Credit Card Competition

Sydney Morning Herald

Wednesday February 23, 2000

THE increase in credit card interest rates by two banks on Monday, with the other ``big two" following as expected, marks a familiar cycle. Consumer groups have been quick to condemn the latest increase as symptomatic of a lack of competition in this financial services area. The popular perception is that banks act with remarkable unanimity every time there is a change in official interest rates, quick to raise their credit card rates when official rates rise and slow to lower them when official rates fall. Even though that might be true to an extent, the overall competition picture is affected by more than interest rates.

There is, in fact, some competition on rates charged between credit card providers. But among the big four banks, which account for the bulk of customers, it is usually so small as to be of no account. The rate, for example, on the National Australia Bank Visa and MasterCard, has just risen from 15.25 per cent to 16 per cent. The 75-basis-point rise, effective on Monday, is greater than the recent 50-point rise in official interest rates. Much the same applies to the ANZ rates. These rates, to take effect on April 26, rise by 60 points, taking the ANZ Visa card to 15.65 by cent and the Qantas Telstra Visa cards to 16.95 per cent. The Commonwealth and Westpac are making similar adjustments.

Even where there is a degree of competition on rates between credit card providers, there is also often a disincentive some would say a false disincentive to shop around. Loyalty and reward schemes offering, for example, airline tickets for use of a credit card for transactions to a certain value will often be enough to dissuade cardholders from looking for better deals elsewhere.

The key to a better deal for consumers is better information from credit card providers and fuller disclosure of the customers' position when they borrow using credit cards, showing clearly what they pay in fees and charges, as well as interest, for the amounts of credit they are supplied. Just as the home mortgage market is more competitive than the credit card market, so, too, is there a heightened concern for disclosure in the home mortgage market. Last October, for example, the NSW Minister for Fair Trading, Mr Watkins, foreshadowed changes in NSW laws to require banks to include in their advertising for home loans a ``comparison rate" a rate which included with the mortgage interest rate the cost of bank fees and charges.

The banks, in defending the cost of credit card lending, correctly point to the differences between credit card and mortage transactions. Credit card loans are unsecured and represent a greater risk for the banks. Even if they are for comparatively small amounts, there is a higher rate of defaulting on credit card loans. And, the convenience of credit cards justifies some charge. These distinguishing features of credit cards justify appropriate fees. But, in the absence of clear consumer disclosure requirements, there is a danger of excessive overall rises in the cost of credit card loans. Rises in charges and fees can be justified by risk and higher costs associated with small transactions. Rises in interest rates can be justified by rises in official interest rates. But unless each rise is fully explained when it occurs and all charges are disclosed when loans are offered, it will be impossible for the consumer to know what is justified and where the best deal is to be had. And where consumers are not fully informed, true competition is absent.

© 2000 Sydney Morning Herald

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