Thursday, May 11, 2006

Bank dicks

At the International Consumer Credit Card Summit 2006 yesterday representatives of the major Australian banks warned of the fearful consequences of low interest rate credit cards in Australia. Ms. Jenny Fagg, Managing Director Consumer Finance of the ANZ, warned, in this morning’s AFR (subscription required), that competing low-rate credit card segments ‘can’t make money’. The ANZ Rewards and Frequent Flyer Visa Cards prevent such difficulties by charging 18.75% interest on loans while the interest paid on a Progress Saver Account is 3.51%.

The margin here will be justified (with academic hack support) because the banks do almost no checks on credit ratings so the interest rates must reflect expected default rates. They capture both good and bad borrowers and charge high rates so that the good borrowers cross subsidise the losses of the bad.

Well why not do a credit check on customers that customers themselves are offered the chance to pay for? Why not the following deal? The banks will provide credit card loans at the deposit rate plus 2% (a healthy profit margin) if a customer agrees to provide security covering the limits on such a card at the customer’s own expense. So the customer provides a mortgage on assets (his or her home or other assets) as they would with a normal personal loan or overdraft, then pay interest of 5.51% on debt but agree to cover all costs of arranging such security including costs associated with debt recovery should they default.

I don’t believe the Australian banks would offer such a deal because the high margins on credit card debt are a major determinant of their profitability. The margins in fact are much greater than those required to cover default costs - they are large eenough to suggest the banks are inefficient oligopolists who, apart from offering poor customer service, provide uncompetitive access to credit. They inhibit economic growth, the efficiency of capital markets and they unfairly penalise ordinary working Australians.

And the best the banks can offer is the pathetic argument that the high rates they charge are saving other financial institutions from losses and borrowers from bankruptcy. And don’t tell me about the special rates of 9-11% they offer ‘approved’ customers. These too are excessive. And personal loans at lower interest rates (still with high bank margins built in) do not have the negotiability and convenience of credit cards as sources of short-term debt.

Three cheers for the full gale force of competition. Its already at hurricane intensity - Australians acquired nearly 1 million new credit cards in the first 3 months of this year - and most of these would be switches away from the high interest cost cards offered by major banks to more commercially reasonable alternatives.


Robert Merkel said...

While I'm on my late night posting spree, you are aware that the profitability of high interest rate cards varies hugely between customers?

As I understand it, if you pay off your balance in full every month the bank barely makes any money out of you, once you add in the cost of the short-term credit extended and the rewards schemes. So my guess is those customers who don't do so on the high interest rate cards with rewards schemes and interest-free periods are massively subsidising those who don't.

So do us a favour, Harry, and stop telling the world they're getting ripped off on credit cards; it'll only make things less attractive for those of using the system to its best advantage :)

hc said...

Robert, That's right. It you pay your advance off each month the credit card companies only make what you pay for the card and the commission paid to them by stores.

So people seeking short term credit cross-subsidise both bad debtors and those who don't seek to take advantage of a few week's credit.

So my suggestion - allow people to pay for all costs associated with getting their credit worthiness assessed, lodging security and paying the costs of debt recovery, Then offering them more market-related borrowed rates comparable to those on a personal loan.

If you don't wanmt to do this you can stick to the current arrangements and not be disadvantaged.