If our financial markets regulators are serious about making the banks they regulate consider their customers' long-term outcomes they could start by plucking the low hanging fruit of credit cards.
The Financial Markets Authority and Reserve Bank report on bank conduct and culture this week suggested establishing basic legal duties on banks to protect or enhance customer interests and outcomes. Credit cards are an obvious product where the long term benefits to their users can be questioned.
Over the past few years interest.co.nz has, on several occasions, highlighted a baffling lack of interest in credit cards from our regulators. Most recently we did this in July.
On that occasion we noted an Australian Securities and Investments Commission (ASIC) report on credit card lending in Australia had again contrasted with the dearth of interest from New Zealand authorities in credit cards, their high interest rates and their debt trap potential for consumers. ASIC, in contrast, highlighted concerns with problematic credit card debt.
This year's Ministry of Business, Innovation & Employment discussion paper on the Government's review of consumer credit regulation mentioned credit cards just three times. And "credit card(s)" did not appear in a single one of the paper's questions seeking feedback.
And in 2015 the Commerce Commission told us there are no restrictions on NZ credit card interest rates with constraint provided by the competitive market, and credit card interest rates aren't something it would investigate unless evidence emerged of collusion between banks to set rates at a certain level.
Meanwhile ASIC's report estimates Aussie consumers, repeatedly charged interest on high-interest rate cards with a purchase rate of more than 20% for three or more months, paid at least A$621.5 million more, in 2016-17, than they would have if interest was charged at 13%. ASIC also highlighted a "debt trap" risk for consumers when making balance transfers between credit card issuers. That's because 31.6% of consumers making balance transfers increased their total debt by more than 10% with 15.7% increasing their debt by 50% or more.
A highly profitable market
Interest.co.nz's credit card page shows numerous NZ credit cards with purchase interest rates at or above 20%. In today's low interest rate world, with an Official Cash Rate mired at a record low of 1.75%, how can such high interest rates be justified?
Two years ago when The Co-operative Bank launched its credit card, with annual interest of 12.95% for both purchases and cash advances, the bank's then-CEO Bruce McLachlan said credit card interest rates and fees "have been ridiculously high for too long." McLachlan was right.
This year's Financial Institutions Performance Survey (FIPS) from KPMG showed banks' profits at $5.19 billion and banks' funding costs at 2.82%. These were the highest profits and lowest funding costs in the 31-year history of the FIPS. And credit cards are a profitable area for NZ banks. In 2016 the London-based Lafferty Group cited NZ as the seventh most profitable credit card market out of 72 countries it surveyed.
"Pre-tax profits reached $275 million in 2015, an increase of 2% compared to 2014. It is forecast to reach $297 million by 2018. Profit per card reached $105 in 2015, compared with $88 in 2010. It is forecast to reach $114 by 2018," Lafferty said.
At $105 per card, profitability in NZ was up $17, or 19.3%, over five years.
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