A New Credit Card Model in Australia: More Interest, Just Fees

The bank card model works well around the world, but repayment terms are not the same everywhere. Many markets like Canada, United Kingdom and United States use standardized formulas to calculate the minimum payment due each month. Using a model at 1/36 of the balance, it comes out at about 3%. The goal is to require the account to have no negative amortization and the standard payment to reduce debt by 1% to 2% each month.

The negative amortization standard is necessary because when the account is structured to allow this, the interest paid will be less than the interest earned. This will result in something called “permanent debt”. Consumers don’t want permanent debt, bankers avoid it and regulators hate it.

Other minimum owed strategies, set by regulations and societal standards, require a shorter payment term, such as turkey, which compresses the minimum due to about 1/12e for certain categories of expenditure, or Sharia-compliant model, which prohibits the interest assessment and relies on a commission for the outstanding line of credit, which caters to a global market of nearly 1.8 billion Muslims.

The new model offered in Australia was announced by a test carried out by the National Australia Bank (NAB), one of the major credit card issuers in that country. the Australian Financial Review calls the new offer a defensive game against emerging lenders who offer BNPL (Buy-Now-Pay-Later) products. Headlines around the world indicate that the card does not charge interest. Instead, it charges a fee similar to the Sharia-compliant model.

  • NAB’s StraightUp card will never charge the customer interest, unlike the 20% rates on many credit cards. Instead, users will be required to pay a minimum amount each month (based on the card’s credit limit), including a monthly fee. There are no late fees or charges if the card is not used.
  • NAB says the new Visa card is a response to the same engine that has propelled Afterpay’s growth: Millennial customers want to reduce their use of interest-bearing cards, so debt doesn’t get out of hand.

It is important to note that no interest does not mean free credit. Banks cannot operate in this environment. Some costs and risks need to be funded.

  • For a $ 1,000 credit limit, customers will need to pay $ 35 per month for the balance, including a monthly fee of $ 10. For a limit of $ 2,000, the minimum monthly repayment will be $ 75, including a monthly fee of $ 15; At a limit of $ 3,000, the repayment is $ 110 per month, including a $ 20 charge. Customers are required to pay the minimum payment, or the card may be blocked. There are no rewards attached to transactions.

The engine of change is the growth of installment loans. Some issuers are concerned about the cannibalization of credit card volume.

  • The new model could put pressure on other issuers, including Citi, Latitude and Macquarie, to experiment with their offerings. It happens after the Commonwealth Bank decided to buy now, pay for space later with an investment in Klarna and integration into its banking application. This is another example of growing competition in payment options after PayPal entered the installment payment market.
  • The Reserve Bank this week reported a 10% drop in the number of credit cards on the issue in the 12 months leading up to the end of July and a 14% drop in the value of transactions. Analysis of RBA data by consultancy firm McLean Roche found that the number of credit cards has fallen by 2 million in the past year and that Australian consumers have canceled 5.3 million cards since mid -2017.

NAB’s model is unlikely to change the world, but it will force other bank card issuers to look at their business models, like Finextra reports during a launch the next day by a competitor of the Commonwealth Bank:

  • Not to be outdone, NAB rival CBA has announced plans to launch an equivalent card – CommBank Neo – at the end of 2020, and an interest-free card for business customers in early 2021. Like the card. NAB, CommBank Neo will come with three pre-set credit limits and slightly high monthly fees between $ 12 and $ 22. The T & Cs require a minimum repayment of $ 25 or 2 percent of the closing balance, whichever is greater.

The new offer will be interesting to watch. While lines of credit are relatively small, typically south of $ 3,000, they can hit a deal with new card accounts and work as a countermeasure against fintech installment loans.

Preview by Brian riley, Director, Credit Advisory Service at Mercator Advisory Group

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