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Matters relating to credit card interest rates
Submission 23
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1. Introduction
Commonwealth Bank of Australia (Commonwealth Bank) welcomes the opportunity to
provide a submission to the Senate Economics References Committee Inquiry into matters
relating to credit card interest rates.
Credit cards play an important role in the financial arrangements of individuals, businesses
and households. They are used to make payments remotely, to access finance while
overseas, to cover costs in an emergency and to provide a convenient and affordable way to
meet everyday spending needs. Awards cards also earn points which can be redeemed for
products, gift cards, cash back or frequent flyer points.
Additionally, credit cards provide retailers with fast and secure payments, in store, over the
phone and online.
Recent public commentary has focused on an apparent low correlation between credit card
interest rates and the official cash rate.
Credit cards are a unique financial product, bringing together the credit of a personal loan
with the convenience and security of a debit card, as well as providing added benefits such
as complimentary travel insurance and interest free periods. Innovations such as Tap & Go,
security chips and Commonwealth Bank’s proprietary Lock, Block & Limit function have seen
this convenience and security grow significantly in recent years.
Compared with home loans, credit cards are subject to proportionally higher direct operating
costs and higher risk profiles given the unsecured nature of the credit on offer. As credit
cards are unsecured lending, they are sensitive to market pressures and the economic
environment, particularly the unemployment rate. Credit card issuers need to take into
account the economic cycle when setting rates.
As will be illustrated, only 22 per cent of the cost of providing a credit card is the cost of
funds. We believe our pricing of credit card interest rates appropriately reflects the risk,
operational cost, product features and competition in the market.
This submission outlines the customer experience, the types of credit card products
Commonwealth Bank offers, the importance of financial literacy, the state of competition in
the credit card market and the cost of providing credit cards and ATMs.
2. Customer experience
Commonwealth Bank provides 2.9 million credit card accounts to its customers in Australia.
Credit cards are versatile products with features, benefits and price points designed to meet
a range of customer needs. They provide customers with a convenient means of payment
and a line of unsecured credit which they can use at any time.
Having access to credit at short notice can be particularly beneficial for customers who are
travelling or experience unexpected financial costs they are unable to meet. All
Commonwealth Bank cards come with up to 55 days interest free on purchases, making
credit cards an affordable, quick and easy way for customers to meet costs.
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Credit cards generally offer a range of other benefits to customers including:
a low cost, permanently available line of credit with global acceptance for everyday
spending, travel needs, cash advances and credit to use in the event of an emergency;
state of the art security and fraudulent transaction detection, with a 100% money-back
guarantee;
dispute and chargeback rights;
innovative payment technology, including contactless (Tap & Go) and mobile device
payment options;
emergency assistance while overseas;
loyalty programs; and
complimentary travel insurance benefits (for Gold, Platinum and Diamond cards).
Commonwealth Bank credit cards also include a range of unique customer benefits such as:
offering control to lock or unlock certain transaction types (such as ATM cash advances
or international transactions) and set daily spending limits, all from the CommBank app
or Netbank;
the ability to redeem Award points directly at point-of-sale at Myer or Flight Centre; and
the ability to tap and pay using PayTags and contactless technology on Samsung
smartphones.
Credit cards also benefit retailers and the broader economy, providing fast and secure
payments both in store and remotely (either over the phone or online). Commonwealth Bank
business customers also benefit from same day everyday settlement into their business
transaction account for the day’s trades, regardless of whether credit card customers default
on their repayments.
Card Types
Commonwealth Bank offers three simple types of personal credit cards including Low Fee,
Low Rate and Awards, making it easy for a customer to choose the most appropriate card
for their needs.
Low fee cards are commonly used by customers who want the security of having a standing
line of credit for use in times of emergency or when facing unexpected costs, but for whom
awards points and other premium benefits are not important.
Our low rate card is commonly used by customers who use their credit card as a revolving
line of credit and are unlikely to pay the full balance within the 55 day interest free period.
For these customers the low rate card provides an opportunity to minimise interest costs. It
also provides our customers with credit in a cheaper, quicker and more convenient way than
an unsecured personal loan.
Finally, our Awards cards reward customers with points for every eligible dollar they spend.
These points can be redeemed for frequent flyer points, cashback, gift cards or one of the
1,000 items available through the CommBank Awards Program. Provided these customers
pay off their balance within the 55 day interest free period, they can obtain a financial benefit
just by using their credit card instead of paying with cash or EFTPOS. Premium tier Awards
cards also include additional benefits such as complimentary travel insurance.
Table 1 illustrates some of the features of our three core credit card types.
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Table 1. Commonwealth Bank credit card types and their features
Low fee card
Low rate card
Awards cards
Rates and fees
Interest rate
19.74%
13.49%
20.24%
Cash advance rate
21.24%
21.24%
21.24%
Annual fee
From $0*
From $59
From $59
Interest free purchases
Up to 55 days
Up to 55 days
Up to 55 days
Features and awards
Fraud money back guarantee
Yes
Yes
Yes
Lock, block and limit
Yes
Yes
Yes
Overseas travel insurance
Available on
Gold
Available on
Gold
Available on
Gold, Platinum
and Diamond
Awards points
No
No
Yes
* If customers spend $1,000 per annum (Standard) and $10,000 per annum (Gold)
3. Understanding the product
For customers to make the right financial choices to suit their situations, it is important that
they understand the products they are selecting.
Commonwealth Bank considers that financial literacy is vitally important in ensuring that
customers get the most benefit from financial products. To ensure that Commonwealth Bank
customers select and understand the best credit card for their circumstances, including their
ongoing obligations, we provide a range of customer centric tools and features including:
card selector and comparison tools;
educational content which explains how interest is calculated and when it is charged;
information on each monthly statement which explains payback periods should only the
minimum required repayment be made;
autopay functionality (available to automatically pay the minimum payment, full balance
or other fixed amount);
financial health checks through staff in any of our branches;
SMS and email payment reminders; and
budgeting tools within NetBank.
Figure 1. Two customer examples of information displayed on statements
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Commonwealth Bank has observed customers using these tools to make decisions about
the best credit cards to suit their circumstances and about how they use and repay those
cards.
The low rate card has become Commonwealth Bank’s most popular credit card. Our low rate
card now comprises more than 42 per cent of our new applications, compared to around 33
per cent in 2011.
Existing customers on Commonwealth Bank Awards and Commonwealth Bank low fee
cards have transferred more than $1 billion in balances to low rate cards since 1 July 2011.
This illustrates the transparency of pricing and the ease with which customers can switch to
a lower interest rate.
As at 31 March 2015, approximately 57 per cent of Commonwealth Bank credit card holders
pay no interest at all as they pay their credit card balance in full each month. Of those
customers who do pay interest, the most popular card is our low rate card.
Data at an industry level indicates similar trends. In recent years customers have
increasingly chosen to pay off a larger proportion of their credit card balances. Since 2011,
repayment rates have grown more than five times as fast as balances (21 per cent
repayment growth, compared to 4 per cent balance growth).
The proportion of outstanding balances accruing interest has also fallen over the last
four years. Of the $51 billion in outstanding industry balances as at June 2015, $33.1 billion
(64 per cent of total) was accruing interest, a 9.3 per cent decrease from June 2011
($36.5 billion).
The reduction in balances accruing interest can be mainly attributed to higher customer
repayment rates and aggressive zero per cent balance transfer offers. In 2013-14 an
estimated 7 per cent of industry balances were on zero per cent balance transfers for up to
24 months from the time of activating the account.
4. Competition in the credit card market
Commonwealth Bank believes that there is strong competition in the credit card market both
in pricing and product features. Since 2011, competition within the credit card market has
increased. There are now around 58 brands offering approximately 171 credit cards in
Australia.
In recent years non-finance companies have also increased their participation in the credit
card market, with retailers such as Coles and Woolworths now offering multiple credit card
products. In a 2015 RFI Group consumer survey, Coles was rated second, ahead of many
traditional providers, as the brand to whom customers will most likely apply for a new card
1
.
Credit card issuers are also increasingly offering attractive incentives for customers to take
up their products or switch between providers. These include:
balance transfers, where existing credit card holders can transfer their debt from their
current provider to another credit provider for low interest rates (currently zero per cent
interest rates for periods up to 24 months are on offer);
1
RFI Cards Council
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low introductory interest rates on purchases (with no interest charged for new purchases
for periods up to 12 months);
annual fee waivers;
cashback credits; and
lump sum loyalty or frequent flyer points.
The number of these types of offers (typically valued at several hundred dollars per
customer) and the prevalence of their advertising to the public is in Commonwealth Bank’s
view an indication of the vigorous competition in the market.
Further enhancing the competition is a rapidly growing industry of intermediaries such as
Mozo, InfoChoice and Cannex who make it easy for customers to compare credit cards and
switch to the best deal. Online credit card comparison sites account for an estimated 10 per
cent of new credit card applications. Some issuers provide approval decisions within 60
seconds of application, making it a simple process to switch providers.
Commonwealth Bank credit card customers can also switch between our own proprietary
card pricing and features, in some instances without changing their credit card number and
scheduled direct debits. For example, if a Gold Awards card customer wants to switch to a
Gold low rate card, this can easily be achieved without disrupting their direct debit
arrangements or requiring a new card number to be issued.
5. Cost of providing credit card products
We note recent commentary surrounding the level of credit card interest rates and their
relationship with the RBA cash rate.
When compared to similar types of unsecured credit, and taking into account the other
features and benefits offered by credit cards, our interest rates are competitive and
appropriately priced.
The costs associated with providing unsecured credit to customers through credit cards
differ significantly from other banking products such as home loans or personal loans. Table
2 illustrates how interest rates and features vary according to the type of credit product for
customers, both secured and unsecured.
Table 2. Comparison of Commonwealth Bank retail banking products
Product
Credit
Type
Interest rate
Transaction
al
Rewards
Debit MasterCard
N/A
Y
N
Prepaid MasterCard
N/A
Y
N
Variable home loan
Fixed line
Secured
5.14%*
N
N
Low Rate credit card
Revolving
Unsecured
13.49%
Y
N
Personal Loan
Fixed line
Unsecured
From 14.77%*
N
N
Personal Car Loan
Fixed line
Secured
From 9.54%*
N
N
Personal Overdraft
Revolving
Unsecured
16.60%
Y
N
Low Fee credit card
Revolving
Unsecured
19.74%
Y
N
Awards credit card
Revolving
Unsecured
20.24%
Y
Y
*Comparison rate
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The costs of providing credit cards to customers are driven by four key components:
pricing the risk of customers failing to meet their payment obligations and our risk of
non-recovery, which is relatively high for an unsecured type of credit;
relatively high direct operating costs through developing and rolling out product
features including travel insurance, security and fraud surveillance, managing
millions of transactions daily;
the cost of providing Awards programs; and
the cost of funds.
The cost of funds only contributes 22 per cent of total costs.
Risk of Non Recovery
As credit cards are unsecured lending, they are sensitive to market pressures and the
economic environment, particularly the unemployment rate.
The long term economic cycle is a key element of credit card pricing as credit card issuers
must factor in long run economic forecasts and risk into the interest rate charged. As credit
made available on credit cards is not provided for fixed periods and is continually available to
a customer, credit providers need to ensure that credit is priced for both current and future
risk, particularly the potential for rising unemployment through the economic cycle.
This long term risk is accounted for in the headline interest rate and does not fluctuate in line
with the RBA cash rate.
Operational costs
Credit card issuers incur significant ongoing servicing costs relative to other types of loans,
especially compared to products such as home loans. Costs include issuing card plastics
with chip and contactless technology and fraud prevention tools.
Credit card issuing also results in significant paper and postage charges due to the
requirement for monthly issuance of statements, unlike quarterly and bi-annual frequency
required for other lending products.
A number of Commonwealth Bank credit cards also include complimentary travel insurance.
Loyalty costs
Customers with an Awards card earn points for their everyday credit card spend and these
points can then be converted into a reward of their choice.
Commonwealth Bank has continuously invested in CommBank Awards to ensure customers
get demonstrable value from the program. Over the past three years, CommBank Awards
customers have benefitted from over $700 million in redemptions and ongoing innovation
such as instant redemption at point of sale.
Customers can redeem their points from multiple retailers across thousands of items,
including:
gift cards at a number of retailers, including Coles, Caltex, BP and Myer;
cashback paid directly into their credit card account;
credit card annual fee rebates;
discounts off selected Commonwealth Bank insurance products;
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cinema tickets;
discounts off car rentals or magazine subscriptions;
charity donations;
products from our online catalogue including items such as homewares, kids’ toys, or the
latest Apple products; and
frequent flyer points with Qantas or Virgin airlines.
Loyalty points are not earned, and therefore are not paid for, on low fee or low rate cards.
Cost of funds
While the RBA cash rate is a cost driver for all lending products, the correlation to credit card
rates is substantially lower than other products. Funding costs for Commonwealth Bank
credit cards comprise only 22 per cent of the overall cost base.
There are a number of factors taken into account when considering headline interest rates,
including the competitive landscape, cost of loyalty rewards, default rates, operational costs,
the economic cycle and regulatory obligations.
Regulatory changes
In the last six years, the credit card industry has seen significant regulatory changes. These
include stricter income verification for new accounts introduced in 2009. Regulation also
included the requirement to obtain customer consent before issuing credit limit increase
invitations, requirements for written notification when a customer exceeds their credit limit,
higher standards for mandatory disclosures both prior to sale and on monthly statements,
requirements regarding repayment allocations and the banning of certain exception fees (all
introduced in 2011).
While the industry has supported and continues to support these measures, they have
added to the cost of providing credit cards. Additional regulation being proposed under the
RBA’s Review of Card Payments Regulation creates further uncertainty for issuers.
6. ATM Fees
We note the Committee’s interest in the pricing of withdrawals from ATMs.
Since domestic direct charging was introduced in 2009 Commonwealth Bank’s charge for
domestic withdrawals and balance enquiry transactions by non-Commonwealth Bank
customers has remained at a cost of $2.
This charge reflects a partial recovery of the cost of providing the 3,487 Commonwealth
Bank ATMs
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at 2,474 unique locations throughout Australia. In the 12 months to 30 June
2015 there were more than 189 million withdrawals made, with over 25 million of these being
completed by non-Commonwealth Bank customers. In addition there were over 2.4 million
balance enquiries by these customers.
While the total revenue from ATM fees averages $54m per annum, the total cost of providing
the Commonwealth Bank ATM network exceeds $160m per annum. The revenue from ATM
2
As at 30 June 2015
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fees has also been declining in recent years, with trends showing more customers using
EFTPOS and card payments than ATMs.
Despite these trends Commonwealth Bank considers ATMs a core component of the way
we interact with our customers, evidenced by the 2011 commitment to invest $80m in an
ATM refresh program to be completed by March 2016. This program offers a range of
benefits to all users including non-Commonwealth Bank customers such as new devices
delivering improved security features, greater functionality such as foreign language
capability, as well as providing improved disability access through enabling audio
functionality throughout the fleet.
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