Competition and consumer choice in the credit card market
This chapter assesses the competitiveness of the Australian credit card
market, and the extent to which consumers exercise choice.
As noted in chapter two, there are at least 80 credit card providers in
Australia providing more than 250 products. An important paradox in the
Australian credit card market, and one which was thrown into sharp relief over
the course of this inquiry, is that despite the large number of credit card
providers offering a wide range of products, consumers do not appear to be
taking advantage of the options available. This chapter attempts to explain
this paradox, and identify regulatory and policy interventions that might help
improve the competitive dynamics of the market and enhance the capacity of
consumers to make informed choices within that market. In doing so, this
chapter builds on the discussion in the previous chapter regarding the need to
better focus consumer attention on credit card interest rates.
This chapter also assesses the ability of consumers to switch from one
card to another, and identifies and suggests ways to overcome barriers that
might be preventing consumers from switching to a card that is more appropriate
to their circumstances and needs.
Finally, this chapter considers whether innovations such as peer-to-peer
lending might provide consumers with superior alternatives to credit card
Competition and consumer choice in the credit card market
The banks were united in the view that the credit card market is, as CBA
put it, 'very competitive and innovative'.
ANZ, for example, argued that the 'credit card segment is one of the most
contested markets in the Australian finance industry', and this competition
provided consumers with 'more choice than ever before of both provider and
Westpac submitted that there were various indicators of the
competitiveness of the Australian credit card market, including 'the levels of
innovation, the number of credit card providers and wide range of product
offerings which suit the needs and behaviours of different customers, low
barriers to entry and consumer switching'.
CBA also argued that the attractive incentives for customers to accept a new
card or switch cards was indicative of the 'vigorous competition in the
The banks told the committee that customers can and were taking
advantage of the range of credit cards available to choose products appropriate
to their needs.
Westpac, for example, noted that 30 per cent of credit card balances
across the Westpac Group are now held in low-rate accounts, up from
23 per cent in 2010. Westpac further advised the committee that in
the last two years low rate cards had accounted for over 50 per cent
of new sales.
Other banks also reported that low rate cards accounted for a growing
proportion of new card applications, and Westpac's figures were broadly
consistent with industry-wide trends reported by the ABA.
The RBA acknowledged that despite the prevalence of high-rate cards and
the concentration of the market around the four major banks, there appeared to
be 'some significant competition' in the credit card market, at least in terms
of product offerings:
There are a lot of card products out there that offer lower
rates and special deals for balance transfers. In many cases, cardholders
should be able to lower their interest rates by taking advantage of those
offers if they are willing to shop around.
While some submitters were concerned about the dominance of the four
major banks in the credit card market, the committee received little evidence
to suggest that there are significant barriers to new entrants in the market.
Treasury advised the committee that the Australian credit card market appeared
'no less competitive than other Australian lending markets'. It further
suggested that changes to credit card access regimes that were introduced by
the Banking Amendment (Credit Card) Regulation 2014, which became
effective in January 2015, would further reduce barriers to entry into the
market for non-bank credit card providers.
Westpac argued that these barriers were 'relatively low and have not
inhibited new entrants', and also suggested barriers had been lowered further
still by the January 2015 legislative changes. As evidence of the low barriers
to market entry, Westpac pointed to 'an increase in the number of providers and
products in the market. Recent new entrants included Woolworths, Coles, ME
Bank, Myer and re-entry by Virgin'.
While evidence about barriers to market entry from the four major banks
might be received with scepticism by some, representatives of the community and
cooperative banking sector also pointed to strong competitive dynamics on the
supply side of the market. Of particular note, COBA advised the committee that
the market was generally delivering competitive products and choice to
consumers. The challenge, COBA argued, was to ensure 'consumers are informed
and empowered to act in their own interests'. To this end, COBA recommended that
ASIC devote resources to raising consumer awareness of diversity of product
offerings in the credit card market, and the risks of high-rate cards.
Representatives of comparison websites also suggested that the issue was
not so much a lack of credit card options, but apparent consumer inertia.
CANSTAR told the committee that despite the wide range of cards available, many
consumers had the wrong card and were paying too much interest.
Mozo also observed that there were good value products available, but consumers
were not moving, probably due to a lack of awareness or because they found
switching too difficult.
Mr Alan Kirkland, Chief Executive Officer of CHOICE, remarked that while
there appeared to be lots of options in the credit card market, it was not
clear that consumers were enjoying the benefits of competition:
Competition, I would say, is not a one-sided force.
Competition is about the interactions that occur within a market. Whenever you
see a market where there are lots of offers and lots of things available to
consumers but consumers are still being ripped off, that is a sign that there
is not effective competition in the market and there is a problem that needs to
be fixed, and it requires demand-side interventions.
St Vincent de Paul challenged what it suggested was a neoliberal
assumption that people on low incomes possessed the financial literacy
necessary to 'interpret the implications of their choices upon their long-term
financial situation in an economically rationalist manner'.
As Treasury explained, even consumers with relatively high levels of
financial literacy can struggle to understand and properly compare credit card
products, given the multifaceted and complex nature of product offerings:
...the credit card market is characterised by a large number of
products, with these products showing a wide spread of characteristics,
including different interest rate and fee structures, balance transfer offers,
and rewards. In a way, this suggests that there is competition in the market and
there are opportunities for consumers to choose cards suitable for them.
However, the complexity of offerings can make it very difficult for consumers
to compare products, especially where consumers suffer from behavioural bias
such as near-term bias and overconfidence in their ability to constrain future
ASIC made a similar point, arguing that the actual exercise of consumer
choice in the credit card market was made more difficult because of the
inherent complexity of the products on offer:
Credit cards are at least two products in one—a non-cash
payment facility and a credit facility, plus a means of withdrawing cash. They
are also often bundled and marketed with other financial products (such as
insurance) and loyalty points, which make it more difficult for consumers to
separate the price and value to them of each feature. This is particularly the
case when some of the costs and benefits are immediate and others are realised
in the future.
CHOICE also asserted that the ability of consumers to understand and
compare the value of credit cards, and thereby exercise real choice in the
marketplace, is inhibited by the sheer complexity of product offerings:
Credit card costs are hidden in difficult to interpret
percentages, behind worthless rewards points and in bamboozling balance
transfer traps. It is far too difficult to answer the most important question:
how much does this credit card cost?
As the above evidence suggests, helping consumers accurately and easily
value and compare credit cards is an important factor in improving the ability
and incidence of consumers pursuing better value credit card options.
Empowering consumers in this manner is also likely to help create a stronger
competitive focus on the pricing of credit cards. Possible reforms in this
regard are considered in the next section of this chapter.
Breaking the 'confusopoly': empowering consumers to compare the market
The banks told the committee that they provide customers and potential
customers with tools and information to help them choose an appropriate
ANZ, in referring to its own tools and calculators to assist customers in
choosing a card, also noted that Australian credit card customers:
...benefit from a strong regulatory environment designed to
ensure customers are able to compare products and pricing and make well
informed decisions about credit cards.
In contrast, CHOICE argued that card providers actually rely on
confusion to distract consumer attention from high interest rates:
Some of the international competition thinkers call this
'confusopoly'—a deliberate strategy of product providers across a whole range
of markets to make the comparison more difficult by adding lots of different
features that are virtually impossible to compare.
In order to help consumers cut through this confusion, CHOICE
recommended that credit card advertising be required to include the monthly
cost for a consumer, expressed in dollar terms, of an average card balance
based on the interest rate and annual fee. Ms Erin Turner, CHOICE Campaigns
Manager, told the committee that such a requirement would:
...allow people to actually compare costs, not just interest
rates, which are somewhat abstract and do not say anything about 'What'll this
mean to me? How much does this card cost?' I can look at card advertising at
the moment and I cannot tell you how much that card will cost me or how much
that card will cost an average consumer. We think there needs to be some sort
of average cost on all sorts of advertising and marketing—something that tells
you this is higher interest, this is high fee, this is what most people are
CHOICE also argued that card providers should be required to do more to
inform their customers about the range of product offerings available in the
market. It recommended that card providers should be required to include
information in credit card monthly statements 'about the credit card market
generally, including the lowest rate in the market as identified by the RBA'.
The Consumer Action Law Centre and Financial Rights Legal Centre also
argued that consumers would be well served if card providers were required to
disclose the average annual cost of their cards across their customer base.
They also suggested that the ability of consumers to understand and compare
credit cards would be enhanced by requiring card providers to 'include a
comparison of the cost of a consumer's current credit card versus the cost of
the provider's lowest rate card in a monthly statement'.
CHOICE made a similar recommendation in its submission, and also recommended
that monthly statements include information about the credit market generally,
including the lowest interest rate currently on offer.
Underpinning these recommendations was the understanding that for
disclosure to be effective, it must be, as CHOICE put it, 'timely, relevant and
tailored to the consumer'.
CHOICE further explained:
In order for consumers to enjoy the benefits of competition
they have got to be able to understand the offers that are on the market and
they have got to be able to compare them and match them to their own
circumstances. Unless you have those three factors present, consumers cannot actually
take advantage of the offers that are there...
Similarly, the Consumer Credit Law Centre of South Australia argued that
credit card disclosure:
...needs to focus on how consumers actually use disclosure and
how they make decisions rather than compliance and risk avoidance. For example,
merely displaying the interest rate in the credit card offer is not enough. To
be effective disclosure must target consumers' behavioural biases. The 'product
use model' is recommended, that discloses actual costs of a credit card based on
consumers transaction history.
During the inquiry, the committee considered and sought input from
witnesses on the possibility of introducing a comparison rate for credit cards,
similar to the comparison rate that is used in the mortgage market. Asked if
there would be merit in such an approach, ANZ responded:
The challenge around that is it is much more complicated
because of the whole range of benefits—so rewards and what you are opting for.
There is a multitude of structures in there, and I think it makes it really
difficult to just have a comparison rate like on other products.
Similarly, COBA and Bank Australia both explained that while there might
be merit in the idea, the complexity of credit card products meant a comparison
rate would be very difficult to design and implement.
Mr Joel Gibson, Campaign Director at One Big Switch, also remarked that while a
comparison rate would be of some benefit to consumers, the multifaceted and
diverse nature of credit cards made designing a comparison rate 'very
At the moment in the credit card space there are probably
half-a-dozen different elements that can be part of a credit card offer or are
commonly part of a credit card offer. It might be a balance transfer. It might
be an interest-free period at the start of the card. It might be an
introductory rate. And there are others as well, of course. When you have all
the different permutations and combinations of those half-a-dozen different
elements, it can be confusing for people. It can be hard to compare. It can be
a case of comparing apples with oranges. That can also be a disincentive to
A more sophisticated approach to product comparison suggested during the
inquiry was providing consumers with access to data about their own credit card
behaviours, which could then be used to compare and understand the value of
different credit cards. In this connection, several witnesses referred to the
United Kingdom's 'midata' program, which was launched in 2011. CHOICE explained
that midata is a voluntary scheme:
...based on the key principle that consumers' data should be
released back to them in a uniform, secure, machine readable format. This
information will then be able to be used in secure comparison engines to
generate personal recommendations. The scheme aims to help consumers make
meaningful comparisons about the different products in key markets, with a
particular focus on energy and banking.
Currently, midata is used for comparing current accounts, but it may be
extended to other products in the future, including credit cards. A November
2015 report by the United Kingdom's Financial Conduct Authority on the credit
card market suggested extending the midata initiative to include credit cards
may enable consumers to make more informed product comparisons.
CHOICE strongly argued the case for a similar 'informed choice' system
in Australia, and noted that both the Competition Policy Review and the
Financial System Inquiry had recommended exploring the benefits of an open data
policy for consumers. Appearing before the committee, Mr Kirkland further
explained how CHOICE's thinking on this matter had been 'heavily informed' by
the UK experience:
At the core of it is a recognition that, in really complex
markets, in order for consumers to make informed choices those choices need to
be linked to their own data about how they consume products and services. I
will give you an analogy. In the energy market it is hard to make a decision
about what the right plan for you is unless it is linked to your individual
consumption data. Applying that to credit cards, it is hard to make a decision
about what is right for you unless you have a detailed understanding of your
monthly patterns in terms of the amount you repay and the residual balance
after any payment. To make that easier, the most effective intervention would
be to allow consumers to extract their data rather than just reading reams of
statements. They should be able to extract it in an electronic form that then
allows third parties to build applications that allow consumers to match that
data to the offers available, to the credit cards that are available on the
market. That is the essence of the reforms in the UK.
The way in which it has been done is through a facilitative
process where government got together with the key industries—the banking
industry and the energy industry—and said, 'Hey, we think we've got a social
problem, and you've got a responsibility to work with us to fix it.' They built
a collaborative scheme where, in some of those industries, the key providers
agree to collaborate and release data. Control of the data is still in
consumers hands. It is not that anyone can get access to your credit card data
but it means that you are in a much better position to make decisions about
what is right for you.
CHOICE added that under such a system:
...rather than going to a comparisons site and just seeing a
whole bunch of credit card rates you could be going to an online service that
says, 'Based on your consumption data this card will cost you X dollars over
the next year, whereas this other one will cost you Y dollars.' It is a much
more individualised source of information on what is right for you.
CHOICE suggested that such a system would need to be heavily controlled
by consumer consent, but that it was important that the consumer had access to
their own data.
To this end, it suggested the government should 'start a process that would
open up access for consumers to their own data so it is easier to compare
offers in the market, similar to some of the reforms that have happened in the
Treasury indicated that midata appeared to be working well in relation
to current accounts in the United Kingdom. It explained that the initiative:
...relies on the cooperation of the industry that holds the
customer data. There was quite an exercise to get to the place where that data
could be released by all the different competing providers in a standardised
format so that a third party intermediary could then use it and bring it up and
do the comparison. It also required there to be a third party intermediary.
Ultimately, an intermediation industry that helps consumers make better
decisions should emerge out of this. We have some very basic comparative
websites that do that job but...on the basis that all these products are so
various and different that it is very [difficult] to line them up and say, 'I
am making an apples-to-apples-to-apples comparison, and I know the first one is
the best one.'
Making a broader point about the value of empowering consumers with
their own data, SocietyOne told the committee that 'real disruption' in the
consumer credit market would occur when there was a fundamental change in the
ability of consumers to access and utilise data about their behaviour through
time. Currently, financial institutions have a clear informational advantage:
They have all the transaction records. They have all the
history. They build dynamic behaviour scores. They constantly have a view about
who to provide limit increases to and who not to, based on profitability
metrics and risks scores et cetera. None of that information typically makes
its way into the hands of the borrower in such a way that they can make informed
decisions. When will disruption happen? It will happen when borrowers are armed
with choices that allow them to determine: 'Which credit product is right for
me at this point in time?'
The committee considers that in order to make informed choices in the
credit card market, consumers need to be provided with the appropriate tools
and information to compare and understand accurately and easily the value
proposition of different credit cards. As explained below, consumers would be
greatly assisted in this regard if they were provided with access to a summary
account of their own historical credit card activity, which could then be used
to provide personalised credit card comparisons.
While the concept of a credit card comparison rate has some basic
appeal, the committee is not convinced that a credit card's costs and benefits
can be separated from the financial circumstances and behaviour of the
cardholder. The sheer complexity and multifaceted nature of credit card
products makes it impractical to develop a credit card comparison rate similar
to the mortgage comparison rate.
Given the complexities of designing a credit card comparison rate, the
committee believes credit card advertising and marketing material should be
required to include a prominent statement of a card's ongoing headline interest
rate and annual fee.
In addition to helping consumers compare credit cards, this requirement would
serve to better focus consumer attention on credit card interest rates. As
described in chapter three, if consumers are more focused on credit card
interest rates then this would encourage card providers to make their products
more competitive in this regard.
In order to make meaningful comparisons of credit card products,
consumers need to understand the value proposition of cards in relation to
their own circumstances and financial behaviour. For this reason, the committee
strongly supports the development of an 'informed choice' system, similar to
the midata system in the United Kingdom, which would ultimately enable
consumers to easily compare credit cards using their own data. While a
midata-style system applied to the consumer credit sector has considerable
merit, the committee recognises that the implementation of such a powerful tool
would take considerable time and effort in Australia. However, the committee
also suggests that even basic personalised data, such as aggregated spending
and repayment data presented in a standardised and machine-readable format in
credit card statements and the like, could be used by a consumer to compare the
value of various credit cards using tools designed for this purpose. The
committee would expect that over time the data available to consumers would
became more comprehensive, thus allowing for even more powerful and focused
The committee recommends that credit card advertising and marketing
material should disclose clearly the cost of a credit card for a consumer,
including the card's headline interest rate and ongoing annual fee.
The committee recommends that credit card monthly statements should
include prominent reminders about a credit card’s headline interest rate and ongoing
The committee recommends that the government work with key stakeholders
to develop a system that informs consumers about their own credit card usage
and associated costs. Initially, historic usage and cost data could be
provided in monthly statements. Over time, it would be desirable to
provide customer-specific, online, machine readable records that would allow
credit card users to compare credit cards using online comparison engines.
Switching and closing credit cards
The ability to switch credit cards—which generally means that not only
is a new card account opened but an existing card account is closed—is an
important component of a competitive marketplace. If cardholders consider it is
difficult to switch cards, this would suggest a failure in this competitive
dynamic to deliver real choice to consumers. This section of the report
considers whether there are any impediments to switching and, if so, what might
be done to reduce or remove those impediments.
Treasury advised the committee that there 'are minimal barriers to consumers
obtaining a new credit card or switching to a different provider, apart from
credit assessments and upfront fees'.
The major banks claimed that switching cards was a straightforward process, and
this was reflected in the incidence of switching in the market. For example,
CBA told the committee that the ease of switching was demonstrated by the fact
that more than $1 billion of CBA credit card balances had been switched to
low-rate cards since 2011.
Similarly, ANZ argued that competition in the market made switching a
simple process, and estimated that close to one million customers change or add
a new credit card each year (approximately 8 per cent of all credit card
customers). According to ANZ, this made credit cards the most switched product
in Australian banking.
Westpac put forward a similar argument, and referred to the Argus 2014
Benchmarking Study, which estimated that:
...approximately 1.4 million to 1.5 million new
Credit Card accounts are opened each year in Australia. This represents around
9% of the 15.7 million accounts currently in the market. Given net account
growth is approximately 2% this demonstrates a churn rate of 7% per annum. This
data provides strong evidence that consumers are willing to shop around and
that switching Credit Card type and providers is relatively easy.
A recent survey undertaken by Dr Juliana Silva-Goncalves from the
Queensland University of Technology casts some doubt on the banks
characterisation of the incidence of switching in the credit card market,
particularly relative to switching on other banking products and in other
consumer markets. According to the survey, while 32 per cent of
respondents indicated that they had seriously considered switching credit cards
in the past five years, only 17 per cent have actually switched. This
figure was lower than the number of respondents who indicated they had switched
their home loan (18 per cent), home and contents insurance
(28 per cent), energy supplier (29 per cent), main
groceries supplier (22 per cent), and mobile phone and internet
providers (both 24 per cent).
A number of witnesses also challenged the bank's characterisation of
switching as an easy, straightforward process, particularly when a cardholder
wanted to not only apply for a new card but also cancel an existing card. For
example, CHOICE told the committee that it was 'incredibly hard to cancel or
switch a credit card'. In order to cancel an existing card, CHOICE told the
committee, the major banks required customers:
...either to go into a branch, where they can then hit you with
the sales tactics, or to get on the phone. Some of them require you to write to
them or send that card. The ANZ say you have to cut your card in half
diagonally and send it back to them as a condition before they will even cancel
your card—I do not know what happens if you cut it in half in a different
direction. This is crazy. This is a time when banks have used closures and fees
to force people online for so many other transactions, yet they put so many
barriers in the way if you want to do anything to change your credit card.
In its submission, CHOICE noted that a consumer survey it had commissioned
revealed that 27 per cent of consumers who had switched cards had
experienced difficulties cancelling their old card. The process of cancelling a
card, it wrote, appeared 'stuck in the pre-internet age':
There is no reason why the process of cancelling a card
should not include an online option. Card providers have little incentive to
offer this to consumers, instead requiring most customers to have a sales
The Consumer Action Law Centre and the Financial Rights Legal Centre
also suggested it can be 'incredibly difficult' to cancel an existing credit
card, and as a result customers 'may eventually find they have a number of
credit cards, and are gradually increasing their overall credit card limit'.
They therefore expressed support for an online option for cancelling a credit
Appearing before the committee, banks confirmed that it was not
currently possible for a cardholder to complete the process of cancelling a
card through an entirely online process. Rather, a cardholder would ultimately
need to speak to a representative of the bank, either in a branch or over the
phone. This is despite the fact that in
some circumstances a person can actually apply for and receive a credit card
through an entirely online process, without ever having to speak to a
representative of the bank.
Several witnesses also argued that consumers were discouraged from
switching cards because the process requires them to contact merchants and
manually cancel any direct debits linked to the card. For example, Coles told
[W]hen customers switch their credit card they have to move
the direct debits that are linked to that card. That is, we believe, a complex
and time consuming process, and the effort involved in that means that some
customers just do not take advantage of better offers.
The Consumer Action Law Centre and the Financial Rights Legal Centre
contrasted the need for consumers to cancel credit card direct debits by
contacting merchants with the ability of transaction account holders to
instruct their bank to cancel direct debits. They submitted that:
...there should be no difference in treatment between credit
card accounts and other accounts under the Banking Code. In our view, a
consumer should be able to instruct their bank to cancel a credit recurring
payment authority, as they can with a transaction account direct debit
authority. Further, upon cancellation or closure of a credit card account, a
bank should take steps to cancel all regular transactions and other standing
The RBA, while suggesting there were few formal impediments to
switching, also observed that cardholders sometimes experience difficulties in
cancelling or modifying some types of periodic or recurring payments that are
debited from their accounts:
These difficulties can arise when a merchant does not act on
a cardholder's instruction to cancel a recurring payment, or when the
cardholder closes their account but does not take steps to cancel such
Even the ABA acknowledged that the 'one area where switching can be more
complex is in arranging the transfer or cancellation of recurring payments
entered into with merchants'.
Mr Christopher Zinn, a consumer advocate, suggested that enhancing the
portability of credit cards, and saving consumers the need to cancel direct
debits and the like, would likely make a positive difference.
In its submission, CHOICE noted that its aforementioned survey revealed
that 10 per cent of consumers had not switched because they believed
it was too difficult to cancel or update direct debits. CHOICE argued that card
providers should make it simple for a customer to arrange the transfer of all
direct debits, and provide an automated option for customers to do so. CHOICE
The government should introduce legislation to establish a
'tick and flick' switching process to allow customers to easily transfer direct
debits to a new credit card. The process should be offered online and
in-branch. It should be promoted in credit card statements and other key communications
to card holders.
CHOICE further recommended that to overcome impediments to switching,
the industry should work towards account number portability. It noted that
while account number portability had been ruled out in a 2011
government-commissioned report on technical grounds, innovations to the
payments system since then suggested the matter should be reconsidered.
To this end, CHOICE recommended that the government 'commission an independent
report to outline practical next steps to facilitate switching, including
portable account numbers, in the credit card market'.
The Consumer Action Law Centre and the Financial Rights Legal Centre also
argued that account number portability for credit cards should be considered.
ANZ informed the committee that it was already able to assist customers
switching from an ANZ card to transfer recurring payments. It acknowledged that
further cooperation between providers might be possible, but cautioned that the
required infrastructure would likely impose significant costs on the industry.
On the possibility of implementing account number portability in Australia, ANZ
Credit card schemes operate technology on a global scale
ensuring infrastructure investment is spread across a large number of customers
and transactions. As a relatively small market, implementing 'card number
portability' in Australia would result in significant industry costs.
While much of the discussion above concerns what some consider technical
or logistical barriers to switching, other witnesses suggested that the
barriers to switching had more to do with consumer knowledge (or, more
precisely, a lack of it) and behaviours. Asked if there was a need to make it
easier for people to bring direct debits with them when they changed card, and
the extent to which this was an issue for portability in the current market,
It is interesting, because the consumer is probably more
empowered down that path than ever before—they can go into their online banking
in some institutions and change all of that without too much drama. They do
have to go to billers—to the gym, to PayPal et cetera and make those changes
also, but there are also online processes. I would imagine that we—and when I
say 'we' I mean the industry—could put in certain tools that would make that a
little easier. I am not sure that that is actually the barrier, though. It has
never been easier to find yourself a second credit card, or a third or a fifth.
It is simplicity itself. I am not sure that there is a genuine barrier because,
in many, many cases, it is not a case of surrendering or cutting up the old
credit card; one has a reasonable period of time to observe those transactions
and to then make the changes. So I do not think that those barriers are genuine
barriers to switching.
Mozo agreed with CANSTAR on this point, and added:
Inertia is a lot beyond the technical and the physical.
Particularly, as we have seen in recent tough financial times, there has been a
real flight back to the bigger institutions—the big banks and other big
institutions. That is part of the inertia as well. People feel more comfortable
with a big bank. They are making a choice—a very deliberate choice—to stay with
a Big Four bank because they are uncertain about going to a small credit union.
The results of a credit card survey of 40,000 of One Big Switch
members, while by no means disproving the role of technical and logistical
barriers to switching, suggest the barriers to switching are largely
attributable to a lack of consumer knowledge about the market and certain
consumer preferences. According to One Big Switch, the survey revealed 'massive
consumer inertia' in the credit card market. In part, it appeared this inertia
was underpinned by a lack of engagement and knowledge on the part of consumers
regarding credit card interest rates (discussed in chapter three), and a lack
of consumer confidence in comparing the market. One Big Switch added that
consumers evidently placed a premium on the convenience of having all of their
banking accounts in the one place, and indeed 39 per cent of survey
respondents reported that this was their reason for choosing their main card.
This perceived convenience, One Big Switch suggested, was a factor in people
not changing to a product better suited to their needs, and the fact that the
banks often bundled credit card products with home loan packages indicated the
banks were alert to this dynamic.
The committee believes that many of the most significant barriers to switching
in the credit card market can be attributed to a lack of consumer awareness,
and the difficulties consumers face in comparing the value proposition of
different credit cards accurately and easily. This reinforces the need for
reforms to enhance the ability of consumers to compare products and properly
exercise choice within the market. The committee considers the 'informed
choice' system set out above in recommendation 3 would make a substantial
contribution in encouraging consumers to switch credit cards when it is in
their interests to do so.
The committee suggests that further consideration should also be given
to reforms that would help consumers overcome any technical or logistical
barriers to switching. While the issue of switching banking products more
generally was considered in a government-commissioned report in 2011, the
committee considers there would be value in a government review into technical
and systems innovations that might ease the process of switching in the credit
card market specifically. As part of this review, the committee recommends that
the government consider the feasibility of account number portability in the
Australian credit card market.
Finally, the committee notes that there appears to be no good reason why
credit card customers are currently unable to close a credit card account
through an online process. As such, the committee recommends that credit card
providers should be required to provide an online 'click-and-close' facility to
The government should undertake a review into technical and systems
innovations that might help facilitate switching in the credit card market, and
as part of this review consider the feasibility of account number portability
for credit card accounts.
The committee recommends that card providers should be required to
provide consumers with the ability to close a credit card through an online
Peer-to-peer lending and differentiated interest rates
During the inquiry, the committee considered whether peer-to-peer
lending might provide consumers with access to an alternative form of credit
that, for some cardholders at least, is more affordable than using a credit
card. SocietyOne, a leading Australian peer-to-peer lender, informed the
committee that it provided consumers with access to personal loans where the
interest rate was set according to the credit profile of the borrower.
SocietyOne referred to the experience of peer-to-peer lending in the United
Kingdom, and noted that the British government had provided crucial signals to
the market that peer-to-peer lending was a legitimate and viable alternative to
more traditional forms of consumer finance:
At a policy level, the [Financial Services Authority]
in the UK decided that there were a number of things that could be done to
support the growth of marketplace lending and to present it as a credible
alternative to the UK parliament's traditional high-street banks. Some of those
initiatives included, at the time, a quite bold policy gesture: 'We will
co-invest with investors dollar for dollar on these platforms.' It was a way of
credentialing the fact that, from a policy point of view, this was a viable and
important option to help drive credit growth and, therefore, job formation,
small business development and individual empowerment in the economy.
The second thing that is interesting to note is they created
some tax concessions for investors on those platforms to create some advantages
that brought it into line with the advantages that are available for other
retirement investment schemes. If you look at just those two things, you would
say: in and of themselves neither of them are significant, but, as a signalling
exercise to the market, it sent a very clear signal that this was a legitimate
option for borrowers to consider and it had the support of the government.
Mr Koch welcomed the emergence of peer-to-peer lending in Australia, and
more broadly spoke in favour of differential lending rates for consumers based
on their credit risk, both for credit cards and alternative products. He told
...there needs to be encouragement for cards which set rates
based on the credit rating of the user so good behaviour is encouraged. This
business of high interest rates because it is unsecured but treating everyone
the same just does not wash. They do it with insurance; why can't they do it
with credit cards and make it fair across the population?
Mr Greenwood suggested to the committee that the emergence of
peer-to-peer lending might help to address the lack of microcredit for small
business in Australia. The lack of microcredit, he explained, forced many small
businesses to fund themselves with credit cards, despite the high expense and
risks of doing so:
I would have to say there has probably been many a small
business that has gone broke off the back of a credit card as well. That is a
really important one to recognise, the lack of microcredit in our country. This
is where maybe even peer-to-peer lending will come into it.
In contrast to the optimism expressed by other witnesses, Ms Lane from
the Financial Rights Legal Centre warned that differential pricing of credit
would simply make it harder for people in financial hardship, as they would pay
higher interest even if they were not in default.
Ms Lane was similarly sceptical about peer-to-peer lending, telling the
I am never against innovation but what I am in favour of at
all times is sufficient consumer protection legislation, because consumers go
out there and think these people are reasonable, and they may not be. We need
to ensure that every consumer in Australia has confidence in financial services
in Australia and that they will not be exploited or take out loans that are not
properly regulated, with proper mechanisms in place for protection.
So, by all means innovate, but the Australian government has
to absolutely make sure that there is properly regulated consumer protection.
And peer-to-peer lending is not properly regulated; I can categorically say
that. It is not properly regulated currently. When the credit laws came in, it
was not properly worked out. There has been no review. There should not be
peer-to-peer lending—or, in fact, anything—until we work out whether people are
While noting the need to carefully consider the regulatory and other
risks presented by the advent of peer-to-peer lending, the committee is
cautiously optimistic that this new and innovative form of lending will
ultimately provide consumers with more and better choices when it comes to
accessing consumer credit. The committee would encourage the government to
carefully consider whether it could be useful and appropriate to provide
clearer signals to the market regarding the legitimacy and viability of
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