Submission to the Inquiry into Competition in the Banking and Non-Banking Sectors 4. Personal Lending Market

Competitive pressures have also been evident in the market for personal credit, particularly credit cards, over recent years. The five largest banks currently account for just over 70 per cent of outstanding credit card balances, which is down from 84 per cent in 2002 (Table 4). Over this period, the market share of foreign-owned banks has increased from around 7½ per cent to 13 per cent, with non-bank financial institutions also increasing their market share significantly, from 6 per cent in 2002 to nearly 15 per cent currently.

Competition in the credit card market has taken a number of forms. In the mid 1990s, it largely manifested itself in the introduction of loyalty, or ‘rewards’, points rather than a reduction in interest-rate margins.[7] More recently, following the Reserve Bank's reforms to card-based payment systems in 2003 (which saw a significant decline in interchange fees paid between banks) there has been significant competition in the ‘no-frills’ cards market, with these cards offering lower interest rates than traditional cards (but typically no loyalty points). These no-frills cards are likely to appeal most to people who do not pay off their credit card balance in full each month and so incur interest charges on a regular basis. Over recent years, some credit card issuers have also attempted to attract business by offering discounted introductory rates or interest-rate concessions on balance transfers for certain periods.

Notwithstanding these competitive pressures, the average interest-rate spread (to the cash rate) on standard credit cards has trended up over the past decade, although this spread was largely unchanged from the beginning of 2002 to mid 2007 (Graph 9). The increase since mid 2007 partly reflects banks' higher funding costs, while the longer-term increase is partly explained by the competition for standard credit cards focussing on features other than interest rates. Spreads on no-frills cards have also increased over the past six months or so, but remain lower than when these cards were introduced earlier in the decade.


See, for example, Gizycki, M and Lowe, P (2000), The Australian Financial System in the 1990s, in Gruen, D and Shrestha, S (eds), ‘The Australian Economy in the 1990s’, RBA Conference, July. [7]