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Credit cards industry in Australia.

Extracts from this document...

Introduction

CREDIT CARD INDUSTRY IN AUSTRALIA TABLE OF CONTENTS 1. EXECUTIVE SUMMARY 3 2. INTRODUCTION 4 3. CURRENT OPERATING ENVIRONMENT 5 3.1 Market Share-Credit Card Companies 5 3.2 Market Share-Credit Card Issuers (Banks) 6 4. DEMAND AND ITS DETERMINANTS 6 4.1 Interest Rates 6 4.2 Interest Rates (Substitutes) 7 4.3 Disposable Income 7 4.4 Preferences 7 5. SUPPLY AND ITS DETERMINANTS 7 5.1 Impact of Sponsoring Major Events 8 5.2 Technology 8 5.3 Economic Recession and Growth 8 5.4 Prospective New Entrants 9 6. HOW DO CREDIT CARD SYSTEMS COMPETE 9 6.1 The Four Party card scheme fee flow chart 10 6.2 Competition within the scheme (Interchange Fees) 10 6.3 The Game Theory 12 6.4 Competitiors within the scheme (Annual fees & Interest Payments) 13 6.5 Oligopoly and Duopoly 14 6.6 Barriers to Entry 14 7. CURRENT ISSUES IN AUSTRALIA CREDIT CARD INDUSTRY 15 7.1 Credit Cards Surge in Users 15 7.2 Credit Card Surge in Transactions 15 7.3 Debts and Bankruptcies 15 7.4 Surcharges for Credit Card Usages 16 8. FUTURE OUTLOOK 16 8.1 Cost and Acceptance 16 8.2 Price Efficiency and Merchants Acceptance 17 8.3 Consumers and Credit Cardholders 17 8.4 Control Measures and Policies 18 9. THE INDUSTRY 18 10. CONCLUSION 19 11. APPENDICES 20 12. REFERENCES 24 1. EXECUTIVE SUMMARY Australia has developed and implemented a world-class credit card payment network, and in recent years, credit cards have become a convenient cash management vehicle. Financial deregulation, innovation in financial products and more importantly growth in Australian household wealth have led changes to consumer behaviour. At March 2001, there were 9.58 million bank issued credit card accounts in Australia, a significant increase of 46% over the past seven years. Credit cards in Australia are used mainly as a pure payment instrument and more for short-term debt than for long-term debt, with approximately 70 per cent of credit card holders paying their card(s) ...read more.

Middle

Hence, card issuers would increase the supply of credit cards to prospective customers. The levels of disposable income that is available to individuals would also affect this. 5.4 Prospective New Entrants The possibility of new players such as JCB (Japan), Discover (US) & MBF Cards (Malaysia) entering the market will effectively increase the supply of credit cards. However, due to the competitive structure of oligopoly, these entrants will face stiff resistance from the market dominants such as Visa and MasterCard. As such, the likeliness of any new entrants is significantly barred. Hence the current supply of credit cards would be limited to the current levels with marginal increases in the market. 6. HOW DO CREDIT CARDS SYSTEMS COMPETE The credit card system in Australia mainly consist of Bankcard, MasterCard and Visa who are known as "four party" card schemes. This is due to the fact that four parties are involved in the payment process. These parties are made up of the following. * The cardholder * The issuer - The financial institution that issues the credit card to its customers. * The acquirer - The financial institution that services the merchant accepting the credit card for payment. * The merchant. 6.1 The four party card scheme fee flow chart 6.2 Competition within the scheme (Interchange fees) At first glance the interchanging fee is a payment that goes from the merchant acquiring institution to the card issuing one. But from an economics viewpoint this is distinguished between statutory incidence and economic incidence of a fee. The statutory incidence is the concept that the party that initially pays the fees under the formal rules and institutions of the market. The economic incidence refers to those who actually pay the fees once the market adjusted to a new equilibrium reflecting the fee. The statutory incidence of the interchange fee for a given transaction is reflected by the association merchant / acquirer payment. ...read more.

Conclusion

9. THE INDUSTRY The industry structure will presumably still remain as oligopoly in the near future. The few giants, Visa International, MasterCard, American Express and Diners will be still the key players as they have very established themselves in terms of infrastructure, networks and marketing bases. A new player will find it very difficult to enter into the market as these big players have established themselves since a long time ago. This is further substantiated based on the last ten years records shows that there were not a lot of changes in terms of industry structure and occasionally there are few small players in the market but they are not really significant in terms of overall result. 10. CONCLUSION In conclusion, credit cards, being convenient and safe, will continue to play a significant role in Australians' shopping habits. Moreover, with the increasing emergence of E-businesses, credit cards will be a fundamental tool for payment. Competitive structure will not change due to the collusive behaviour between existing firms. 11. APPENDICES Table 1 Market Shares of Credit Card Companies by Number of Cards in Circulation 2000-2001 % Circulation 2000 2001 Visa 40.2 42.7 MasterCard 23.9 24.0 Other 35.9 33.3 Total 100.0 100.0 Source: Euromonitor, trade interviews, trade interviews, trade press Note: "Other" refers to mainly BankCard, but also includes the small number of credit cards produced by companies such as Amex and Diners Club. Table 2 Market Shares of Credit Card Issuers by Number of Cards in Circulation 2000-2001 % Circulation 2000 2001 CBA 26.1 26.0 ANZ 25.0 24.0 NAB 23.9 24.0 Westpac 20.7 21.9 Other 4.3 4.2 Total 100.0 100.0 Source: Euromonitor, trade interviews, trade interviews, trade press Figure 1 Table 3 REAL NET NATIONAL DISPOSABLE INCOME Seasonally Trend Adjusted $m % $m % 1999 September 125,754 1.2 125,653 1.4 December 127,444 1.3 127,736 1.7 2000 March 129,146 1.3 129,020 1.0 June 130,221 0.8 130,012 0.8 September 130,457 0.2 131,420 1.1 December 130,259 -0.2 129,585 -1.4 2001 March 130,462 0.2 130,198 0.5 June 131,635 0.9 131,660 1.1 September 133,196 1.2 133,410 1.3 December 134,601 1.1 134,560 0.9 Figure 2 Source: Australian retailers association 12. ...read more.

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