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Credit card shake-up good news for consumers

Consumers struggling with “outrageous” interest rates on credit cards could be the big winners of a government move to overhaul the credit industry and allow tech companies, supermarkets and others to issue credit cards.

The government is moving on recommendations by the Reserve Bank to abolish requirements for credit card issuers to have a banking licence. Currently, only registered banks or specialist credit card institutions can issue credit cards or accept credit card transactions on behalf of retailers.

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That is good news for consumers. According to ASIC, Australians have a collective credit card debt of $32.8 billion, or $4200 for every citizen, and the average cardholder pays about $750 a year in interest.

The bad news is, if you have a $4200 credit card debt and only pay the minimum repayment, it will take 31 years and $14,900 to pay it off. Between us, we pay nearly $6 billion in interest each year.

The changes could lead to an explosion of choice in the credit cards available to consumers, and with more competition, interest rates and other fees might fall, while the perks of card ownership, like rewards programs, could improve.

‘Right balance’

In a statement issued this month by Finance Minister Mathias Cormann, the aim of the change is to strike the right balance between stability and competition that aligns with findings from the Reserve Bank recommendations.

“The changes will encourage new participants, drive product innovation and encourage better use of technology,” he said. “Increased competition will also benefit consumers and retailers by putting downward pressure on credit card fees and charges.”

Kirsty Lamont, director of Mozo, a financial comparison website, says competition would benefit consumers.

“On face value, competition and innovation is a good thing. Credit cards are a lucrative industry for the banks. Consumers would certainly benefit from lower rates,” Ms Lamont says.

“It’s outrageous. The average interest rate is nearly seven times higher than the (RBA’s official) cash rate.

“Over the years, we’ve seen competition from non banking players, such as supermarkets, yet there hasn’t been any downward pressure on rates. In fact, it’s the opposite. The average rate is 17.25 per cent. This has been going up for the last few years, not down.”

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Choice is coming to the credit card sector.

Other benefits

Ms Lamont points out that competition among existing card providers generally centres around reward points, introductory offers and perks.

“There is definitely room for competition and we’d benefit from lower interest rates, whether we see this from the new regulations remains to be seen,” she says. “This could also open the doors for overseas players looking to enter the market. Mobile payment providers, like Square, are potentially looking to launch its virtual credit card here.

“Other potential players include technology companies such as Apple, Sony, even Google entering the space to drive more competition and innovation. This is where it gets very interesting.”

‘We welcome it’

Chris Hamilton, CEO of the APCA, a self-regulatory body for the payments industry, says any changes which encourage diversity and competition in the marketplace is a good idea.

“We work with government regulators as part of our approach to encourage a competitive marketplace so that new ideas that come into the market can effectively compete,” said Mr Hamilton.

With regard to lower interest rates, Mr Hamilton says there are a number of factors that come into play.

“Firstly, interest rates only make up one component of fees. Other components include rewards and the functionality of services available. Having more diversity may not necessarily provide competitive rates. We already have players out there who compete with introductory rates or interest free periods. It’s not just about comparing rates, there is more complexity to it.”

Scroll down to see CHOICE’s top five Australian credit cards

Mr Hamilton adds the specialist credit card institutions (SCCI) reforms were introduced in the 1990s in an effort by the government to set up processors not just for the traditional financial institution, but to broader groups.

“Looking back, this has had a beneficial effect. We now have Virgin and GE Capital, and other players competing. The regulators are conscious of consumer risk, regardless of whether you are a SCCI; you will still be subject to regulations.”

The changes will come into effect in early 2015.

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