Credit Card Reform A Failure

Sydney Morning Herald

Saturday May 7, 2005

PETER WEEKES

The Reserve Bank's attempt to lower the cost of credit cards has backfired, with both consumers and card issuers out of pocket, a report shows.

Independent research group Datamonitor says many consumers are changing to low-interest cards as the cost of loyalty programs associated with high-rate cards has soared and rewards have been reduced. "Consumers are not seeing lower prices at the checkout," Datamonitor's financial services analyst, Alex Boorman, said. "They are also paying more in annual fees for credit cards and loyalty schemes, while some retailers are now charging a surcharge when a credit card is used."

Under the 2003 reforms, the interchange fee that banks charge each other for processing transactions was cut by about 40 per cent. At the time, it was estimated the fees totalled $1 billion a year, which helped pay for the loyalty programs.

The Reserve argued that the reforms would lower costs to merchants, who would pass on the savings to consumers through lower prices.

"There is some evidence that the banks have lowered charges paid by the merchants," Mr Boorman says. "Based on that, there should be a knock-on effect, but there is no evidence that the prices charged to consumers have fallen."

Due to the loss of revenue, card issuers have increased the fees for owning a credit card and scaled back rewards. For example, the annual fee on the ANZ Frequent Flyer Visa is now $95 (including a $55 fee for loyalty scheme membership). Before the reforms it was $67.

"In broad terms, the fees on credit cards with reward programs have doubled and the value of the reward programs have halved," says Mike Ebstein, card analyst and director of MWE Consulting. "Most reward programs continue to give one reward point per dollar spent - but if you then want to convert them into frequent flyer points, instead of being one for one, they are now two for one or 1.5 for one." This has led many card holders to opt for low-rate cards such as those offered by Bank of Queensland (9.9 per cent) and Members Equity (10.2 per cent).

Mr Ebstein estimates low-rate cards account for 10 to 15 per cent of the market, compared with virtually zero before the Reserve's reform.

© 2005 Sydney Morning Herald

Back to News Index | Back to Home