|
|
Regulators say huge credit card profits driven by the poor - SMH - August 28 2015 - Shaun Drummond Regulators and politicians are turning up the heat on a very profitable corner of retail banking that relies on poor people: credit cards. The Reserve Bank of Australia estimates the interest rate on "standard cards" averages 17 per cent. The cost to the banks to fund this credit is around 2.25 per cent, generating a profit margin around 14.75 per cent. On "low-rate" cards the average rate charged is 13 per cent, but most poor people use the more expensive cards. Most of those who actually pay credit card interest are on lower incomes. The Australian Securities and Investments Commission is concerned that benefits like interest-free periods, zero per cent balance transfers and loyalty points, which are mainly on cards charging the highest interest rates, are luring customers to use these more often in the belief they won't pay interest. "Only a quarter of credit card holders have low-rate cards, although 40 per cent of new cards being issued now are lower rate," ASIC senior executive leader Michael Saadat told a Senate inquiry into credit card interest rates in Sydney on Thursday. "Seventy-five per cent of cardholders on lower incomes do not hold low-rate cards." The Reserve Bank's assistant governor for the financial system, Malcolm Edey, said the margins banks earn on credit cards above their cost of funding are at record highs. "Credit cards vary a lot – some are very high, higher than I think can be easily explained," he said. Shop aroundIf people are paying those sorts of rates, however, he said people should shop around. "There are a lot of cards that offer low rates," he said. Some low-rate cards can charge 8 to 9 per cent. The problem is that customers don't shop around, the Reserve Bank and others have said. The Council of Financial Regulators – which includes the RBA, ASIC, APRA and Treasury – will discuss credit card rates, competition in the sector and whether further regulation or changes to the law are needed, at a board meeting in September. The Senate committee's chairman, Sam Dastyari, asked whether credit card account numbers can be made portable, like mobile phone numbers. The banks also say credit cards are unsecured loans, so rates have to be higher to cover the risk, and there are a range of other costs apart from funding costs that reduce the profit they make. Mr Saadat said another reason people don't choose lower rate cards is that the higher rate ones often get bundled with mortgages and other financial products. CHOICE chief executive Alan Kirkland told the hearing there is in fact too much choice, dubbing the vast array of features on each card, from interest rates, to fees, loyalty points and other perks, "confusopoly". "So the card issuers add lots of different features that are very hard to compare," he said. "The real problem we're seeing is lots of choice, but not competition." He wants simple comparison figures that include all fees and charges on a card, like comparison rates on mortgages and banks, to give consumers their own spending pattern data. "Banks need to allow consumers to extract their data in an electronic form that then allows them to match that data to the offers on the market, and the government needs to start leadership in this," he said. Three-year limitKatherine Lane, principal solicitor at the Financial Rights Legal Centre, said she sees many people mired in credit card debt. She argues credit card terms can last decades and should be limited to three years, and borrowers should be required to pay off larger minimum amounts, including the minimum of the principle. But she said after 26 years of working in the financial services sector, she still couldn't understand why credit card interest rates stay so high. "Personal loans are for five years, credit cards are for 30. Let's change that. Banks have made a fortune at amounts they shouldn't have got – a reasonable period is three years," she said |
|
|
|