The Reserve Bank this week confirmed that banks and other financial institutions are gouging millions from Australian credit card holders.
In its submission to the Senate inquiry into credit card interest rates, the RBA asserts that as the banks’ funding costs have declined since the global financial crisis, the average interest rates on standard credit cards have soared.
“Advertised rates on standard and lower-rate cards have been quite sticky in recent years, despite significant falls in funding costs,” the RBA stated in the submission.
“Spreads on advertised credit card interests rates over funding costs increased during the global financial crisis and have remained at that level or drifted modestly higher since then.”
In plain English, the RBA found that banks are enjoying fatter margins on credit card lending because they have not passed on official rate cuts to borrowers.
The RBA also found that the banks’ total loss rate on credit card lending has been falling since 2013 to 2.5 per cent from above three per cent.
So, even though the total cost of managing their credit card businesses has plummeted, none of the major banks have passed on rate relief to most of the country’s 15 million credit card holders.
Banks have snookered themselves
The RBA’s findings appear damning for the major banks and are likely to embolden members of the Senate inquiry to recommend the government take some form of action to restore price competition in the credit cards market.
As the accompanying chart shows, the banks are claiming profits of up to nine per cent on every dollar that they lend to credit card customers.
Arguments stumped up by the Australian Bankers’ Association in the last month that the local credit card market is competitive, simply don’t stack up when one examines the failure of lenders to pass on sustained cost reductions to customers.
Earlier this month the ABA’s director of industry policy Tony Pearson tried to argue that the widening margins between funding credit cards and the interest rates charged were justified.
“Since the global financial crisis, banks have had to re-price risk in response to the increased volatility in financial markets,” he said.
“Accordingly, we have seen the gap widen between the cash rate and advertised interest rates on a range of household lending products – not only credit cards, but also mortgages, personal loans and some deposit products.”
This argument defies almost every law of a properly functioning market.
The ABA seems to be using the global financial crisis of seven years ago to explain why credit card rates rose in the last two years.
This is misleading because the default risks on all forms of lending have reduced significantly since 2008.
And this is borne out in the RBA’s research, which shows that the average loss rate incurred by banks on credit card lending has fallen consistently in the last two years.
Fewer borrowers are defaulting, funding costs are lower, but credit card rates keep rising.
It makes no sense.
Joe Hockey was right – but what will he do?
When the RBA cut official rates at its February board meeting, Treasurer Joe Hockey said he expected rates on all credit products to fall “immediately”.
“I expect the banks to pass these cuts on immediately … I also expect this to be passed through, particularly for small business owners and to be passed through for everyone that has a credit card. We expect this to cut through right across the spectrum of credit.”
The Treasurer’s jawboning fell on deaf ears within the banking industry, as did a similar call after official rates were lowered again in May.
If Mr Hockey’s expectation that credit card customers were deserving of rate relief in February, then what has he to say now that the banks have increased the pricing of many cards since then?
Reform of credit card fees imminent
While the RBA’s findings shatter the flimsy arguments put up by banks for not lowering credit card rates, the submission to the Senate inquiry focuses mostly on credit card fees.
This is a strong signal that the RBA will soon move to lower the fees that banks levy on retailers when customers pay with credit cards.
Banking industry sources told The New Daily that the RBA is poised to overhaul the fee arrangements on credit card transactions, which should result in lower charges borne by card users.
Under the soon-to-be-announced reforms consumers can expect the cost of credit card surcharging to fall.
A meeting of the RBA’s Payments System Board is expected to finalise aspects of the reform program at a meeting Sydney on Friday.
For more detail on how the overhaul of credit card fees is likely to affect you, read our story from August 6 here.