RFi Group Opinion: Looking ahead (not forward) to the FSI reforms

As we approach July 2017 and the implementation of the FSI interchange reforms, I thought it appropriate to assess the health of the credit card industry and look at some of the key performance indicators by looking at the industry in the month of June over the last 13 years since the original interchange reforms began in 2003.

At RFi Group’s upcoming Australian Retail Banking Summit (Sydney 25th & 26th May), we will address a full spectrum issues including the FSI and the credit industry, as this article attempts to tackle the topics front of mind to many.

The media has been very fond of pointing at credit card debt and speculating that we as a nation are increasingly indebted – indeed, as I write this article, there is a story on the ABC which directly quotes credit cards as an increasing debt burden. Total outstanding balances on cards of more than $50bn is an eye-catching story. However, the reality is that the value of debt per account stopped growing some time ago and now sits at a level on par with 2008. Of course, if we take into account inflation, balances are significantly lower today than they have been for well over a decade.

I hear the media say “Australians must have more accounts than they did back then!”. Again the statistics tell a different story. It is certainly true that there are more accounts today than there ever have been (almost 17 million according to the RBA), but if we look at the average number of credit card accounts per capita, then we see a different story. As at June 2016 there were 0.89 credit card accounts for every Australian adult, a figure which has been almost unchanged since June 2006. In fact, the only notable growth in card accounts per capita occurred between 2003 and 2006 as issuers adjusted their propositions in light of the interchange reforms and consumers took up more (different) cards to make sure they were still collecting their rewards points or revolving at reasonable prices.

In addition, the proportion of those balances that are accruing interest is falling rapidly. As the chart below shows, up until 2011 this proportion was increasing, but then Australians started to pay down their balances and not revolve as much. This coincided with the introduction of NCCP2 in mid-2012. There is something about being told that it will take you 70 years to pay off your credit card by making the minimum repayments that appears to galvanise peoples’ desire to be debt-free.

How about card spend? Well average transaction sizes are falling as cards are increasingly accepted by smaller merchants and cards displace cash. Currently, the average transaction value is less than $130, where they were closer to $150 ten years ago. They are still a lot higher than debit at $50.

While overall transaction values for cards are rising, the average spend per account per month has plateaued in the last couple of years, which suggests that we are getting towards a natural balance in credit vs debit vs cash spend.

So looking ahead to July 2017 and beyond, what do we expect to see from consumers? I would argue that we will see the number of card accounts will increase temporarily as consumers take out additional cards to minimise the impact on their rewards-earning capacity. In addition, the average transaction value will continue to fall as cards erode cash until we reach a point where debit and credit card average transaction values are closer.

In terms of overall spend value, there has been speculation that we will see some shift to debit, but I don’t see this being a significant factor. There are two reasons for this:

  • Consumers that are spending on non-rewards cards are doing so because they don’t have the money in hand to purchase with debit or cash.
  • Consumers that are interested in rewards, will still continue to chase them even if they are getting fewer points per dollar spend.

In fact, one could see a scenario where spend increases as the rewards chasers put a greater proportion of their everyday spend onto their credit card to maximise their rewards earning in a more challenging environment.

For more information please contact me, I'm always open to a conversation.

Alan Shields
Managing Director – Consulting
Ph: +61 2 9126 2600
Email: ashields@rfigroup.com

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