New Zealand: credit card is king

New Zealand is well down the road towards the card payment industry’s Holy Grail of becoming a cashless society according to Lafferty Group’s latest report for the World Cards Intelligence (WCI) database.

The country’s National Statistics Office estimates that the mean share of total retail spending conducted through payment cards for the year to the end of June 2010 was 61.4 percent.

The share of electronic card transactions in the retail industries has been slowly rising as evidenced by comparable figures of 60.8 percent and 58.8 percent for the same yearly periods to 2009 and 2008 respectively.

New Zealanders are among the world’s most frequent users of payment cards, and use credit cards for everyday items rather than confining use to “big ticket” or leisure purchases.

There were 250 point-of-sale transactions (POS) using payment cards per capita in 2009, the WCI database shows.

Spend per card is also comparably high averaging around $7,300 for all payment cards which is one of the highest rates in the world.

The WCI report also shows that total payment cards spend accounted for just under $65.6 billion at the end of 2010, or 46 percent of GDP.

Perhaps unsurprisingly, given these characteristics, New Zealand is one of the most profitable credit markets, although the economic crisis and cautious consumer spending has had an impact.

In 2010, the Lafferty Group estimated profit per card to be averaging $103 (9.5 percent below the 2008 peak), representing a profit pool of $272 million.

However, the database notes that the high rate of profitability of credit cards could mean consumers are continuing to use them to meet household expenses even in tough financial conditions.

It states many issuers will need to be wary that consumers are not overstretching themselves on their credit cards as profitability relies on the loss rate on cards remaining low, and at a manageable level.

Concerns over consumer indebtedness means issuers will need to actively improve risk management and even consider rationalising their portfolios in order to prevent a potentially sharp increase in the loss rate.

However, with the 2011 outlook expected to be generally positive, issuers may feel current levels of managing risk are sufficient.

New Zealand’s economy grew steadily from 2000 supported by the strengthening of domestic demand and exports, but slipped into recession in early 2008.

The WCI report states that the economy’s contraction, fuelled by falling house prices, rising oil and food costs and a fall in demand for exports, started even before the global financial meltdown in late 2008.

The situation became significantly worse as the poor global financial climate impacted upon the economy with poor liquidity and tightening borrowing conditions affecting many businesses, while households under increasing strain led to concerns about the ability of many consumers to service their debts.

In an attempt to ease the country out of recession and to stimulate the housing market, the Reserve Bank New Zealand (RBNZ) cut interest rates in March 2009 by 1.5 percent, to a record low of 3.5 percent – down from 8.7 percent just seven months earlier.

In November 2008 the government announced a raft of measures as part of its fiscal stimulus package to improve the economy.

It included a $4 billion injection into the economy, cutting personal income tax from 2009 and a number of infrastructure and public works projects.

The database shows that New Zealand has a highly urbanised population, despite a strong agriculture-based economy, with around 72 percent of the resident population living in urban areas.

According to the New Zealand National Statistics Office in 2010, 22.1 percent of the labour force is employed in wholesale and retail industries, 18.8 percent in education and health industries, and 10.1 percent in manufacturing.

Professionals are the most common occupational group in New Zealand with other key occupation groupings including services and sales workers, legislators, administrators and clerks.

Returning to the cards payment market, WCI shows that debit cards are the dominant product in the country, accounting for around two-thirds of all cards in issue and total payment card spend.

The frequency of usage was 189 transactions per card in 2010, compared to 91 transactions per card for credit cards.

Annually, credit card usage, as a proportion of the total transaction value, has been falling since 2006 from 36.3 percent to 33.2 percent at the end of 2010.

Payment cards are well penetrated in New Zealand, averaging 2.5 payment cards (whether debit or credit) per New Zealand adult.

There are approximately 152,266 EFTPOS terminals operating in New Zealand which equates to over 35 terminals per 1,000 people, one of the highest in the world. By comparison the EU averages around 16 to 18 terminals per 1,000 people.

New Zealand has a strong and developed credit cards market which compares favourably with some of the most advanced markets throughout the world.

At the end of 2010, there were fewer than three million issued cards on the market, which represents a penetration rate of approximately 76.2 percent of adults.

Credit cards are overwhelmingly used as a means of payment in New Zealand with around 90 percent of billed volume spend and 93 percent of transactions volume being made at the POS in 2010.

New Zealanders use credit cards as short-term borrowing facilities as illustrated by the high rollover rates on credit card outstandings, which at the end of 2010 was 66.2 percent.

The number of credit cards in issue declined in 2009 and 2010 due to a combination of issuers, tightening credit conditions and a more cautious public.

Following regulatory action against interchange in neighbouring Australia, New Zealand’s Commerce Commission began its own investigation into what it regarded as anti-competitive arrangements between banks and credit card companies on the fees they charged to retailers for credit card transactions.

Under a settlement with Visa and MasterCard in 2009, banks issuing credit cards can individually set the interchange rates that will apply to transactions using their credit cards, subject to maximum rates determined by the network, which will be made publicly available.

The settlement also allows merchants to surcharge customers for credit cards usage and actively encourage customers to pay by other means.

This settlement could have a major impact on the future growth of credit cards in New Zealand. With merchants being allowed to surcharge and to encourage card holders to use other payment methods, consumers’ demand for credit cards could be further eroded.

Issuers will need to ensure the package offered on their credit cards is sufficient to mitigate these negative pressures. In Australia, for example, despite the intense regulatory environment, issuers have been successful in growing the credit cards market by developing products (specifically low cost ‘no frills’ cards) to meet the market conditions.

The settlement also means you no longer have to be a bank to issue a credit card; non-bank organisations or companies who want to provide acquiring services to merchants are now allowed to join the Visa or MasterCard network as acquirers – if they meet the relevant criteria.

Debit cards exceed credit cards in terms of number of cards, billed volume and number of transactions.

Since the EFTPOS scheme was introduced by the RBNZ in the 1980s, consumers have embraced debit cards.

Debit cards, as with credit cards, are predominantly used as a means of payment. The split between POS and ATM transactions has increased gradually over the last decade and purchases at the POS in 2010 account for around 81.5 percent of total debit card transactions, and 56.2 percent of total spend.

The strength of New Zealand’s debit cards market is highlighted by the country’s high merchant acceptance and vast POS infrastructure. At the end of 2009, there were approximately 150,000 EFTPOS terminals operating in New Zealand.

The average spend on debit cards is also high, working out at approximately $7,373. This translates to 28 percent of the average working wage.

International networks have only recently entered the New Zealand debit cards market in comparison to other markets.

Prepaid cards are very popular in New Zealand, with a wide variety of products available. These include gift and travel cards as well as reloadable alternatives to standard debit and credit payment cards.

New Zealand’s consumer finance market has one the highest levels of indebtedness in the Asia-Pacific region and the world, leveraged particularly on mortgage loans.

The household debt to disposable income ratio has risen appreciably from 59 percent in 1991 to 178 percent in 2010 and the ratio is estimated to continue rising through to 2012.

With high household indebtedness and the fallout from the economic crisis, demand for credit is expected to remain subdued as households shift their spending habits and look to tighten their budgets.

As well as tightening credit conditions, demand for borrowing by consumers has also dropped as high unemployment and weak income growth has limited the recovery in household consumption. Many consumers are facing greater challenges in accessing, using and repaying credit.

As far as networks are concerned, New Zealand’s competitive credit cards market is represented by all four of the big international brands: Visa, MasterCard, American Express and Diners Club; although the latter has an insignificant share in the consumer credit cards market.

Visa is the leader in New Zealand’s credit cards market in terms of number of cards in circulation, billed volume and number of transactions with a market share of around two-thirds.

MasterCard is a distant second with 759,000 credit cards in circulation, or 29 percent while the share of other networks in the market, including American Express, Diners Club and private label cards, has been fairly constant over the last few years, albeit slightly declining. At the end of 2010, there were an estimated 130,000 such credit cards.

The debit cards market remains dominated by EFTPOS, the domestic debit scheme. However, in 2007, Visa became the first international network to launch a debit card product in partnership with Westpac.

More recently Kiwibank, BNZ, National Bank and ASB have also begun offering Visa debit products in New Zealand.

The New Zealand banking landscape is composed predominantly of domestic banks, Australian banks and other domestic banks with majority shareholding by Australian banks. Other foreign banks, such as Citi and HSBC, have a presence in New Zealand, although less significant compared to Australian banks.

Three issuers dominate the credit cards market: ANZ National, BNZ, and Westpac. These banks account for over three quarters of cards issued in New Zealand, highlighting a highly concentrated banking market. ASB and Kiwibank are also significant issuers which have grown their presence over the last five years.

New Zealand’s four major domestic banks – ANZ National, BNZ, Westpac and ASB – all provide merchant acquiring services, including Visa and MasterCard credit card transactions. EFTPOS NZ (owned by the ANZ National) and Paymark (owned by ASB, Westpac, BNZ and also ANZ National) provide the switching services for payment card transactions in New Zealand.

For more information on World Cards Intelligence please contact steven.cowan@lafferty.com.