Banks claim credit interest rate fees are used to fund costly infrastructure

Banks have defended that high interest rates they charge consumers for using credit cards are justifiable, given that they use the funds to cover the cost of running backend infrastructures.

During a Senate inquiry into matters relating to credit interest rates on Tuesday, Labor Senator Sam Dastyari questioned the banks on how they divide the funds they collect through interest rates charged on credit cards.

According to Dastyari, Australians are paying AU$1.5 billion in credit card fees annually, and at least between AU$1.5 billion to AU$1.7 billion in interchange fees.

In the bank's defence, Diane Tate, Australia Bankers' Association retail policy director, said part of the funds banks collect through credit interest rates are used to service the infrastructure used to operate credit cards.

"For most people you think you put [your card] into an Eftpos machine or you tap and go, and suddenly, miraculously a transaction is made but there is a significant amount of cost that goes into the infrastructure, which is global infrastructure," she said.

"Years ago you could use a basic bank card and pay for certain services...now you can use low fee, low rate, or rewards scheme cards to pay anywhere in the world, so that includes fraud management, security management, and the security infrastructure."

In further detail Tate said fraud management includes tracking how and where people are spending their money, and that requires a "huge backend infrastructure banks have to put in place to manage this".

Another point that was raised during the inquiry suggested that if consumers had access to the history of their own behaviour they would able to make better assessments of what credit card products are suitable for them.

The banks responded suggesting that it would consider the opportunity to "modernise disclosure" of consumer information, but said it would raise "complex issues" of big data.

"We need to resolve at a community level our views of the use of data, and it's not just a bigger question for banks and the financial services industry. From our perspective the more we are able to provide information to consumers, the more we're able to provide tailored information, streamlined disclosures the better," Tate said.

Scott Gregson, Australian Competition and Consumer Commission executive general manager of Consumer Enforcement, said the industry needs to consider how to reduce the cost and increase the ease of switching between credit cards to "enliven competition".

Dastyari agreed, recommending the banks need to consider implementing new policies that would enable greater credit card portability.

"That's around giving consumers the ability to take numbers with them but also be able to switch easier," he said.

Other policy recommendations Dastyari made included seeing banks match government investments in financial literacy programs; change the rules to allow more competition in different times of lending, including greater ease for peer-to-peer lending, and more flexible and tailored lending rates; higher minimum repayments; and restriction or controls around advertising including totally banning unsolicited offers even if people choose to opt-in.