Credit crackdown concern as banks commit to addressing credit card failures

The corporate regulator has unveiled a new voluntary framework to address bank failures in credit card lending, prompting concern about a possible credit crackdown.

Yesterday ASIC announced Australia’s 10 largest credit card providers had signed up, to varying degrees, to new commitments designed to ensure responsible lending to credit-card holders.

It followed a report earlier this year which found more than one in six Australians are struggling with credit-card debt.

Under the new voluntary arrangements, ASIC said it expects credit providers to take proactive steps to address “problematic credit card debt” and minimise extra credit to customers who exceed their limits.

ASIC’s initial report found almost 550,000 people were in credit arrears, and an additional 930,000 had persistent debt.

The regulator said it will be monitoring lenders over the next two years to ensure they address issues identified in its review, but for small businesses using credit cards, it could represent a possible cashflow problem.

Australia’s small business and family enterprise ombudsman Kate Carnell says the measures are welcome changes but is worried about unintended consequences if providers need to crack down.

“The great dilemma in the small business space is that they tend to be very lumpy, they use credit cards when they might have a cashflow problem, or when they have an unexpected requirement, a machine breaks down or whatever it might be,” she tells SmartCompany.

“What would be a really bad outcome is if the availability of business credit cards became more difficult as a result of this.”

Small businesses regularly rely on credit cards, both personal and business-specific, to finance their operations.

A survey of over 1,200 SMEs conducted by Scottish Pacific last year found about 67% rely on personal finance options such as credit cards to ease cashflow problems.

A further 66% said they prefer using a credit card over other solutions for cashflow issues, such as offering suppliers discounts for early payments.

An earlier report by the Australian Bureau of Statistics in 2015-16 found 15.3% of SMEs seek out credit cards when looking for additional finance.

Credit card expert and adjunct professor at Swinburne University of Technology, Steve Worthington, told SmartCompany earlier this year some small businesses were getting in trouble with credit-card debt.

“People take out a credit card, then find themselves unable to repay the debt in full every period. They extend that debt, and pay huge amounts of interest, sometimes up to 20%, on new cards,” he said.

The banks subject to ASIC’s review include American Express, ANZ, Bendigo and Adelaide Bank, Citigroup, Commonwealth Bank, HSBC, Latitude, Macquarie, NAB and Westpac.

In total, nine large providers have committed to taking proactive steps to help consumers with problematic debt, while nine providers said they’ll adopt a fairer approach to balance transfers.

Nine said they will lower the amount by which cardholders can exceed their credit limits.

“We will be monitoring lenders over the next two years to make sure they have taken action to address our concerns and to ensure that consumer outcomes are improving in the credit-card market,” ASIC commissioner Sean Hughes said in a statement on Tuesday.

Diving deeper into the commitments each bank has made, three of the four major banks has implemented changes or is piloting changes to improve consumer outcomes.

ASIC said measures include tailored communications with customers and tailored payment arrangements.

Carnell says the non-legislative approach to addressing issues in the space is appropriate at this stage, but that a tougher instrument will need to be considered if the banks don’t lift their game.

“The thing is for ASIC to keep a very close eye on it and if the commitment from the banks aren’t delivered on they’ll need to look to a legislated regulated solution,” she says.