20/08/2015 - 13:53

Day of reckoning for banks on cards

20/08/2015 - 13:53

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Is it greed, ignorance or stupidity that prevents bankers from knowing when they have overstepped a moral and ethical boundary, if not a legal one?

Is it greed, ignorance or stupidity that prevents bankers from knowing when they have overstepped a moral and ethical boundary, if not a legal one?

It’s not a question that applies solely to Australia’s banks, though several examples highlight the problem of not knowing the difference between right and wrong.

On the international scene, there have been the outrageous examples of US banks almost trashing that country’s economy with their sub-prime lending scams of a decade ago, and the more recent example of British bankers defrauding the world’s key interest-rate setting mechanism, the London Inter-bank Offered Rate.

In both the US and British examples, huge fines have been dished out by the courts, plus a few jail sentences.

Meanwhile, in Australia we’ve had the disgrace of the Swiss franc loan scandal that destroyed a number of farmers and led to a handful of suicides and, more recently, the dud advice scandal in which innocent bank customers lost thousands of dollars thanks to bad investment advice.

The latest example is the one that could carry an even heavier political and economic cost for the banks, and that’s the shameful way in which they use credit cards to squeeze the most vulnerable members of society through sky-high interest rates.

Rich, smart and switched-on bank customers have always known that credit card debt is a trap – that’s why they avoid it.

Poor, not-so smart, and less astute customers either have no choice when it comes to accumulating credit card debt, either because it’s all they know about borrowing, or banks refuse them other forms of cheaper debt.

Whatever the explanation, the Reserve Bank of Australia is onto the case, which means politicians will not be far behind; and while I have often defended banks from political witch-hunts, on this occasion they deserve everything that’s coming.

The facts, as detailed by the RBA in a submission to an ongoing Senate inquiry into credit card interest rates, include clear evidence that banks are “gouging” their customers with interest rates on outstanding credit card debts of 20 per cent.

Given that the cost of money to the banks in the current era of super-low interest rates for depositors is around 3 per cent (and less), the margin on card debt looks to be around 17 per cent; perhaps the highest on any form of lending in the world outside the back streets of Palermo.

The details of what the RBA had to say about credit cards is that banks have been increasing the rates they charge since the 2008 GFC, despite the cost of their borrowings failing sharply.

Different cards attract different rates, and banks are clever at moving their rates around, but what the RBA said in its submission to a Senate inquiry into card interest rates was that the advertised rates had risen from 16 per cent to 20 per cent on standard cards, while so-called low-interest cards had risen from around 10 per cent to 13 per cent.

Since the GFC, the bank profit margin on credit cards has stretched out by 3 per cent, with the only explanation being that for some reason, which no-one has been able to explain, card rates are ‘sticky’.

The RBA’s view is that there seem to be: “A significant number of consumers who are either not well informed or for various behavioural reasons are reluctant to switch banks or seek a lower rate.

“At the same time, banks may have little incentive to lower interest rates, given that rates are not a determining factor for many individuals who may, possibly mistakenly, not expect to build up significant balances,” the RBA said.

Another interpretation is that banks are failing in their duty to warn customers that if they build up a large credit card debt they will be whacked by punitive interest rates that could severely affect their financial future.

I have another theory when it comes to banks increasing credit card interest rates while their cost of money has been falling – because they have been able to get away with it.

In a way, squeezing people who use credit cards as a form of bank loan is no different in principle to advancing a home loan to people who will not be able to service the loan over time – which is what sub-prime was all about.

The banks, of course, will mount a defence along the lines of ‘we’re providing a service’ and ‘no-one forced a customer to spend beyond his means using debt he or she couldn’t afford over time’.

The problem with that defence is that it didn’t hold water in the sub-prime investigations and will not hold water in the Senate, because in both cases the victims of the banks are the most vulnerable members of society and the banks are profiting from their ignorance.

 

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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