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10.02.2023

The impact of regulation on credit card market competition: evidence from Australia

verfasst von: Ming-Hua Liu, Dimitris Margaritis, Yang Zhang

Erschienen in: Journal of Economics and Finance | Ausgabe 3/2023

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Abstract

Using an error-correction style ARDL model and bounds tests for co-integration, we examine the impact of credit card reform on the relationship between credit card interest rates and funding costs in Australia. Our results show that after a major reform was carried out in the early 2000s, Australian banks reduced the spread between credit card lending rates and deposit rates. In both the long term and the short term, credit card rates were more responsive to changes in the cost of funds. However, after the outbreak of the GFC, the impact of the reform has been more than reversed and there is no evidence further reforms have bucked this trend.

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2
Among others, the new rules and guidelines stipulate that monthly minimum payment by cardholders should be increased to help break the cycle of persistent debt; unsolicited increase of credit limit should be banned; and increases in interest rates on debt already incurred should not be allowed or be restricted.
 
3
For example, card issuers would be able to set the interchange fee individually subject to the maximum rates determined by Visa. The rates would also be made publically available. Merchants will no longer be restricted from applying surcharges to payments made by credit cards. Visa also agreed to open its network to non-banks subject to certain financial and prudential criteria. The Commission also filed proceedings against various banks and card companies who were accused of breaching the restrictive trade practice provisions of the Commerce Act. Currently, the Commission is investigating how retailers handle these fees and the extent to which they pass them onto their clients amid concerns that some merchants are applying excessive surcharges.
 
5
There are two types of credit cards in Australia: those with an interest-free period and those without. The first type is far more popular. For example, as at November 2009, there were 12.638 million such accounts with a total credit limit of A$115.58 billion, or an average credit limit of A$9,146 per account. In comparison, there were only 0.582 million accounts that do not have interest-free period. The total credit limit was A$3.118 billion or an average of A$5,357 per account. The number of the 1st type account increased by 128% over the period 1994-2009 whereas the 2nd type account decreased by 43% over the same period. In terms of transactions, cash advance transactions accounts for 8.84% of the total transaction value of A$16.42 billion in November 2009. The average size of cash advance was A$372 and the average purchase transaction was A$131. The outstanding balance was 41.866 billion in November 2009, in comparison, the amount was A$5.166 billion in May 1994. By June 2017, the number of credit card accounts increased to 14 million and outstanding balance increased to about A$45 billion, A$31.7 billion of which were incurring interest charges.
 
6
Interestingly, when the RBA implemented the credit card reform in 2003, banks’ fee income from credit cards grew by nearly 40%, followed by another increase of 27% in 2004, due to growth in annual membership fees, higher credit card spending, as well as increases in charges for late payments, overdrawn accounts, and cash advances (RBA 2004). And theses increase in fee income came at the back of a reduction in interchange fees that amounted to about A$500 million loss of potential fee income in 2004, according to RBA estimates.
 
7
We have tested for unit root in the interest rate series using standard Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests. We find that all level series are nonstationary unit root processes. We present the unit root test results in Appendix Table 7. However, these tests should be interpreted with caution as they are known to suffer from low power and size distortion problems. In untabulated tests, we also tested for unit roots by allowing for a break at an unknown point in the series. Again, we found all level series to be unit root nonstationary processes.
 
8
As shown by Phillips (1995), the FM-OLS estimator has some very attractive features. It is applicable in models with either full rank or cointegrated I(1) regressors as well as in models with stationary regressors. In all such cases, the estimators retain their optimal asymptotic properties.
 
9
In untabulated tests, we have also tested for cointegration using the Johansen cointegration test. The Johansen trace and max eigenvalue test statistics confirm the bounds test results of the presence of a cointegrating relationship between credit card lending rates and the cost of funds measures. Moreover, they show that the cost of funds variables are weakly exogenous.
 
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Metadaten
Titel
The impact of regulation on credit card market competition: evidence from Australia
verfasst von
Ming-Hua Liu
Dimitris Margaritis
Yang Zhang
Publikationsdatum
10.02.2023
Verlag
Springer US
Erschienen in
Journal of Economics and Finance / Ausgabe 3/2023
Print ISSN: 1055-0925
Elektronische ISSN: 1938-9744
DOI
https://doi.org/10.1007/s12197-023-09619-w

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