How a legal loophole lets CBA and Westpac charge their most loyal customers more

Commonwealth Bank and Westpac are using a legal loophole to penalise long-term customers who max out their credit cards – dubbed a “loyalty tax” by critics – despite the fees being banned for new accounts more than 14 years ago.

Overlimit fees, charged when a customer exceeds the limit on a credit card account, are illegal for banks to charge by default for any customer who opened their facility after June 2012, as part of reforms brought in by the Gillard government.

Despite CBA and Westpac each announcing recent overhauls to their credit card programs – ahead of looming Reserve Bank changes that include a ban on card surcharges and a cap on interchange fees that fund rewards perks – they have not scrapped the overlimit fees charged to long-term account holders by default.

A CBA spokesman said that the bank was “currently reviewing our credit card products and fees”. However, a “legacy fee of $15″ continued to apply to customers with credit card accounts opened before mid-2012 if they exceed their agreed limit.

“Customers can opt out of the overlimit feature at any time if they no longer require this option,” the CBA spokesman said.

A Westpac spokeswoman confirmed it continued to charge its overlimit fee to credit card accounts opened before June 2012.

“Customers with these accounts can contact us to discuss options available to have transactions declined where there isn’t sufficient credit available, helping them to avoid going over their agreed credit limit and incurring a fee,” the Westpac spokeswoman said.

In some circumstances, banks are allowed to charge overlimit fees to accounts opened after mid-2012, provided the customer expressly consents to incur such fees when activating an overdraft capability for their credit card.

The Gillard-era ban applied only to newly opened accounts, allowing banks to continue to charge established customers fees for each month they exceeded their limit.

Australia’s major banks responded to the legal changes in various ways. Most moved to a system where transactions that would take a credit card beyond its limit are declined by default.

NAB phased out overlimit fees for all cardholders before the ban was introduced, meaning old and new customers alike do not incur such fees. ANZ removed the fees for pre-2012 customers with its base level credit card accounts, but continues to charge a $20 fee in some instances to long-term customers.

However, CBA, with a market capitalisation of $268 billion, and Westpac, with a value of $119 billion, continue a broad policy of charging $15 overlimit fees to credit card holders who established their accounts before the mid-2012 ban.

The onus has been on customers to contact their bank to opt-out of the facility to exceed their credit limit and incurring the fee. Each bank charges the fees only once a month, when a limit is exceeded, as opposed to per transaction over the limit.

Even if a customer changes to a different credit card or if the product is phased out, moving them automatically to a new credit card, the fact their credit account was opened before mid-2012 means the banks can legally continue to charge the fees.

Consumer Action Law Centre chief executive Stephanie Tonkin called on the banks to remove the fees she described as “a loyalty tax”.

“Why keep them only for their most loyal customers?” she said. “The Aussies who end up paying these fees may well be among the lowest income people in the community as they struggle to make ends meet each week, so this is a classic example of the poverty premium at play.”

Tonkin said switching products or institutions to avoid the fees “isn’t that easy, and this is the penalty for those people experiencing barriers”.

“To continue to charge is not in the spirit of the law, is a fundamental failure of the bank’s social licence and not in line with community expectations,” she said.

CBA and Westpac did not provide details for how many customers hold accounts that attract the $15 overlimit fees.

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