Starting and running a business using a credit card may be seen as a back-up funding option by many budding entrepreneurs, but new legislation that came into force at the start of the month could be set to alter this view.
On July 1, the latest round of credit card reforms came into effect. The reforms are designed to offer card holders a fairer deal, which is potentially good news for cash-strapped start-ups, albeit with some drawbacks.
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New account switching arrangements will make it easier for people to move their everyday transaction account from one financial institution to another, including all of those regular direct debits and credits.
So what exactly has changed and how will it affect your business? Fred Schebesta, founder of CreditCardFinder.com.au, outlines everything you need to know.
1. What’s different from before?
Changes to all credit card contracts:
- Banks and lenders are no longer able to send out unsolicited credit limit increase offers unless the card holder has agreed to it first.
- All credit card statements must show personalised information about how long it will take to pay off a credit card’s outstanding balance, making the minimum repayment only.
- Consumers must be provided with a key facts sheet about the card they are applying for and other cards offered by a lender – before the application is complete.
Changes to all new credit card contracts in place after July 1, 2012:
- Ban over-limit fees and inform customers when they’re going over-limit.
- Allocate credit card repayments to the debt on the card that’s attracting the highest interest charges first. This was previously at the bank’s discretion.
2. How will the changes benefit small business owners?
“These reforms are aimed at the most debt-stricken credit card holders in Australia, as they aim to make it faster and easier to repay your credit card balance,” Schebesta says.
“Small business owners or not, the people who will see the greatest benefit from these reforms are the credit card users who carry a range of debts including balance transfers, purchases and cash advances.”
“Small business owners who use their card for cash advances/purchases or balance transfers will see the most significant savings on their business credit card repayments.”
3. Are there any drawbacks?
“The main issue is that the reforms in full have not been applied retrospectively to all credit card contracts prior to July 1, 2012.”
“Some card holders will only see some of the changes as some reforms apply to new credit card contracts only.”
“The second issue is that the new reforms that make it easier to transfer direct debits when switching transaction accounts won’t apply to credit cards.”
“Another issue is that industry analysts Jeremy Cabral (CreditCardFinder.com.au) and Michael Ebstein (MWE Consulting) believe the government reforms will damage the industry as a whole.”
Ebstein admits individual reforms are logical and make sense.
“But something I think that legislators lose sight of in their endeavour to protect the vulnerable segments of the community is they impose costs on the industry, which therefore flow to the total industry, which are disproportionate to the benefits which will flow to the vulnerable,” he says.
4. So what do start-ups need to be aware of?
Schebesta says the reforms focus on card holders who are in debt and don’t use their cards responsibly, which could end up hurting business owners.
“It may mean card users who have been more responsible with their spending, like many business credit card holders, may be punished in the form of less competitive offers or a higher annual fee rolled out by the banks to subsidise lost revenues due to the reforms,” he says.
According to Cabral, card holders should consider switching credit cards and locking in a deal before the industry has the chance to adjust their product margins in a post reforms market.
“It’s likely the banks will have to eventually change their offers to subsidise any lost revenues due to the reforms,” he says.
5. Are the reforms likely to change again?
“Look back to 2003 with the RBA’s Payments Systems Board, they changed the rules around interchange fees with card schemes and have met recently to look at what these reforms have done over the past decade, which led to more reforms,” Schebesta says.
“You can bet your top dollar that a similar board from the Treasury will be meeting to discuss effects of reforms in a couple of years’ time.”
Schebesta says it is worth mentioning that the latest round of reforms failed to address account switching with credit cards.
“The reforms which make it easier for you to transfer the direct debits on your transaction account don’t apply to credit cards,” he says.
“This still presents a barrier to switching credit cards and should be addressed in the next round.”