Bankwest Card Launch Signals A New Assault On The Big Four's Credit Billions

The Age

Tuesday January 31, 2006

STEPHEN BARTHOLOMEUSZ

THE WEEKEND launch by BankWest of the lowest rate credit card in the market is the latest shot in a gathering assault on the major banks' lucrative stranglehold on the credit card segment.

The HBOS-owned BankWest, with non-banks like Virgin Money, GE Money's Wizard and John Symond's Aussie Home Loans, is starting to ratchet up the competitive intensity in a segment where, until relatively recently, there had been little price-based competition.

BankWest is offering a rate of 8.99 per cent against the average rate of 16.75 per cent charged in a segment dominated by the major banks. If the market were to move to its price point, more than $1.8 billion of annual credit card revenue would be at risk.

That probably isn't going to happen in the near to medium term, but BankWest believes the low-rate segment of the credit card market will double within three years to levels experienced in other major markets, where they represent about a quarter of the market.

The rate of growth in the low rate market probably depends on how aggressively the majors respond to the attacks on one of their core franchises.

Their experience of a similar assault on their deposit products by BankWest and others, where they were forced to offer more attractive products to retain deposits, suggests they will probably respond earlier and more aggressively.

Most of the banks have a low rate product, but BankWest has established a new pricing benchmark.

The fresh outbreak of competition in credit cards reflects the continued unbundling of credit cards that started with the Reserve Bank's reforms to interchange fees. Those reforms stripped hundreds of millions of dollars from the banks and triggered a re-pricing of card features, including loyalty programs, that made the cost and benefits of the cards far more transparent.

Customers are now paying higher fees for fewer rewards, which created the opportunity for rival institutions to compete purely on price.

Previously the card system had been a mass of hidden cross-subsidies, with retailers, or rather their customers, subsidising loyalty programs through interchange arrangements and customers with revolving balances subsidising those taking advantage of interest-free credit.

The RBA acted on interchange fees because it was concerned about the growth in credit card activity relative to more efficient payment instruments.

It was worried about the high levels of consumer debt, but just as concerned that the interchange fees were facilitating growth in credit card usage and distorting customers' behaviour by allowing the banks to use unwitting consumers, paying higher retail prices than they ought to have for goods and services, to finance the reward schemes that were driving that growth.

The unbundling of the card system enabled competitors to target particular segments and the most obvious segment to target was those customers with the revolving balances who pay exorbitant rates for unsecured credit.

Those customers are now being inundated with low-rate offers that usually include a honeymoon interest-free period to transfer their existing balances to the new provider.

There are estimates that about 50 per cent of cards are revolved - the customer doesn't repay the debt within the interest-free period - but, as those are the cards with the bigger amounts outstanding, they represent about 70 per cent of credit card balances.

With nearly $24 billion of credit card debt outstanding, the stakes are large.

If the major banks lose a significant share of the system to their smaller competitors - or are forced to sacrifice large slabs of margin to retain share - there may be a flow-on effect to their broader card businesses, forcing further re-pricing of loyalty programs and the interest-free periods.

Already, however, some of their rivals are talking about the opportunity to target other segments of the credit card market - reward programs, for instance - that will be created as increased transparency in the costs and benefits of the card features improves consumers' ability to compare.

The big banks are concerned about the emergence of giants like GE Money, HBOS and Citibank as increasingly aggressive competitors for their core retail and small to medium business customer bases, particularly as credit growth, while still strong, has slowed.

Without legacy positions and systems or massive physical distribution networks, and without having to offer a full suite of products, the new rivals are able to cherry pick the big banks' most profitable products.

In recent years a steady compression of bank margins has been more than offset by volume growth. If the targetted attack on their more profitable segments forces them to compete directly on price and credit growth subsidies to more conventional levels, it would have a leveraged impact on their profitability.

In Britain, despite similarly strong credit growth in recent years, competition for credit card balances is said to have almost halved the average revenue per card over the past five years and the cost to the sector of zero rate balance transfers alone is said to have been as much as $2.5 billion a year.

That isn't an appealing prospect for the majors, who have already lost billions of dollars of margins from home lending and deposit products following the emergence of the specialist mortgage originators and brokers and the big international institutions targeting relationship products to build their presence in this market.

bartho@theage.com.au

© 2006 The Age

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