vary by segment. For examples, wealthy seniors use their cards and have high turnover balances, but revolve very little. On the other hand, exclusive professionals use their cards, and revolve significantly.
Younger families are also using their cards, but the average balance and turnover is lower.
This once again highlights the importance of customer segmentation within financial services. You can read more about our analysis of credit card economics here.
Our research shows that households do not know what they are paying in fees and charges on their credit cards, nor the value of “rewards” on these cards. This is over and above transaction surcharging which has been subject of recent regulatory review. The RBA says in 2015, households paid $1.5 billion in card fees, up 6.6% from the previous year.
In fact there have been a number of changes to the terms and conditions of credit cards from several of the large providers. This is in response to recent changes to payment regulation, and banks seeking to capture more value from non-revolving card holders.
It is worth checking the true value of rewards points, which we think are being devalued (the so called earn and burn rate) means you spend more for less benefit. In addition, fees on reward cards have been rising steadily.
In addition, there are a range of other potential transaction fees. For example, an Australian dollar transactions from overseas merchants now carries a fee, by for example the CBA. Whilst foreign currency transactions did cop a charge, Australian dollar transactions did not. The CBA says:
We charge you an international transaction fee when you make a purchase or obtain a cash advance (whether in a foreign currency or Australian dollars):
While overseas; or In Australia (for example online) where there is an overseas connection, as the merchant, or the financial institution or entity processing the transaction, is located overseas. The international transaction fee for these transactions is:
- Transactions converted by MasterCard® or Visa – 3.00%
- Transactions converted by American Express® – 2.00% (plus a currency conversion factor of 1.50% which is included in the converted transaction amount)
- Transactions in Australian dollars but with an overseas connection – 3.00%
- In some cases, overseas merchants may allow you to pay in Australian dollars, e.g. when you’re shopping online or over the phone. This is still considered an international transaction because your transaction is processed overseas.
- Note: Even though a merchant has a website address ending in ‘.com.au’ and displays prices in Australian dollars, they may still be located overseas or otherwise choose to process their credit card payments outside of Australia. It’s best to check with the merchant before you pay if you are unsure.
Depending on your card use – if you revolve and pay interest, then the interest charges will swamp most other charges, – it would be worth looking at some of the non-reward, no fee cards which are available, because these sneaky little fees soon add up.
We think there is a case to make the disclosure of fees on credit cards clearer, and for consumers to reconsider whether reward schemes attached to cards are worth having at all. You can compare cards here.
“Where consumers see a card surcharge, they should check to see what non-surcharged methods of payment are available. Before paying a surcharge, they should think about whether any benefits from using that payment method outweigh the cost of the surcharge; if not they should consider switching to an alternative payment method. This will not only save them money, it will help keep costs down for businesses and will put pressure on card schemes to keep their charges low”. This was Tony Richards, Head of Payments Policy Department RBA, conclusion when he spoke at the 26th Annual Credit Law Conference and discussed the revised card payment surcharging regime.
In his speech he started by looking at data on average merchant service fees (or MSFs) show that there are very large differences in the cost of different card systems for merchants. These costs ranged from an average of just 0.14 per cent of transaction value for eftpos in the June quarter to about 2 per cent of transaction value for Diners Club. For MasterCard and Visa transactions, the average cost to merchants of debit cards was 0.55 per cent of transaction value, while the average cost of credit card transactions was 0.81 per cent. The average cost of American Express cards was 1.66 per cent of transaction value.
But these averages mask significant variation across different merchants. Many merchants pay up to 1–1½ per cent on average for MasterCard and Visa credit card transactions. And it is not unusual for merchants to pay 2–3 per cent to receive an American Express card payment.
Then he discussed five key elements of the new framework contained in the Bank’s new surcharging standard and the Government’s amendments to the Competition and Consumer Act.
First, the new framework preserves the right of merchants to surcharge for more expensive cards, but it does not require them to do so. Under the framework, a merchant that decides to surcharge a particular type of card may not surcharge above their average cost of acceptance for that card type.
For example, if on average it costs a merchant 1 per cent of the value of a transaction to receive a Visa credit card payment, the merchant may apply a surcharge of up to 1 per cent for that type of card. The merchant would not, however, be able to apply the same 1 per cent surcharge if the customer chose instead to pay with a debit card that was less costly to the merchant.
Second, the definition of card acceptance costs that can be included in a card surcharge has been narrowed. Acceptable costs will be limited to fees paid to the merchant’s card acquirer (or other payments facilitator) and a limited number of other documented costs paid to third parties for services directly related to accepting the particular type of card. A merchant’s internal costs cannot be included in a surcharge.
Third, a merchant that wishes to surcharge will typically have to do so in percentage terms rather than as a fixed-dollar amount. In the airline industry, this means that surcharges on lower-value airfares have been reduced significantly.
Fourth, the Government has given the ACCC investigation and enforcement powers over cases of possible excessive surcharging.
The Bank’s standard and the ACCC’s enforcement powers apply to payment surcharges in six card systems that have been designated by the Reserve Bank – eftpos, the MasterCard debit and credit systems, Visa’s debit and credit systems, and the American Express companion card system. However, Reserve Bank staff have been in discussions with other card systems that have not been designated and we expect that those systems will all be including conditions in their merchant agreements that are similar to the limits on surcharges under the Bank’s standard. This will mean that merchants that wish to surcharge on payments in these other systems will be contractually bound to similar surcharging caps to those that apply to the regulated systems.
Fifth, surcharging in the taxi industry – which is subject to significant regulation in many other aspects – will remain the responsibility of state taxi regulators. Until recently, surcharges of 10 per cent were typical in that industry. However, authorities in five of the eight states and territories have now taken decisions to limit surcharges to no more than 5 per cent. As new payment methods and technologies emerge, the Bank expects that it will be appropriate for caps on surcharges to be reduced below 5 per cent. The Government and the Bank will continue to monitor developments in the taxi industry with a view to assessing whether further measures are appropriate.
The first stage of implementation of the surcharging reforms took effect on 1 September and covers surcharging of card payments by large merchants. Merchants are defined as large if they meet certain tests in terms of their consolidated turnover, balance-sheet size or number of employees. The framework will take effect for other, smaller merchants in September 2017.
There are a few reasons for the delayed implementation for smaller merchants. Most importantly, these merchants are less likely to have a detailed understanding of their payment costs. Since the new framework involves enforcement by the ACCC, the Bank considered it important to ensure that such merchants have simple, easy-to-understand monthly and annual statements that show their average payment costs for each of the card systems subject to the Bank’s standard. Accordingly, as part of the new regulatory framework, acquirers and other payment providers must provide merchants with such statements by mid 2017. All merchants will be required to comply with the new surcharging framework from September 2017 and ACCC enforcement will apply also to smaller merchants from that point.
Given the new framework has only been effective for two weeks, it is too early to be definitive about how the new surcharging regime applying to large merchants has affected the surcharging behaviour of those merchants. However, based on some corporate announcements and an initial survey of some websites, I think it is possible to make six initial observations.
First, and most prominently, the major domestic airlines have moved away from fixed-dollar surcharges to percentage-based surcharging. This will result in a very significant reduction in surcharges payable on lower-value airfares. The two full-service airlines have introduced surcharges for on-line payments of 1.3 per cent for credit cards and 0.6 per cent for debit cards. A passenger wishing to pay for a $100 domestic airfare by card will now pay a surcharge of $1.30 or 60 cents, as opposed to a surcharge of up to $7-8 previously. Surcharges on some high-value airfares may rise with the shift to percentage-based surcharges. However, the airlines have implemented caps on surcharges of $11 for domestic fares and $70 for international fares, indicating that they continue to prefer to not pass on their full payment costs on purchases of more expensive tickets.
Second, there does not appear to have been any increase in the prevalence of surcharging. It remains the case that companies that face relatively low merchant service fees are tending not to surcharge, while those businesses which receive a high proportion of expensive cards are more likely to surcharge.
Third, the surcharge rates for credit cards that have been announced show significant variation, which is consistent with other evidence that there is a lot of variation in the merchant service fees faced by different businesses. In the case of the Qantas group, for example, Qantas is charging a credit card surcharge of 1.3 per cent while Jetstar – which presumably receives fewer high-cost cards – is charging a surcharge of 1.06 per cent.
Fourth, as required by the Australian Consumer Law, merchants that have announced changes to their surcharges are continuing to offer non-surcharged means of payment. In the face-to-face environment, this typically includes cash, eftpos and sometimes MasterCard and Visa debit cards. In the on-line environment, it typically includes payments via BPAY, POLi or direct debit, which are typically low-cost for merchants.
Fifth, while there are still many instances of ‘blended’ credit card surcharges, there are some early signs of greater discrimination in surcharges. Blending refers to the practice of charging the same surcharge across a number of systems regardless of their cost – say across the MasterCard, Visa and American Express credit systems.
The new framework allows merchants to set the same surcharge for a number of different payment systems, provided that the surcharge is no greater than the average cost of acceptance of the lowest-cost of those systems. For example, if a merchant accepts cards from two credit card systems, which have average costs of acceptance of 1 per cent and 1.5 per cent, it can set separate surcharges of up to 1 per cent and 1.5 per cent, respectively. If it wishes to set a single surcharge, it cannot average the costs and set a 1.25 per cent surcharge for both systems, since it would be surcharging one of those systems excessively. In this example, the maximum common surcharge that could be charged would be 1 per cent.
While I think we are already seeing some reduction in the practice of blended surcharging, it is likely that we will see this trend continue from mid 2017 when new rules on the interchange fees exchanged between banks for card transactions take effect. Without wishing to go into details, the Bank will for the first time be placing a cap on the maximum interchange fee that can be paid on any card transaction. This will significantly reduce the cost of MasterCard and Visa payments for those merchants which currently receive a high proportion of high-interchange cards.
The sixth change has been in the event ticketing industry, where it was previously very difficult to avoid a card surcharge in the on-line environment. Given this, the ACCC had already required the major ticketing companies to show their surcharges as a separate component within their headline, up-front pricing. Effective 1 September, the two major companies have now removed their card surcharges and are now quoting a simple, single price for all payment methods.