Banks won’t pass on rate cuts. Why are we not surprised?

The failure of Australian banks and other credit card providers to pass on interest rate cuts shows they just don’t get it, writes Gerard Brody. What will it take for banks to show Australians respect?

The failure of Australian banks and other credit card providers to pass on interest rate cuts shows they just don’t get it.

Following the Banking Royal Commission, the Australian Banking Association acknowledged that the sector’s failures have caused deep hurt, suffering and heartache for too many customers, and said that they must change. The claim was that “banks are determined to learn the lessons, fix the problems and make it right”.

However, while the cash rate has dropped 3.75 per cent since 2011, it is clear that very little of this has flowed through to rates on credit cards.

Rather than drop, credit card rates have increased. Picture: istock

According to one analysis, rather than coming down, credit card rates have actually increased by 2.9 per cent on average over this time, netting credit card providers a profit of $5.2 billion.

The reason credit card interest rates have not come down is because competition has failed and because banks and other credit card providers hold significant market power. The simple fact is that competition cannot work to keep a lid on interest rates.

This is because when we apply for a credit card, we optimistically (and often mistakenly) believe that we will be always able to pay off the balance by the end of each statement period, and hence won’t be charged interest. The rate of interest is just not a relevant consideration.

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Instead we focus on rewards such as vouchers or frequent flyer points, or the level of annual fees. The irony is that cards with lower annual fees are likely to come with higher interest rates. And this is why it is common to see credit card providers continue to charge interest rates of more than 20 per cent per annum.

It is clear banks have not done very little to pass on interest rate cuts to credit cards. Picture: istock

The banking association’s claim that credit card industry is “fiercely competitive” is simply false. While there may be more than 200 options in the market, there is little evidence that all these options are leading to safer choices.

A key example is the commonly promoted balance transfer card. Comparison websites frequently promote these cards right at the top of the list. However, these cards can be the most expensive.

ASIC research shows that around one million cards accounts had a balance transferred onto them at some stage — almost 10 per cent of all open card accounts. ASIC also found that reducing debt is a key motivation for transferring balances. Despite this, more than 30 per cent of customers increase their debt during the balance transfer promotional period. In other words, these cards are a ‘debt trap’.

Many people are trapped by high credit card rates. Picture: istock

There have been important law reforms to credit cards from January 1 this year. New rules include a requirement that credit card providers assess whether you can repay the full credit card limit over a 3-year period.

This change is already protecting people from being given unaffordable credit card limits, which has been a common practice in the past.

However, the change doesn’t help the millions of customers out there with credit card debt that is unaffordable.

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Much of the unaffordable limits have been driven by unsolicited credit card limit increase offers. For example, it is not uncommon to see someone who initially received a credit card with a low limit, but only to be encouraged to increase the limit over time.

The Royal Commission examined this issue and found that it is likely that unsolicited offers of credit are likely to have breached existing responsible lending requirements. This is because the lender is, before offering credit, obliged to inquire about the customer’s requirements and objectives for the money.

Commissioner Kenneth Hayne and Treasurer Josh Frydenberg with the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Picture: Kym Smith/News Corp Australia

According to Commissioner Kenneth Hayne, lenders “would find it hard, if not impossible, to show compliance with those requirements, if only because it is not for the lender to impose its judgment of what the consumer requires or ‘needs’ and it is not for the lender to impose its judgment of what objectives the consumer could have (even should have) in taking up a proffered line of credit”.

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Given Commissioner Hayne’s comments, it is incumbent on the banks and other credit card lenders and assess whether unsolicited credit card limit increase offers were provided irresponsibly in the past. If this is the case, they should proactively offer debt relief.

While banks and credit card providers may have market power when it comes to setting interest rates, they should not be able to escape compliance with existing laws.

If limits provided irresponsibly are reduced through debt relief, more people will be able to afford their monthly credit card bill and will be less likely to be trapped by persistently high credit card interest rates.

Gerard Brody is CEO of the Consumer Action Law Centre