07 July 2018

Cryptocurrencies and Credit Cards

Funny money or smart contracts? 'Cryptocurrencies are (smart) contracts' by Simon Geiregat in (2018) Computer Law and Security Review comments
The functioning of cryptocurrencies like Bitcoin ultimately depends on participants’ agreements to selectively disclose or conceal information. Various arguments suggest that those agreements amount to a large multilateral contract to which all participants are parties. That multilateral agreement is automatically enforced through smart contract technology. Therefore, cryptocurrency “wallet holders” are simultaneously creditors and debtors of smart contract claims vis-à-vis their cryptocurrency community. 
Geiregat argues
Smart contracts are not unanimously defined. Many scholars, however, agree that the concept does not refer to contracts in the proper legal sense.  Instead, smart contracts can be described as (hardware and/or) software that initiates, controls and/or documents legally relevant acts, depending on predetermined and digitally proven events, and by means of which legally binding contracts may be concluded, depending on the circumstances. Hence, a smart contract, quite deceptively, is a technical means that can be used in the contractual sphere e.g. to execute contracts rather than simply being a legal concept. It is therefore more accurate to refer to it as smart contract technology. 
Smart contracts and blockchain 
Vending machines are an old-school example of an application of smart contract technology.  Hence, smart contracts do not necessarily make use of blockchain technology. When they do, however, trust is put in computer power and the public availability of certain information. As a result, blockchain-enhanced smart contracts are more efficient and trustworthy. Hence, although blockchain technology is not a requirement for smart contracts, its application is likely to lead to an increase in use of smart contract technologies. 
Cryptocurrency agreements use smart contract technology
From a private-law perspective, cryptocurrency systems give rise to a multilateral agreement to which all wallet-holders (aka the community) are parties (supra). When two of those parties agree to transfer coins from one party to another, both only need to push some virtual buttons. When they do, ultimately the whole cryptocurrency community automatically undergoes the effects: software automatically verifies whether the transaction is legitimate and registers the transaction if that is so. Through the architecture of the system, each wallet-holder who wishes to continue using the system, must accept that (cryptocurrency) wealth has shifted from one participant to another. This holds true, even if not all legal conditions for validity of the contract are fulfilled. In other words, cryptocurrency participants use software that initiates, controls and documents legally relevant acts, depending on predetermined and digitally proven events. In sum, they use smart contract technology.
He concludes
Cryptocurrency community members (wallet-holders or participants) are all parties to one multilateral agreement. The use of smart contract technology is part of that agreement. These findings only relate to the legal position of a cryptocurrency participant vis-à-vis his or her fellow-participants [Fig. 1]. They do not permit conclusions to be drawn as to the nature of the agreement concluded between two users who exchange “cryptocoins” for goods, services, a sum of money or anything else [Fig. 2]. Nonetheless, as a “payment” in cryptocurrency coins essentially amounts to the creation of a claim on the cryptocurrency community, the smart contract classification may indirectly alter the classification of that two-party contract. For instance, trading goods for cryptocurrency coins amounts to a trade in goods for claims rather than for money, which implies such exchange can never qualify as a proper sales agreement. In other words, lawyers who use their “(smart) contract lenses” may see a clearer picture when analysing cryptocurrency transfers.
ASIC Report 580 Credit card lending in Australia discusses the findings from ASIC’s review of credit card lending in Australia between 2012 and 2017.

ASIC comments
We sought to understand the credit card market in Australia more generally. Based on the data we collected, at June 2017: (a) there were over 14 million open credit card accounts (an increase of over 300,000 since July 2012); (b) outstanding balances totalled almost $45 billion (an increase since 2012, although balances showed signs of seasonal variation); (c) outstanding balances on cards where interest was being charged totalled $31.7 billion (a decline from over $33 billion in 2012); and (d) consumers were charged approximately $1.5 billion in fees over the previous year, including annual fees, late payment fees and other amounts for credit card use. 
Our data linking exercise indicated that 12.3 million people owned the 21.4 million cards in the dataset. There is a difference between the number of people and the number of credit cards because the linking exercise identified those consumers who were highly likely to have more than one card. 
Most consumers had only one credit card between 2012 and 2017: 62.1% of cards were not linked to any other card. Consumers with multiple cards generally had two cards. The linking exercise indicated that less than 5% of consumers had five or more credit cards between 2012 and 2017. 
Its  key findings were summarised thus
Consumer outcomes 
In our review, we identified four situations where credit card debt is potentially problematic and developed indicators for each category:
(a) Severe delinquency—The account has been written off or is in the worst state of delinquency that the relevant credit provider reported to us. 
(b) Serious delinquency—The account has been 60 days (or more) overdue in the previous 12 months. Note: There were differences in how some credit providers reported delinquency information to us. We standardised this information where possible, but there may be minor differences between providers’ cards. We have considered these differences when developing and using the indicators. 
(c) Persistent debt—The average balance of the credit card is 90% of the credit limit over the previous 12 months and interest has been charged. 
(d) Repeated low repayments—The consumer has made eight or more repayments on the account at or below 3% of the credit limit and interest has been charged over the previous 12 months. 
At June 2017, 18.5% of consumers with a card satisfied at least one of the problematic debt indicators. We found: (a) over 178,000 people were in severe delinquency; (b) almost 370,000 additional people were in serious delinquency; (c) around an additional 930,000 people had persistent debt; and (d) roughly a further 435,000 people made repeated low repayments. 
Some satisfied more than one indicator, sometimes for multiple cards. For example, at June 2017: (a) 1.7% of consumers were in severe delinquency on at least one card; (b) 5% of consumers were in serious delinquency on at least one card; (c) 10.8% of consumers had persistent debt on at least one card; and (d) 8.5% of consumers made repeated low repayments on at least one card. 
Not all consumers with persistent debt and repeated low repayments may currently be vulnerable or experiencing harm. However, consumers in these situations may be at risk of future problems, potentially driven by changes in life circumstances. These consumers may also be charged more interest compared to other finance options. 
Findings 1–2: Credit card debt is a problem for many consumers, and problems can persist over time 
We found some areas of particular concern: young people were more likely to be in delinquency, and multiple card holders were over-represented in our indicators. Additionally, over 890,000 consumers who were in problematic debt in 2013 also met our indicators in 2017. It was relatively more common for consumers to meet the persistent debt or repeated low repayment indicators in both 2013 and 2017, suggesting that there is scope for further measures to help these consumers. 
Many credit providers have promoted cards with higher interest rates that have additional ‘lifestyle’ benefits such as reward programs and longer interest-free periods. Consumer behavioural biases can mean that consumers select a card based on these promoted benefits rather than on how they are likely to use the credit card in practice. 
We looked for consumers with products that were not suited to their behaviours. Specifically, we looked for consumers who: (a) carried a balance and were repeatedly charged interest on a high-interest rate card; (b) repeatedly exceeded their credit limit; and (c) had a card with relatively high fees that they did not regularly use. 
At June 2017: (a) 19% of consumers (who we had enough information about) were charged interest for three or more months in the previous year on a high-interest rate card; Note: Some consumers were excluded from this analysis due to data issues. (b) 10.7% of consumers had exceeded their credit limit for two or more months in the previous year; but (c) we did not find evidence of consumers having cards with substantial fees that they did not regularly use. 
For consumers that were repeatedly charged interest on high-interest rate cards, we estimate that the amount of interest charged could have been reduced by at least $621.5 million in 2016–17 if interest was charged at 13%. 
Consumers with cards that were not suited to their behaviours were also more likely to satisfy our problematic debt indicators. 
Finding 3: Some consumers have credit cards that are not well suited to their behaviours or needs 
Finding 4: Few credit providers take proactive steps to address persistent debt, low repayments or products that are unsuited 
We asked credit providers whether they proactively take steps to prompt larger repayments, look for potential hardship or products that do not suit consumers’ behaviours. 
In general terms, few take these proactive steps: (a) nine of the 12 providers do not proactively contact consumers that make payments at or near the minimum amount for an extended period to prompt them to repay more of their outstanding balance; and (b) eight of the 12 providers did not proactively look for signs of potential consumer harm (other than through training frontline staff to look for signs of financial difficulty after a consumer initiated a discussion). 
Consumers who are in persistent debt, or repeatedly making low repayments, are profitable for credit providers. However, providers have obligations to conduct themselves efficiently, honestly and fairly. 
Two credit providers have begun pilot programs to proactively identify and engage with consumers that meet their own indicators of potential harm, low repayment behaviour or unsuited products. Others were considering or developing their own initiatives. 
Credit providers should implement these types of initiatives, with indicators of potential harm or problems framed to capture an appropriate pool of consumers. We consider that this is consistent with: (a) their obligations to engage in credit activities efficiently, honestly and fairly; and (b) a culture of prioritising consumers’ interests. 
Balance transfers 
At June 2017, balances had been transferred onto 7.6% of open credit card accounts. Across the five years of our review, consumers transferred $12.4 billion in balances. 
The use of balance transfers varied substantially between providers: some do not promote balance transfers and represent fewer than 1% of the accounts that received a transferred balance. By comparison, some larger credit providers held between 15% and 20% of all accounts open at June 2017 that had received a transferred balance. 
Findings 5–6: Balance transfers are more common with certain types of consumers and credit providers 
Rates during the promotional period also varied between providers, although 79% of balance transfers in our dataset had a promotional rate of 0%. Consumers said that reducing debt was a key motivation to transfer balances, and that the promotional rate was an important consideration when deciding on a particular transfer. 
Almost all balance transfers had a promotional period of 24 months or less. The most common periods were six, 12, 15 and 18 months; 60.9% of balance transfers had a promotional period of between 12 and 18 months. 
Consumers with a higher level of credit card debt across all their cards were more likely to transfer balances. 
To consider the effect of balance transfers on debt levels, we compared the total balance of all the consumer’s cards at the start of the transfer to the total balance shortly after the promotional period ended. 
We found that approximately: (a) 53.1% of consumers reduced their total debt by 10% or more, with almost 8% paying the debt off completely; (b) 15.3% of consumers maintained relatively stable total debt levels; and (c) 31.6% of consumers increased their total debt by more than 10% (with 15.7% increasing their debt by 50% or more). 
Consumers who transferred more than one balance were less likely to reduce and more likely to increase their total credit card debt during the promotional period (but achieved relatively better outcomes on later transfers). 
These findings suggest that the ‘debt trap’ risk for balance transfers noted by the Senate Inquiry exists and affects a substantial proportion of consumers. 
Despite prompts from the Senate Inquiry for credit providers to remind consumers with an outstanding debt from a balance transfer that the promotional period is about to end, many consumers do not receive any warning. The interest rate on outstanding debt after this period is usually significantly higher than the promotional rate. 
Of the 10 credit providers that offer promotional rates on balance transfers, five do not take proactive steps to remind customers who have not repaid the transferred amount that the promotional period is about to end. 
Findings 7–8: While many consumers reduce their credit card debt after a balance transfer, the ‘debt trap’ risk is real for one-third of consumers 
Finding 9: Consistent repayments may help consumers who transfer balances to reduce their debt, but credit providers can do more 
Findings 10–11: Most consumers do not cancel cards after transferring balances and continue to use them, resulting in interest charges 
Over 63% of consumers who transferred balances did not cancel any of their other credit cards. Older consumers were slightly less likely to cancel other cards after transferring a balance. 
If a consumer did cancel a credit card, this most commonly occurred soon after the balance was transferred. Consumers were progressively less likely to cancel cards during the six months after the balance was transferred. 
Most consumers (53.8%) used the card with the transferred balance. This included 21.7% of consumers with interest charges exceeding $5 in fewer than six months of the promotional period, and 32.1% with interest charges in six or more months. Consumers who used the card were less likely to reduce their debt during the promotional period. Note: We analysed card use on cards opened with a balance transfer with a promotional rate of 0%. 
Some consumers appeared to use both their old cards and their new card(s) with the transferred balance. Consumers who did not cancel a card, and who used both their old and new cards, were more likely to increase their total debt during the promotional period. 
Effectiveness of key reforms 
The Key Facts Sheet is a standardised one-page document intended to help consumers compare credit cards and choose one that suits their needs. However, the data available for accounts opened online suggests that many consumers are unlikely to have engaged with the Key Facts Sheet when applying for their credit card. 
Most credit providers offer tools to help consumers choose cards. Some provide interactive tools that prompt consumers to think about what features are important to them or how they use their credit cards. 
Under the additional requirements implemented in 2012, credit card repayments must be allocated to balances with higher interest rates before those with lower interest rates (unless the consumer requests otherwise). This reform was intended to standardise practices and prevent terms that maximised the time and money needed to repay credit card debt. 
Findings 12–14: Many consumers are not using the Key Facts Sheet when choosing a credit card 
Findings 15–17: The requirement to first allocate repayments to balances with higher interest rates saves consumers money 
This requirement has saved consumers money; prevailing practices before 2012 were inconsistent across credit providers, but generally less favourable for consumers. Eight of the 12 credit providers have applied this requirement to all their consumer credit cards. 
However, four providers (American Express, Citi, Macquarie and Latitude) continue to apply previous practices for some or all credit cards contracts entered before July 2012. We estimate that 525,000 consumers may have been charged extra interest as a result, including on more than one card. While these four credit providers are not breaking the law, they are charging their longstanding customers more interest than they should, and their conduct is out of step with the rest of industry. 
In anticipation of a new Banking Code of Practice, from 2019 Citi and Macquarie will no longer use the previous method of allocating repayments for grandfathered credit cards. American Express has also indicated it will make this change in 2019. Latitude is considering its position. 
The minimum repayment warning is a disclosure on the credit card account statement that compares the total cost and time to pay off the balance through minimum repayments with an alternate repayment which would repay the balance over two years. The warning aims to highlight the effect of making minimum repayments and encourage higher repayments. 
Based on a sample of credit cards from some credit providers in our review, we did not find evidence of a ‘spike’ in repayments at the level included on account statements.