Banks Explain Why Credit Card Rates Can’t Go any Lower

The Associate of Banks in Malaysia wishes to reiterate that the recent revisions to the credit card rates, which are already one of the lowers in the region, have taken into consideration all relevant factors.

Moreover, banks would like to reiterate that in addition to the funding costs, there are very real and substantial costs involving a credit card operation.

Bad Debt Collection

Given the complexities of the credit card business, these costs include credit risk, particularly since the credit card debt is not backed by any form of security or collateral, fraud risk, administration, infrastructure (credit card users enjoy prompt and fast service anywhere in the world due to a sophisticated and costly worldwide network and back – end system) and marketing and promotion. In turn, the credit risk component encompasses credit bureau charges, collection costs as well as fees and expenses for bad debt collection.

The costs mentioned are firmly in double digit ranges. Indeed, the bad debt collection costs alone can be as high as six percent. In a worsening economic environment, credit risks and associated bad debts will rise.

Own Business Model

Furthermore, each bank has its own business model and because its card business portfolios differ, the next margin for each bank is different. At best on an average in respect of the three tiers, it does not exceed five percent overall. Banks are constantly seeking to improve its cost base and pass savings to customers.

It must also be appreciated that banks are in fact funding the outstanding USD 6.3bil or RM22.8bil in credit card loans, and which is growing at ten percent year on year, as they would have paid the merchant the day after the transactions but would only receive payment from the card holders twenty one to fifty days later.

Interest is earned based on the applicable tier bracket only in respect of the revolving balances. Despite rising costs, the interest rate band for credit card users in Malaysia was cut on March 31 to between 13.5% and 17.5% per annum.

The Lowest Pricing Regimes

The Malaysian banking system operates one of the lowest pricing regimes in the world. In addition, credit cardholders are at liberty to shop around for the best rates or take advantage of the “no frills” cards.

Check on information available on relevant websites reveal that credit card rates in Asia, the UK, US and Canada can be as high as forty five percent. Among our neighboring countries, Australia charges nine percent to nineteen point five percent. Hong Kong seventeen point eight percent to thirty six percent, Singapore twenty four percent, Taiwan four percent to twenty percent (risk based), Thailand twenty percent, and the Philippines thirty percent to forty percent.

Banks are always willing to engage with credit cardholders who are unable to repay their outstanding credit card debt. It is in the bank’s interest to manage such situations before the debt escalates to become non – performing.

Review Your Financial Position

Likewise, affected credit cardholders would benefit if the credit card debt can be resolved sooner rather than later. Credit cardholders are thus encouraged to approach the banks to review their financial position as and when necessary.

The credit card business has high margins and admittedly high risks as well.

In the article, banks had assumed a non – performing loans rate of six percent, which is three times the industry average, already reflecting the higher risks.

The gross margin after this is ten percent, which is very high for a lending operation.

All aspects of the financial services business such as lending, insurance, broking and so on have their own costs, and the credit card business is not alone in this matter.

Make Reasonable Profits

The point is that, those who engage in the lending business must make reasonable profits and that does not appear to be the case for credit cards when the gross margin is ten percent.

To remove guesswork, the industry should give a full breakdown of its costs and tell banks what their net margin is after all costs, also giving details of the highest net margin and the lowest in the industry. That will settle the argument.