Big banks defend card profits

Big banks defend card profits, but vie for most virtuous - SMH - Shaun Drummond and Clancy Yeates - 16 Oct 2015

The major banks have rushed to out-do each other on reforms to their own credit card products to protect poor customers in a surprise development from a Senate inquiry looking at whether banks earn too much on cards.

Commonwealth, Westpac and ANZ banks each supported various mandatory options to reduce the impact of credit card debt on people struggling to repay card debt after earlier evidence given by regulators to the inquiry showed poorer people are the most likely to be paying card interest.

CBA has called for mandatory minimum credit card repayments and ban on 0% balance transfers.

All defended headline interest rates that have not fallen from averages of 13 to 20 per cent for four years, arguing "effective" card rates had, in fact, dropped in that time due to competition involving 0 per cent balance transfers and more people paying off debt faster.

Commonwealth Bank, however, revealed it still had a 40 per cent profit margin on personal loans and credit cards combined, earning $1 billion annual profit on $2.5 billion revenue.

ANZ Bank said it made about $400 million in annual profit on credit cards, equating to 5 per cent of group profit.

At the inquiry, it announced a new "low rate, no fee, low limit, high repayment card" that it will offer to people in trouble, but also to those with a good credit history but low income.

"Our initial thought had been we would have it as a below the counter card," for those in hardship, ANZ deputy chief executive, Graham Hodges, told the inquiry. "But the usefulness of that card might be wider - for students who are moving out of home or individuals who are approaching retirement to manage their spending behaviour down."

Mr Hodges argued a small amount of credit needs to be offered to poorer people to prevent them going to high-interest payday lenders.

Commonwealth Bank said zero per cent balance transfers should be banned and mandatory minimum repayments of interest and principal should be imposed for card holders of up to 2.5 per cent.

The bank's head of retail banking services, Matt Comyn, claimed it had never offered zero rates on balance transfers because it could become a "debt trap" for customers.

"We view that such arrangements are not the right thing to offer our customers," he said.

NAB question CBA's motives

However, NAB – which has the smallest credit card market share of the major banks at 10.5 per cent – told the same hearing 0 per cent balance transfers helped competition and questioned the motives of CBA as the dominant credit card issuer with about a quarter of the market.

Mr Comyn denied the bank's enthusiasm for banning zero per cent balance transfers was more about reducing the ability of competitors to take its customers. He said CBA competed on other features, including technological innovation such as giving customers the ability to block overseas transactions.

Westpac's head of its commercial and business bank, David Lindberg (its chief product officer until June), did not support raising the minimum repayment amount, but argued customers should be able to set their repayment period.

"We don't think [mandatory] minimum repayments go far enough. All credit card issuers should provide an option to pay off their debt within one, three or five years," he said.

Those who had been using credit cards "inappropriately" as a long-term debt and repaying just the minimum amount for a long period should be offered alternative products to transfer their debt to lower interest rates.

Mr Lindberg did not support a ban on 0 per cent balance transfers but said the term of these offers should be limited.

"Forty per cent of our customers who take up these offers, do in fact pay off their debt," he said. "[But] we want to force customers to face the end of the debt."

NAB's group executive product and markets Antony Cahill said people using 0 per cent balance transfers were four times less likely to move into delinquency than other credit card customers.

"It allows them to consolidate debt, get their finances under control. We don't believe it leads to customers being in financial stress," he said.

Both Mr Cahill and Mr Hodges said they were open to discussing proposals to mandate minimum credit card repayments. But both warned that some changes could drive customers towards higher-cost payday lenders.