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Credit cards: learning lessons from Down Under

27th May 2005
By BBR Staff Writer

The impact of the interchange ruling on the Australian credit card market has largely been negative for both consumers and card issuers. Consumers are not seeing lower prices at the checkout. 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.

For Australian card issuers, the imposed reduction on interchange fees has cost millions of dollars in lost interchange revenues. Prior to the reforms, interchange fees accounted for 35% of card issuer revenues. Indeed, the Australian experience should serve as a test case for UK and European markets considering interchange reforms.

Interchange can be defined as the fees that financial institutions pay one another when their customers make credit and debit card transactions or use ATMs. These fees are 'wholesale' fees which are not paid directly by consumers, but which are often reflected in other fees that they pay or which are paid by merchants.

In Australia, the reform on interchange fees has resulted in increases in credit card fees and led to loyalty schemes cut backs. They have also encouraged card issuers to find ways round the reforms - partnerships with American Express and Diners Club highlight strategies being employed by Australian card issuers.

Moreover, interchange reforms have had a significant impact upon consumer behavior - consumers are encouraged to search for cards that better suit their usage and repayment behavior. Consumers who revolve a balance from month-to-month and who do not value loyalty benefits are encouraged to hold low rate cards.

However one positive indirect impact for Australian consumers from the interchange is that it has stimulated the trend towards low rate cards. The low rate segment is now the most competitive area of the credit card market in Australia. Indeed, following the emergence of 0% introductory offers provided by GE, HSBC and ANZ, this segment is likely to become even more competitive over the next 12 months.

While it is unlikely that similar reforms in the UK would lead to a flood of low rate cards as an indirect result (the market is more mature in this respect than Australia), it is likely to result in issuers in the UK increasing card fees and scaling back on additional benefits such as loyalty schemes.

In continental Europe there are very few credit cards and deferred debit card products, which do not charge interest, are much more popular. If interchange revenues on these deferred debit cards are hit, European issuers will be in a weaker position to make up lost revenue from credit card interest.

Undoubtedly, issuers will increasingly push credit cards in order to open up new revenue streams. However, as they are famously reluctant to use cards for borrowing purposes, winning continental consumers over will be no easy task. As such, other revenue replacement tactics such as introducing or increasing ATM charges for cash withdrawals may be brought into play, and this is unlikely to prove popular with consumers.

The interchange reforms in Australia were arguably more significant than those now being considered by regulators overseas notably in the UK and in Europe. However, even if less imposing reforms are introduced, card issuers and regulators should not underestimate the potential impact on their market.

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