This changing pattern in credit card usage has coincided with the widespread introduction of loyalty programs by card issuers, and has seen credit card usage reach annual growth rates of around 26 per cent over the past 4 years.
3.1 Market Share – Credit Card Companies
Visa International (Visa) and MasterCard International Inc. (MasterCard) are prominent organisations in the global credit card industry. With a combined market share of close to 70 per cent in Australia (see Table 1), they have been dominating the local credit card market. BankCard, a joint venture between all the majors banks, is the third largest credit card company in Australia and operates a network similar to Visa and MasterCard.
While the issuing of cards is largely restricted to the major banks, Visa and MasterCard, with a much wider acceptance and their position as global players, have the scale to provide incentives to the banks, making them more attractive than the BankCard network. Banks, on the other hand, who charge a fee for card transactions, are able to generate more revenue out of promoting these cards than by promoting BankCard, thus causing distribution to decline.
Another pertinent factor in their market dominance is being able to draw on the significant resources of their parent companies, often resulting Visa and MasterCard to be far more widely advertised. Visa dominates the market and the key to their success with regard to attracting consumers is the relationships and successful alliances they have formed with banks and, more recently, other organizations with large numbers of consumers such as Australia’s largest telecommunications company, Telstra and airline giant Qantas.
3.2 Market Share – Credit Card Issuers (Banks)
The Commonwealth Bank of Australia (CBA) has the most bank-issued credit cards in circulation. This dominant position is primarily due to the fact that they have the highest number of customers and credit card accounts are generally attached to their bank accounts. Consequently, the majority of consumers obtain their credit card through their bank. CBA also has the largest ATM, EFTPOS, branch and agency networks in Australia in addition to an extensive network overseas. The other three large banks ANZ, NAB and Westpac, easily have the next highest market shares of branches and numbers of bank-issued credit cards in circulation. (see Table 2)
The pole position of CBA was strengthened further in 2000 when they struck a deal with McDonald’s and installed 4,800 new terminals across the country. ANZ have a slightly higher number of cards issued than NAB and Westpac, largely due to issuing the extremely popular Qantas and Telstra Visa cards.
- DEMAND AND ITS DETERMINANTS
The criteria that consumers plan to buy of any particular good or service depend on many factors. This involves considering how rational consumers behave. A rational consumer is a person who weighs up the cost and benefits to him or her of each goods or service acquired. In relation to the demand of credit cards, three determinants/elements have been identified and are as follows:-
4.1 Interest Rates
Interest rates are the price for borrowing money. Interest rates move up and down/fluctuates, reflecting many factors. The most important among these is the supply of funds, available for loans from lenders, and the demand, from borrowers. For example, the credit card market, in a period when many people are borrowing money for short-term loans, banks need to have the funds available to lend. They can get these from their own depositors or a surplus of their account. Interest rates have been decreasing since it was at a high of 15.05% in June 1990 before declining to 4.72% in June 2002. (see Figure 1) With the overall declining of interest rates, we can make the assumption that consumers/customers has the opportunity to search for the lowest interest rates from various banks as interest rates are very competitive among banks.
4.2 Interest Rates (Substitutes)
Other forms of short-term debt such as overdrafts and personal loans are close substitutes and have a significant impact on credit cards. The fluctuations in the interest rates will directly affect the demand of the latter. For example, when the prime-lending rate for loans and overdrafts increases, it will more cost effective to use credit cards to obtain debt. Hence, the demand for credit cards is positively correlated to the interest rates of these substitutes.
4.3 Disposable Income
Disposable income specifically focuses on the amount of income available for private consumption and spending. Disposable income takes into consideration the reality that “take-home pay” is heavily influenced by not only gross income, but also by factors such as government transfer levels, taxation levels, and inflation. The table below provides estimates of Real Net National Disposable Income (RNNDI), in both seasonally adjusted and trend terms, for the past ten quarters. In the December quarter 2001, seasonally adjusted RNNDI was $134,560 million, compared with the seasonally adjusted chain volume measure of GDP of $165,882 million (Both of these estimates are in 1999-2000 dollars). Seasonally adjusted RNNDI grew by 0.9%, compared to growth in the seasonally adjusted chain volume measure. (see Table 3)
Thus, we can assume that there is a high demand of credit card usage. Consumers are spending more, but are only paying a minimal portion of the amount due back to the banks. This in turn will increase the disposable income of consumers that will lead to a higher savings and a stronger purchasing power for other consumer products.
4.4 Preferences
Lifestyle and preferences of the consumer plays a vital in determining the demand of credit cards. Due to rising standard of living in Australia, people are more affluent and more sophisticated, thus leaning towards a cashless society. Security is a paramount concern especially when making purchases online.
- SUPPLY AND ITS DETERMINANTS
Supply represents a decision about what goods or services to produce. A good or service not offered for sale is not part of the market supply. With intense competition between, banks and credit card companies to supply credit cards to consumers, a few determinants has been identified such as follows: -
5.1 Impact of Sponsoring Major Events
Olympic sponsorship generates measurable results through brand enhancement, product and service showcasing, boosting corporate spirit and increase sales and market awareness on the global and local scale. No event touches individuals throughout the world so intimately while providing a consistent marketing platform that successfully transcends cultural boundaries and speak effectively in all languages. Visa was one of the major sponsors for the Sydney 2000 Olympics. Visa used the Olympic as their marketing platform as it is the most popular and has a balanced demographic property available in the world today. With the presence of Visa at global events such as the Olympics, it has strengthened working relationship with the local banks. This would spur the supply of bank issued credit cards. The circulation of credit cards in Australia has increased by 46% over 7 years to 9.58 million. Also, the use of credit cards has more than doubled over the same period to an average of 7 transactions per card per month. By sponsoring major events, credit card companies are able to make the event appealing to their audience locally, nationally and globally.
5.2 Technology
Credit cards are a convenient way to shop pay bills or for online transactions over the Internet. Credit cards can be an alternative to cash or cheques. In line with this, banks has introduced numerous and different technologies on behalf of the credit cards. In an effort to attract greater market share, credit card companies have reinvented the credit card industry, by having smart chips embedded in the credit card. This technology will allow numerus information about the cardholder to be stored unlike the current cards. In certain parts of the world technology and innovation has taken a step further, credit card can be half the size of the standard credit card and is attached to your key chain. The card is enclosed by a protective plastic case and can be used in any machine that allows for a credit swipe. In the near future you will only need to carry your hand phone or PDA, and your card accounts will be encrypted in those devices. You will simply need to press a button on the device and an exchange of information will take place. The consumer’s response towards technology will change in the long run as more people are exposed and educated towards a knowledge world.
5.3 Economic Recession and Growth
When the Australian economy contracts and a recession take place, there are certain factors that would have an influence. These could range from the fact that there is less money circulating to purchase goods and services as well as the fact, that a growing percentage of the population would be unemployed. In this kind of climate, issuers of credit cards would have stringent rules and regulations. This is to ensure that applicants that are likely to increase the level of bad debts and bankruptcies could be minimised. Hence, the issuers are likely to reduce the issuing of credit cards to new applicants.
In times of economic growth there would be available more money circulating in the economy. 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.
- 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. The rational of interchange fees on merchant service fees and the prices of card services charged to cardholders are recognized as the rational for interchange fees.
This payment method needs to provide the most efficient and beneficial cost structure that creates competition among the various users of the system.
At present there is no documentation showing the actual process used to set the interchange level. A statement by the top two credit card issuers in Australia is as follows:
MasterCard
“The interchange fees are designed to compensate for the likes of sales transactions, cost of processing, cost of money and increased risk due to the use of master card in interchange transactions”
Visa
“The setting of interchange fees is a complex matter that requires commercial judgment. The judgment is shaped by the realities of market place competition; between Visa and its open credit card network competitors; between the open credit card network and their closed counterparts; between credit cards and between cards and other means of payment. This judgment is then tested”
These interchange fees need to be competitive as these cost could be past on to the merchant. This is due to the fact at present merchant cost per transaction stands at $1.04.(see Figure 2)
As of present information that is available, the credit card interchange fee as a percentage of transaction value is as follows:
Current standard rate Current electronic rate
(Customer & card present)
MasterCard 1.2(1993) 0.8(1993)
Visa 1.2(1993) 0.8(1993)
(Source: MasterCard & Visa)
A study done by the Australian Retailers Association reveals that interchanging fees are a significant proportion of the revenue from credit card issuing. The average amount received by issuing in 1999 was $0.95 per transaction, which accounted for 35.5% of revenue. The total revenue generated by interchanging per issuing bank stood at $775m.
With regards to interchange fees there is no differentiation in the charge between the two competitors. This is due to the fact each of the cards are funded and run by the main banks in Australia. This would lead to a collative and non-competitive market.
6.3 The Game Theory
In regards to Promotions & Awareness
Strategies
They can each
- Sponsor an event such as the Olympics or the Football World Cup
- Do Not sponsor an event such as the Olympics or the Football World Cup
Payoffs
4 outcomes are possible
- If each firm sponsors, both the firms will increase awareness
- If neither do not sponsor, both the firms do not increase awareness
- MasterCard increase the awareness for the brand but Visa’s awareness maintain the same.
- Visa increases the awareness for the brand but MasterCard awareness maintain the same.
6.4 Competitors within the scheme (Annual fees and interest payments)
The issuers of credit cards through the banking system compete for cardholders in a number of methods. Based on the research done by UMR Research (PVT) Ltd – “usage and attitude survey Australia – July 2000” it was found that cardholders viewed certain aspects as important in the selection of credit cards
- Has reasonable interest rate (62%)
- Offers good rewards for usage (29%)
- Widely accepted in Australia (79%)
- A convenient card to have (65%)
- Is good for paying bills (62%)
Since most types of credit cards are accepted at all institutions within Australia as a tool of payment the last three items on the survey have very little scope for competition. Hence it’s on items such as interest that there is scope for competition.
At present the likes of ANZ Visa have low interest introductory rates of 7.95% for the first six months. There by debts on any other card could be transferred to the ANZ credit card. This would result in an increase in market share. This is comparable with a interest free period.
They would also increase the limit to encourage the level of loyalty by customers. They could also provide services such as interest and phone banking services.
To re-enforce all of these the issuer would promote and advertise to build brand awareness and loyalty to the product. For instant Visa promoted and sponsored the Olympic Games while MasterCard was involved with the football world cup. Additionally billboard, TV plus Internet advertising is a common factor among credit cards. The table (Banks/Card) in the appendix indicates the number of ways that are available for competition among the number of cards in the market place.
Hence there is anti-competitive structure with regards to Issuers, Acquirers and Merchants, which has indicated a levelled playing field. The only area of competition as indicated from the findings would be at the stage of cardholders.
6.5 Oligopoly & Duopoly
Thus from the information that has been stated above with regards to the competitive structure of the credit card industry, it could be identified that at present the industry is functioning on a Oligopoly structure. Hence, an analogy of the theory of Oligopoly suggest “No soccer coach plans an attack without considering how the opponent’s defence will move”
This is due to the fact that, the credit card industry within Australia is controlled by the main four banks which consist of Commonwealth bank, Bank West, ANZ & National Bank of Australia. These four banks are the main shareholders within Visa & MasterCard credit schemes. Hence as discussed above there would be collusion with regards to the setting of the interchange fee. This would amount to price fixing within the industry.
In addition, since Visa & MasterCard account for nearly 67% of the Australian market in terms of market share as is seen from Table 1, it could be stated that this constitutes a Duopoly in-terms of market structure. As they control the market share and in-tern the main banks control these two cards. Therefore there would be a collusive and corporative structure which would not encourage competition.
6.6 Barriers to Entry
In this market structure, there is one main factor that influences other entrants. That is, though the Reserve Bank Of Australia has liberalised and opened the financial market for new credit card entrants, the current system does not encourage new comers.
This is due to the fact that the main banks have controlling interest over the main market player’s i.e. Visa & MasterCard. The current infrastructure to support the credit card network is being controlled by these four major banks. Hence, it would be very difficult for a new player to come in, to set up its own network because it will be capital intensive since they would not get the corporation of the existing players
- CURRENT ISSUES IN AUSTRALIA CREDIT CARD INDUSTRY
7.1 Credit Cards Surge in Users
Governments, consumer advocacy groups and community have generally expressed concerns over the explosion number of cardholders and consumer debts in Australia.
Report from the Reserve Bank of Australia shows that the number of bank issued credit cards in circulation in Australia has increased by 46% over the past seven years to 9.58 million (between the periods of May 1994 and April 2001). This study only on four major banks; ANZ, CBA, NAB, Westpac, as this representing around 90% of the total of bank issued credit cards in Australia (RBA, “CO1- Credit Card Statistics Banks”) .
7.2 Credit Cards Surge in Transactions
This results to an explosion of consumer credit and a significant increase in the consumer usage of credit cards in Australia. The number of credit card transactions (per card) per month has more than doubled in the last seven years, from under 3 transactions per month in 1994, to around 7 transactions per month in 2001 (RBA, “CO1- Credit Card Statistics Banks”).
7.3 Debts and Bankruptcies
The level of household debt in Australia has risen substantially over the last 10 years, more than doubling in real terms from $149.9 billion to$357 billion in 2000. Credit card debt has been responsible for 5.8% of the increase (RBA, “D02 Lending and Credit Aggregates.”)
Credit card debt has risen relatively almost double from 2.9% to 4.9% of the overall Australian household debt during the last decade. Australians owe nearly $70 billion in personal (non-housing) debts, including 17.4 billion on bank credit cards (Consumer Credit Round Table – Feb 2001).
In the past financial year, over 23,000 people applied for bankruptcy compared with 8500 ten years. After unemployment, excessive use of credit card was cited as the chief reason for bankruptcy (Consumer Credit Round Table – Feb 2001).Many people are over-committed with credit, causing substantial hardship to themselves and their families.
7.4 Surcharges For Credit Card Usages (effective from January 1 2003)
The Reserve Bank's standard on merchant pricing has been already in force on 1 January 2003. This standard removes the restriction imposed by the international credit card schemes that prevents merchants from recovering from cardholders the costs of accepting credit cards. (RBA No: 2002-18)
The standard will apply to the MasterCard and Visa credit card schemes. On 1 January 2003, the undertakings provided by American Express and Diners Club to the Reserve Bank to remove merchant restrictions in their respective schemes will also come into force. (RBA No: 2002-18)
In summary, the merchants/retailers have the options whether to absorb or pass on the surcharges/transactions cost on all of the credit cards transactions onto customers who choose to use credit cards from 1 January 2003 onwards.
- FUTURE OUTLOOK
8.1 Costs and Acceptance
Previously, the merchants have to face an 'all or nothing' choice – accept credit cards and absorb the merchant service fees into their overall cost structure, or refuse to accept credit cards at all that denies merchants the freedom to set prices for customers that promote the competitiveness of their business. Freedom for merchants to charge according to the means of payment will introduce normal market disciplines into negotiations between merchants and acquirers over merchant service fees, and eliminate the 'all or nothing' choice currently facing merchants deciding whether to accept credit cards. In principle, the higher are merchant service fees levied by an acquirer, the greater the incentive the merchant has to pass the fees onto credit cardholders. This will give smaller merchants in particular, paying the highest merchant service fees, more bargaining power to negotiate lower merchant service fees
In the absence of regulatory action by the Reserve Bank, the community as a whole, not just those who use credit cards, would continue to bear the costs of providing credit card services, in the form of higher prices for goods and services. This burden is diffused over a wide range of merchants, in which varying mixes of payment instruments may be used, and over millions of consumers undertaking a myriad of transactions.
In total, however, the impact on the general level of prices is likely to be significant. Merchant service fees on credit cards currently cost merchants around $1.5 billion a year (RBA No: 2002-18).
8.2 Price Efficiency and Merchants Acceptance
The community will benefit from more efficient price signals. Some merchants that had previously refused to accept credit cards because of their costs might decide to do so when they can pass these costs onto credit cardholders. A larger network of merchants accepting credit cards will benefit all credit cardholders. Consumers will always have the options when comes to mode of payments whether to pay cash or by credit. These surcharges might act as a deterrent to the consumers/credit cardholders to use ‘future money’ and this might help to reduce the debts from individual or national perspective level.
8.3 Consumers and Credit Cardholders
If merchants charge a 'fee for service' for accepting credit cards, cardholders using their credit cards will face more of the resource costs of providing credit card payment services. They will, of course, have the option of avoiding those costs by switching to lower cost payment Concerns have been raised about credit card lending practices and banks have been advised to adopt a more rigorous, objective and soundly based credit assessment and issuing process. Banks should not be targeting either on low-income earners or young people for either new credit accounts, or for credit limit extensions just to increase their market share.
Proposals for regulatory and policy interventions appear to be focused in the following areas:
Instruments. The higher costs of credit cards will no longer need to be built into the prices of goods and services paid by all consumers, whether or not they pay by credit card.
8.4 Control Measures and Policies
- Setting mandatory minimum assessment criteria that banks must apply when providing credit to individuals and assessing an applicant’s capacity to repay.
- A ban on unsolicited mail offering credit cards, or credit limit increases.
- Regulating uniform credit application forms and processes for verification.
- Requiring mandatory external auditing of banks’ procedures for assessing whether to extend credit.
- Mandatory external auditing of banks’ level of default (to ensure they are meeting the Uniform Consumer Credit Code requirement only to provide credits if consumers have a capacity to repay without substantial hardship).
(Consumer Credit Round Table – Feb 2001).
The government should monitor closely on the credit cards’ market with the possible regulatory and policies mentioned above and better educate the consumers.
- 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.
- 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.
Figure 1
Source: Australian retailers association
- REFERENCES
-
McTaggart, Findlay and Parkin, Economics, 4th Edition, Addison Wesley, Sydney, 2003
-
Sloman,J., Economics, Prentice Hall, 1991
-
Beardshaw,J., Economics, A Student’s Guide, 2nd Edition, Pitman, 1989
-
KPMG Consulting, Credit Cards in Australia, A Research Report July 2001, Nolan Norton Institute
-
Reserve Bank of Australia, Reform of Credit Card Schemes in Australia I, A Consultation Document, December 2001.
-
Reserve Bank of Australia, Reform of Credit Card Schemes in Australia II, Commissioned Report, August 2001.
-
Australian Bureau of Statistics, 2001, Meaning Australia’s Economy, Section 8 Financial Market, Interest Rates, Cat. No. 1360.06, Edition 7, ABS,Canberra
-
Australian Bureau of Statistics, 2001, Australian National Account :National Income,Expenditure and Product, Feature Article-Real Net National Disposable Income-a new national accounts measure, Cat. No. 5206.0, ABS,Canberra
-
Getten, L. (17 December 2002), Mini Credit Cards:gimmick or innovation?, Available from [19 February 2003]
-
Alan L. Tyree, Banking law in Australia, Sydney: LexisNexis Butterworths, 2002,
4th edition.
