Australians Increasing Shifting Away From Credit Cards For Debit Cards
Australians are increasingly shifting away from credit cards and using debit cards for their spending instead as they seek to cut down on their expenses.
According to a news report in the Sydney Morning Herald, purchases made using debit card rose by 25.8 per cent year on year, representing the fastest growth rate ever recorded.
Analysts says that Australians are becoming increasingly savvy and are focusing on obtaining the best deal and getting good value for money, in response to the financial crisis and since then higher interest rates
Recently the Australian central bank published data which suggests that Australians spend many millions of dollars every year simply checking bank balances at ATM’s.
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Australian Banks Prepare To Do Battle With The Government
Australia’s major lenders have signaled their intention to fight a protracted battle against the government’s plans to abolish fees charged to credit card borrowers who exceed their limit, and ban credit limit upgrades, and the government seeks greater regulatory oversight of the industry.
Three of the big four lenders, including NAB, Westpac and CBA are in the process of finalizing their formal submission to the government in which they all heavily criticize the proposal
ANZ has chosen not to prepare its own submission but opted to contribute to one drafted by the Australian Bankers Association instead.
In December last year the government unveiled a package of reform proposals one of which included the scrapping of so called over the limit fees, which amongst the major lenders amounts to $9 every time a credit card borrower exceeds their credit limit.
The government is seeking to ban banks from offering their customers unsolicited credit limit upgrades. Instead, customers will now have to approach the banks to increase their credit-card limits.
The government has been heavily criticized for only allowing the lenders just two days to prepare their submissions in response to the proposed legislation, and as of Tuesday were scrambling to prepare their statements during the consultation period.
In their submissions, Australian lenders are likely to argue that over the limit fees are required because lenders are providing a service to customers who exceed their limit by allowing transactions to occur.
CBA heavily criticized the proposed legislation on Tuesday, saying much more time was needed to contribute to the public debate.
“The Commonwealth Bank is concerned at the short consultation period and also the short period before introduction of any legislation,” a statement from a spokesman said.
“The bank believes that the issues raised should be thoroughly debated and considered before introduction.”
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Australian Credit And Debit Card Fraud Rising
Fraud perpetrated on Australian credit and debit cards rose to $183 million over the last financial year, from $167 million in the previous financial year according to new data from the Australian Payments Clearing Association (APCA).
The biggest increase occurred in fraud perpetrated on proprietary or brand name credit cards, where PIN’s were also compromised, leaping from $18 million in the 2008 to 2009 financial year, to $27.5 million in the current financial year.
That figure includes fraud committed using counterfeit cards containing stolen information which resulted in $22 million in fraudulent transactions over 70,000 incidents.
$1.8 million was stolen by criminals who used compromised PIN’s, whilst fraud committed using PIN’s of lost or stolen cards fell slightly to $3 million.
According to APCA, debit card fraud is defined as fraud involving PIN only protected cards, which are used at ATM’s or for EFTPOS transactions. Scheme credit, debit and charge card fraud is defined by the agency as including signature protected cards and card not present transactions.
Card not present fraud, where stolen account data is used for transactions over the internet, phone or mail rose from $82 million to $102.6 million, whilst skimming declined to $35.5 million from $45 million.
Fraud committed in Australia using cards issued by international lenders fell to $68 million from $105.5 million.
Chris Hamilton chief executive of APCA says criminals are increasingly focusing their attention on card not present situations which do not require chip or PIN security.
“This is consistent with what happened in Britain during the transition to chip,” he said. “Fraud where the consumer is not physically present for a transaction increased by 25 per cent in the past year, and now accounts for 52 per cent of all frauds on locally issued credit, debit and charge cards. Wider and better implementation of the Payment Card Industry Data Security Standards to tighten controls around card information, as well as improved authentication methods, are critical to reducing this type of fraud. We encourage internet shoppers to register a password when prompted to do so online.” Mr. Hamilton said.
Credit and debit card customers are not liable for fraudulent transactions conducted using their credit card, provided it is established that the customer exercised reasonable care such as protecting PIN’s and looking for suspicious behaviour whilst using store payment devices and ATM’s.
Mr. Hamilton says there is strong evidence that chip technology was having a positive effect on protecting both businesses and consumers from fraud.
“Skimming fraud is dropping significantly as financial institutions and merchants progressively roll out chip,” he said. “This is making Australia less attractive for fraudsters from other countries.”
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Australians Paying Off Credit Card Debt
According to the results of a recent survey, Australians are making a greater effort in paying off their credit card debt in full.
The survey conducted by Datamonitor showed that 48.43 per cent of borrowers polled said they had not paid any interest over the last 12 months. This was up from 40.23 per cent in 2009 and 39.07 per cent in 2008.
“This is a staggering 8% nominal increase compared to last year, with nearly half of Australians did not pay any interest at all in the last 12 months” says Harry Senlitonga, senior analyst at Datamonitor and author of this research.
Mr. Senlitonga said that the global financial crisis has resulted in a paradigm shift in how borrowers pay off their credit card debt.
“This year is a year of recovery, not just for the global economies, but for many Australians who were impacted by the crisis. We have seen that consumers are not just becoming more price conscious, but also more savvy than before in searching and using their credit cards.”
The change in borrower attitudes towards credit card debt repayments may results in a potential loss of revenue by lenders in the form of lower interest income.
According to Datamonitor six consecutive rate hikes undertaken by the Australian central bank between October 2009 and May 2010 has also been a major reason behind the shift in borrower attitudes. Datamonitor says that should the trend continue the industry will be forced to undertake a major review of credit card prices which could result in lenders considering opting for a more stable fee-income model as opposed to one based on interest rates.
“Arguably, the increasing cost of funding and combined with the uncertainty caused by a shift in consumer behaviour has shaken the fundamental business model for some credit card issuers. Credit card issuers should see these changes as an opportunity to innovate, especially to design some products to target specific consumer segments” concludes Senlitonga.
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NAB To Cease Credit Card Negative Payment Hierarchy
One of the worst features of credit cards is what is known as negative payment hierarchy. An example of this if the borrower undertakes a balance transfer to a zero balance account, the interest on the balance transfer is zero, whilst if the borrower uses the same card to make a new purchase, that purchase will attract interest.
Negative payment hierarchy is when credit card companies use any payment made to pay off debt which is accruing at low or zero interest, whilst the debt which carries higher interest continues to accrue charges at the higher rate.
Australian banking major NAB is seeking to end its practice of negative payment hierarchy, and has flipped it on its head by allowing its borrowers to pay off their higher interest debt first.
Negative payment hierarchy is an industry wide practice according to NAB personal banking group executive Lisa Gray.
“This will no longer be the case for NAB customers, credit card transactions attracting the highest interest rate will be paid off before the lower interest rate, helping to reduce the overall interest cost to our customers.” Ms. Gray said.
The changes imply that all balance transfers will shift to the lower interest rate at the end of the introductory period, which will reduce the interest charges for borrowers.
The new systems will apply to all NAB consumer and commercial credit cards, which total about 1.5 million accounts, the bank said.
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Australian Lenders Begin Talks With Government On Credit Card And Banking Reform
Australia’s largest lenders have begun their discussion with the Federal Government on the proposed crackdown on credit card fees which became an election issue.
According to The Australian, senior executives from CBA held meetings with government officials soon after the new government was sworn in over two weeks ago. The newspaper said the discussion was wide ranging covering credit cards to the broader financial system.
Executives from NAB reportedly held discussions with the Treasurer’s office last week, and The Australian is reporting that ANZ is due to begin its discussion with the government this week.
Lenders are preparing themselves for a far stricter credit card regime, after the governing Labor party proposed tough new regulations during the general election campaign.
Labor had made a campaign pledge that lenders would not be allowed a credit card accounts would not be allowed to go overdrawn without the implicit consent of the borrower. Unsolicited credit limit extensions would also become prohibited.
On Monday NAB was the first lender to enact changes ahead of any new regulations as it cut a range of fees on its credit cards. NAB’s move was part of efforts to bridge the widening gap in the credit market between it and its major competitors.
ANZ says it wants guidance from the government on credit card regulation before it enacts any unilateral changes of it s own.
“This is government policy that may become legislation and we are meeting with government this week to discuss the potential changes,” an ANZ spokesperson said.
The other major lenders have yet to comment on what their strategy will entail.
ANZ Chief Issues Stark Warning On Interest Rates
Mike Smith, chief executive of Australian banking major ANZ has issued a stark warning, suggesting that world’s bank will be forced to alter their business model in response to the “permanently” higher cost of banking.
Mr. Smith issued the warning whilst unveiling the latest set of ANZ results last week. ANZ’s third quarter underlying profits leapt 37 per cent.
Despite the great performance, Mr. Smith added a note of caution, saying that the costs of wholesale funding were now a permanent feature of banking a result of the global financial crisis.
“We have to face up to the fact that banks now have permanently higher costs of doing business, these include continuing pressures on wholesale funding costs and at the same time rates for deposits have never been higher compared to short-term wholesale rates. We also have to carry significant costs associated with the new international capital and liquidity requirements. The result is we simply to have think differently about our business. We need to change, we need to streamline our structures and do things in new and different ways.” he said.
Mr. Smith’s comments immediately started speculation that Australian lenders would raise their interest rates once the results of the election became clear.
ANZ’s warning followed similar comments from NAB and CBA, both of whom say that debt that have issued which is about to mature will have to be rolled over with more expensive current funding.
Analysts believe that lenders would increasingly try to shift the burden of higher funding costs on to their customers, by increasing mortgage and consumer lending rates, as well as increasing interest rates on business loans.
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ANZ Lifts Excessive Debt Burden From Pensioner
Australian banking major ANZ says it will eliminate $18,600 in debt racked up by pensioner on his credit card, after the lender began steadily increasing his credit limit over the last nine years.
Alec Stubbs, a 72 year old pensioner, who has lived on a pension for several years, receiving $485 a fortnight, had his credit card limit increased to $46,000 since 1991.
“It’s clear this customer’s credit limit should not have been increased to this extent, and due to the exceptional circumstances we have decided to clear this debt to ensure his family is not placed under any additional stress at this time,” ANZ spokesperson Stephen Ries told the Herald Sun.
Mr. Stubbs also holds a Commonwealth Bank credit card, whose limit has steadily climbed from $3,500 in 2003, to $25,000 in 2006.
CBA said through a spokesperson that the lender had ceased offering unsolicited limit upgrades to customers who live on welfare payments since 2007, with those type of customers who request a higher credit limit, required now to pass a financial test.
Mr. Stubbs wife only recently learned that her husband carried $36,000 in credit card debt, when opening his mail whilst Mr. Stubbs was in hospital receiving treatment for cancer.
“I nearly died,” she said. “How in the hell could they think a pensioner could really afford this? We are not secret millionaires. Even if he asked for this, don’t they check into people’s circumstances before they throw money around?”
Mr. Stubbs and his wife Pauline have maintained separate bank accounts throughout their 53 year marriage, which kept Mrs. Stubs being in the dark regarding the minimum monthly payments, which were often hundreds of dollars a month.
In August the federal government promised new measures that would mean credit card companies would not be allowed to increase credit limits without agreement from customers.
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NAB Endorses Credit Card Law Reform
Australian banking major, National Australia Bank, once again differentiating itself from its big four rivals over exception fees, says that credit card law reform would benefit consumers.
Lisa Gray, who runs the lenders personal banking division says that NAB has already implemented changes to its credit card portfolio, which are consistent with the federal government’s proposed changes to credit card laws.
Ms. Gray made her comments in response to the announcement made by current Prime Minister Julia Gillard, that a re-elected Labour government would seek to ban lenders from charging customers who exceed their credit card limit.
Under existing regulations, customers who exceed their credit limit can be hit with a $25 fee.
Labour is seeking to change this, so that lenders would be regulated in a way that would prevent them from allowing customers to over draw on their credit card without the prior explicit consent of the customer.
The government also proposes to ban unsolicited offers to extend credit limits. whilst NAB has already has already done away with its over-limit fee on credit cards and cut its late payment fee, Ms Gray said in a statement.
NAB said nothing however about whether it would also end the practice of unsolicited credit limit extensions.
“While further consultation would be needed, some sensible credit card law reforms would benefit consumers and banks offering the fairest and best value,” NAB said.
NAB’s position is at odds with its other big four rivals, with a banking lobby group suggesting that further regulation was unnecessary, since the vast majority of Australians used their credit cards responsibly.
In 2009 NAB distanced itself from its rivals by cutting exception fees, and undercut mortgage interest rates, as it sought to improve its market share, and build goodwill with its customers.
In 2009 NAB sought to differentiate itself from its rivals by cutting exception fees and undercutting interest rates on mortgages to improve its market share.
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Half Of All Australian Households Worry About Interest Rate Rises
Nearly half of all Australian households say they worry over the threat of looming interest rate rises, but only 20 per cent say they expect to have to carry increased debt levels in the next few months.
According to the results of the latest survey by Dun & Bradstreet, which polled consumer expectations across 1,205 individuals in Australia, nearly half or 49 per cent said they believed that interest rates would rise further, and the hikes would dent their finances.
The credit reporting agency completed the survey in June, one month after the Reserve Bank of Australia (RBA) lifted the official cash rate to 4.5 per cent, its sixth rise in eight months.
Households that include dependent children will feel more financial stress, with 55 per cent of respondents who have children, saying that the impact of rate rises would negatively affect their finances, compared with 43 per cent of households that do not have children.
The survey suggested that the stress from rate hikes would only translate into additional debt for just 20 per cent of households.
According to the survey, which examined future spending in September, nearly half of all individuals polled aged under 50 planned to use credit to pay for expenses over the period, whilst only a quarter of all Australians aged over 50 said they intended to do the same.
The RBA’s credit and charge card statistics for May 2010 showed the average credit card balance reached $3,248 in May, an increase of five per cent in 12 months.