Ace In The Hand

The Age

Monday June 23, 2003

Denise Cullen

The major banks are losing big as more and more credit customers play their cards for cheaper rates, writes Denise Cullen.

AUSTRALIANS are dumping high-cost credit cards in favour of cheap competitors as the industry shake-up predicted last year gathers pace.

Even before many of the sweeping Reserve Bank reforms kick in, hundreds of thousands of people are estimated to have taken the scissors to their expensive loyalty-scheme-linked cards and instead slipped single-digit-interest-rate alternatives into their wallets.

The "churn" caused by customers jumping from one product to another is becoming ever more pronounced, says credit card analyst Mike Ebstein, of card information firm MWE Consulting.

Analysis of the latest Reserve Bank data shows that, while 96,000 credit card accounts were opened in April, 126,000 were closed - a net reduction of 30,000 accounts.

Given it costs around $100 to acquire a customer's credit-card business, it is clear that the people jumping ship are costing the banks, big time.

"Small movements in (net) account numbers are masking very large numbers of account closures and openings," Mr Ebstein says. "This churn is estimated to have cost issuers about $50 million in the last year."

Though low-cost cards won't kill off their high-cost competitors, credit cards charging interest rates of 15 per cent plus seem destined to become a corporate perk rather than a mainstream product, according to Chris Connolly, director of the Financial Services Consumer Policy Centre at the University of NSW.

"They won't be used by that many people whose businesses aren't paying for them," he says.

Mr Connolly says that even "transactors", or card customers, who avoid revolving balances each month will eventually be drawn to a low-interest product, because "even the most careful people stuff up and pay interest at some point".

According to MWE Consulting figures, the average credit-card account has an outstanding balance of $2455, a credit limit of $6988 and annual spending of $11,558.

But hard-core credit-card users tend to be in much deeper than those figures would indicate, constantly tipping over their limits and, according to financial counsellors, withdrawing cash advances on one card to pay the minimum balance due on another.

It is these people - who don't make use of interest-free periods and no longer have the cash flow to chase loyalty points - who have the most to gain from rock-bottom rates.

But double-digit interest isn't the only reason card holders are keen to stick it to the big banks and take their business elsewhere.

In an attempt to claw back lost revenue expected to result from the Reserve Bank reforms, the banks have also increased the annual fees they charge for credit cards, in some cases to a breathtaking degree.

Infochoice chief executive Lisa Montgomery points out, for instance, that ANZ last year lifted its rewards program fee from $33 per account to $55 per card.

"Now that has a lot of bite - the cost went from $33 to $110 for people with a joint account," she says. "How do they justify a $77 fee increase?"

Disillusionment with and cynicism surrounding loyalty schemes is also making it hard for the banks to hold on to their estimated 75 per cent share of the credit-card market.

For example, some banks have announced plans to cap the number of reward points that can be accumulated, reducing the perceived value of the card.

And many people are still stinging from the slap in the face they got when Ansett collapsed almost two years ago, says Kathlene Jones, the director of research with information provider Cannex.

"People are still burnt over that," she says.

"A lot of people lost a lot of points."

So where do you turn for a cheap deal?

The Virgin Credit Card, which offers a 4.9 per cent introductory rate for six months followed by an 11.9 per cent ongoing rate, has made the biggest and most recent splash into the credit card pool. The card boasts up to 55 interest-free days on credit purchases, automatic membership of a "Mates Rates" rewards program and no annual fee.

While reaction to the rewards program has been mixed, the Virgin offer is pretty appealing to consumers who constantly revolve four- or five-figure balances on cards charging 16 to 18 per cent, says Ms Jones.

Indeed, more than 50,000 people applied for the card within a week of its launch.

However, anecdotal evidence suggests many of these prospective card holders were left hanging for quite a bit longer than the five to 10 business days Virgin said it would take to make a decision on their application.

The managing director of Virgin Money Australia, Rohan Gamble, says there were some "initial teething problems" because of overwhelming demand.

"We were expecting the card to be very popular, but we hadn't bargained on such a spectacular response," he says.

Mr Gamble says demand for the card in subsequent weeks continued to be "incredibly strong", though he declined to reveal exact figures, saying they were commercially sensitive.

"We've been working through a massive volume of applications, (so) it has taken longer to work through the initial volume (than we expected), but we're already back on track,"

he says.

Mr Gamble rejects suggestions from some quarters that the "no annual fee - ever" promise, along with other aspects of the Virgin offer, is unsustainable.

"(The no annual fee offer) is very sustainable; our business case is very sound," he says. "The question should be, 'How do our competitors get away with charging so much?'

"Around $2 billion a year is currently being wasted on unnecessary fees and charges, in the form of interest rates and annual fees. In our opinion, existing card issuers are taking consumers for a ride."

According to Mr Gamble, the "general belief among our competitors that we can't be making any money" is misplaced.

The big banks, he says, are content to "sit on the sidelines and snipe at us" rather than come up with better consumer credit products themselves.

"Frankly, we could not be happier with that attitude," he says.

Other low-cost credit-card deals include the Members Equity MasterCard, which has a

9.75 per cent interest rate, and the BankWest Lite MasterCard with a 9.99 per cent rate.

Ms Jones says that, while BankWest's Lite MasterCard is a good product, "It is very difficult to obtain if you are a non-WA resident - you need to be either a shareholder or an existing BankWest customer."

However, access to the card seems set to broaden following its state-based success. When it was introduced a year ago, the Lite card boosted BankWest's share of the credit-card market in Western Australia by more than 5 per cent, says Chris Whitehead,

chief executive of the bank's Consumer Solutions Division.

This influenced the bank's decision to broaden the range of "Lite" products to include a simple home loan with a low rate (5.95 per cent ongoing) and limited features.

Launched last month, the Lite Home Loan package (which automatically includes the BankWest Lite MasterCard) is available nationally through the bank's network of mortgage brokers and also through telephone banking channels.

Mr Whitehead said some customers were still using their expensive cards to accumulate loyalty points, but were then loading their balances onto the Lite Card. They did this by taking advantage of the fact that BankWest did not impose a cash-advance fee when they transferred cash from their Lite Cards to pay off their high-priced cards.

Many other cards, including Virgin, charge 1.5 per cent of the cash advance amount - putting the cost of a simple $1000 cash advance at $15 and making manual balance transfers such as this a pricey way to manage one's money.

But the new offers don't stop there. More are expected within months.

Although the Aussie Group would not confirm plans to introduce a fresh piece of plastic - it already boasts the Aussie Card issued through Amex - it is widely rumoured to be planning to introduce a product in its own right by the end of the year.

"This is an area that's of significant interest to us," says Tony Davis, general manager of marketing and strategy with the Aussie Group.

"We re-engineered our residential home loan proposition, from a single product to a service-based broker, and we're currently looking at a range of opportunities to stretch the brand and build non-core income streams.

"If we were to enter the credit-card market, we would be looking to do it with some scale and with some fanfare, (because) we don't do anything quietly."

Indeed, Aussie Home Loans, the mortgage originator offering cheap home loans but no other banking services, stirred up the mortgage market in 1992. That led to an explosion in the number of mortgage offerings available to borrowers.

For example, in 1980, there were about two dozen mortgage products on the market, according to the Australian Consumers Association. Now, as a result of relentless competition and innovation over the past two decades, there are 3000 or so different offerings.

Other possible card entrants are rumoured to be large retailers, particularly Coles Myer, and telecommunications companies, such as Telstra.

Diverse product offerings from new entrants would result in cards aimed at different layers of the market, instead of being concentrated at the extreme ends of the spectrum, says the Consumers Association finance policy officer, Catherine Wolthuizen.

"We'd also expect to see more competition around interest rates (because) there is a long way they can come down," she says.

TROUBLE IN PLASTIC PARADISE

As thousands of shiny new Virgin cards in a range of shades from pink and silver to black and blue quietly wing their way in the post to their new owners, the court battle over the Reserve Bank of Australia's proposed reforms to the credit-card system continues to rage.

Card companies Visa and MasterCard last year initiated separate actions against the Reserve Bank over reforms designed to promote competition and transparency in the credit-card market.

These reforms included permitting retailers to recover the costs of credit-card purchases by charging their customers a "surcharge", opening up the market to new entrants and cutting wholesale fees.

While retailers, businesses and service providers have been allowed to charge card holders a fee or surcharge for credit-card transactions since the beginning of this year, only a handful have chosen to, says the Australian Consumers Association finance policy officer, Catherine Wolthuizen.

This is due, in part, to competitive pressures and administrative hassles.

However, of much greater concern to the banks and the card companies is the proposed reduction in "interchange" fees, a controversial reform scheduled to take effect later this year.

Interchange fees are previously hidden fees that the banks charge each other for processing each others' credit-card transactions.

These fees are worth an estimated $1 billion a year in Australia alone, and are charged back to merchants and, ultimately, to consumers who end up paying more for goods and services to compensate the retailers for paying the fees.

The big banks are proceeding on the basis that the interchange reforms will proceed and, whether they like it or not, they will lose almost half this $1 billion from their balance sheets.

Hence, despite accusations from consumer groups about double-dipping, they have introduced hikes in annual fees and charges and enthusiastically pruned the rewards programs attached to their credit-card products.

For instance, The Australian Financial Review last month quoted Westpac chief executive David Morgan as saying that, despite the uncertainty, "we are doing all our planning on the assumption that the interchange rate changes".

"We are leaving Visa and MasterCard to pursue their own corporate objectives as they see fit, and we're not exerting any pressure one way or the other," he is quoted as saying.

But Visa and MasterCard have refused to take the reforms lying down, arguing that the Reserve Bank has "over-reached" the power assigned to it by the Payment Systems (Regulation) Act 1998 and the Reserve Bank Act 1959.

They have also said that certain aspects of the reform are not in the public interest.

The case is being heard by Federal Court Justice Brian Tamberlin and is scheduled to conclude late this month.

TOP 10 CREDIT CARDS*
INSTITUTION             PRODUCT                 RATE    ONGOING FREE    REWARDS

                                                        (%)     FEE
DAYS    PROGRAM
Members Equity          ME MasterCard                   9.75    $30.00
44      No
BankWest                BankWest Lite MasterCard                9.99    $36.00
        40      No
St George Bank/BankSA   Starts Low Stays Low MasterCard 10.99   $59.00
55      No
ANZ Bank                ANZ First (Low Interest Visa)           11.75   $26.00
        0       Yes
Virgin Money            Credit Card                     11.90   $0.00
55      Yes
HSBC                    HSBC Visa No Free Days          13.40   $39.00
0       Yes
Victoria Teachers CU    Visa Credit Card                        13.75   $0.00
        55      No
Westpac                 No Annual Fee MasterCard                14.45   $0.00
        0       No
Commonwealth Bank       MasterCard Fee Free             14.50   $0.00
0       No
National Australia Bank Bankcard Fee Free                       14.85   $0.00
        0       Yes
*RANKED BY RATE.
SOURCE: CANNEX

© 2003 The Age

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