Commonwealth Bank’s crafty credit card ripoff  --- THE NEW DAILY   Aug 10, 2016    George Lekakis

Commonwealth Bank boss Ian Narev owes a big debt to 4.2 million Australians who hold one of his bank’s overpriced credit cards.

That’s because credit card customers bore the brunt of the bank’s opaque pricing policies that drove its record-breaking profits of the last decade.

Mr Narev unveiled another bumper result on Wednesday, with the 2016 net profit rising 2 per cent to a massive $9.22 billion.

But the result has triggered renewed concern among consumer advocates about how the bank’s pricing strategy discriminates against certain types of borrowers.

Credit card holders at CBA are paying more interest today to service their debts even though funding costs of the bank have fallen dramatically in the last 10 years.

The CBA’s credit cards have not followed Reserve Bank governor Glenn Steven’s rate cuts.

Since 2007 the Reserve Bank has lowered official rates to the current historic low of 1.5 per cent from 6.25 per cent.

While political pressure on CBA has ensured that mortgages and business loans are now cheaper than in 2007, the bank has forced credit card holders to subsidise the benefits flowing to other types of borrowers.

CBA has increased the interest rate on its so-called “low rate” Mastercard to 13.49 per cent from 11.74 per cent in June 2007.

During the same period the rate on CBA’s standard variable home loans fell by 1.4 per cent and the cost of business overdrafts dipped more than 1 per cent.

The gouging of credit card customers is so extreme that consumer advocates are vowing to turn up the heat on CBA and other banks to reprice these products in line with their true costs and risks.

“It is outrageous that as a key cost for banks has plummeted, that they have raised interest rates on credit cards,” CHOICE chief executive Alan Kirkland told The New Daily.

“This points to a major issue with competition in the banking sector.

“CBA is getting away with hiking prices on what should be a low cost product.”

It’s a similar story with the bank’s other credit cards, including the Low Fee Card, which has risen to 19.74 per cent from 18.15 per cent in 2007.

Rising credit card rates at CBA and other major banks make a mockery of the era of cheap money that dawned in 2011 when the Reserve Bank embarked on a sustained bout of rate cutting.

In the years since the global financial crisis, the CBA and other banks have tried to argue in public forums that default risk on credit cards has been rising and that funding costs have increased.

These arguments contradict disclosures made by the CBA and other major banks in their own financial reports.

Myth #1: Default risk is rising

Fewer Australians are falling behind on their card debts.

According to CBA’s own annual reports, the number of borrowers unable to service their credit card debts has actually fallen since 2007.

In that year around 2.7 per cent of customers were 30 days or more behind on their credit card repayments compared to only 2.4 per cent of customers in the year to the end of June.

In other words, credit card customers are more likely to repay their debts on time in 2016 than they were in the 2007.

CBA’s directors actually highlighted this good news story this week when they told shareholders that “the arrears for the home loan and credit card portfolios are relatively low”.

This positive trend is lowering costs borne by the bank, but none of the benefits are flowing back to customers.

Myth #2: Margins are being squeezed

Bank lending is now more lucrative, so why the onerous credit card fees?

The other argument that has been trotted out by the CBA for not providing rate relief to credit card customers is that competition has put a squeeze on profit margins.

This defence also lacks credibility simply because CBA’s overall margin on all forms of lending has actually improved since the financial crisis hit in 2008.

Back in 2008 CBA was earning net interest revenue of $2.06 on every $100 it lent to Australian borrowers.

But in 2016 it was generating $2.15 on every $100 it lent.

So, the bottom line is that margins have gone up in the last decade, which has helped the bank to profit more from each dollar it lends.

Depositors skinned for a decade

Apart from credit card customers, savers have also been subsidising the bank’s margins and bottom lines since 2007.

Back then CBA was paying average interest of 5.1 per cent to retail depositors, but this more than halved to 2.54 per cent in 2016.

The great bulk of CBA’s loans are funded through deposits from households and business customers.

While the bank does not disclose specific details about the profitability of its credit card business, disclosures in its financial accounts suggest that the margins on its low rate credit are at least five times the return it gets on each dollar it lends to home borrowers.

The profit margins are even fatter for gold and platinum credit cards that carry interest rates of more than 20 per cent.