The Co-operative Bank enters the credit card market striving to 'shift the debate' to interest rates and fees and away from loyalty schemes

By Gareth Vaughan

The Co-operative Bank is marking its first foray into the credit card market by making the case for consumers to focus on the interest rates and fees they're paying rather any benefits they get from being part of a loyalty scheme.

CEO Bruce McLachlan told interest.co.nz in a Double Shot interview The Co-operative Bank wants to create a new category for credit cards, alongside the likes of low interest rate, rewards, business, and platinum credit cards offered by other banks. McLachlan labels The Co-operative Bank's new Mastercard credit card a "fair rate credit card."

"Credit cards is the part of the banking market that would appear to have the least competition. In our view interest rates and fees have been ridiculously high for too long and we don't believe there's any current category of cards that actually cater for what the real needs of a lot of New Zealanders are," McLachlan said. "So we are trying to create a new category."

The Co-operative Bank credit card will charge annual interest of 12.95% for both purchases and cash advances. That means unlike other banks, The Co-operative Bank won't apply payments to credit card balances at the lowest interest rate so the bank continues to earn more on the higher interest balances. The annual fee is $20, and there'll be no over limit fee. That's both the lowest interest rate and lowest annual fee of any bank credit card in New Zealand. (ASB's new Visa Light has no annual fee, and BankDirect has a Visa Classic card with a $10 six monthly fee). See full details on interest.co.nz's credit cards page here. And also see David Chaston's comparison of all bank credit cards.

The latest Reserve Bank figures show total outstanding credit card balances of $6.05 billion. Interest is being paid on $3.85 billion of that, with a weighted average interest rate of 18%. As reported by interest.co.nz last month, New Zealand credit card profitability has risen 19% per card over five years to $105, according to the Lafferty Group, with pre-tax profits of $275 million in 2015. NZ was the seventh most profitable credit card market out of 72 countries Lafferty surveyed.

"What we really don't like is the fact that consumers get hit with a different interest rate, and in our view an exorbitant interest rate, should they choose to access their line of credit for anything other than a purchase. So that fact that most banks would charge you 22.95% or more to use your limit, we think is ridiculous," McLachlan said.

"We don't see there's justification for having a different rate for purchases than there is from accessing your credit limit for other reasons. So that's quite a change in this market."

"One of the things we also think is unfair is the fact when consumers seek to spend over their limit, banks allow them to access [credit] and make a conscious decision to allow them to do that, but then charge a large fee. And we don't think that is fair. So there is no over limit fee on the [Co-operative Bank] card," added McLachlan.

Co-operative Bank management has been working with consultant Brent McKenzie in the development of its credit card. McKenzie was the chief manager of credit cards at BNZ when that bank launched its GlobalPlus credit cards.

'Most loyalty schemes really are not worth it'

McLachlan said The Co-operative Bank is keen to "spark a debate" about credit card loyalty schemes such as Fly Buys and Airpoints, which are strongly promoted by several other banks. The Co-operative Bank credit card won't be part of a loyalty scheme.

"When people think credit cards they often think interest free days and loyalty and that's totally wrong. Because actually what they should be thinking is the interest rate they're paying. The reason for that is two-thirds of all spend put on credit cards ends up incurring interest. And the interest on average they end up incurring at the moment is 18%, which is ridiculously high."

"So we can't understand why there's all this focus on loyalty," McLachlan said.

"The average spend on a credit card is about $12,000 a year and at that spend and below, the annual fee people are being charged is greater than the benefit they get off most loyalty schemes. So we don't know why there's such a focus amongst consumers on loyalty. Most of them [loyalty schemes] really are not worth it. The focus should be on interest and the interest cost and that's why our whole package is to try and shift the debate. And it's a debate that has to be had because New Zealanders are focusing on the wrong thing when it comes to credit cards," said McLachlan.

The Co-operative Bank is launching its credit card at a time the Government is reviewing retail payments costs, and says it's prepared to consider regulation. This could force interchange fees lower, which are used by banks to help fund their loyalty schemes.

High credit card interest rates 'can't be justified'

As reported by interest.co.nz last year, the Government is comfortable with banks setting their own credit card interest rates, and neither the Commerce Commission nor the Reserve Bank is mandated to intervene. (Also see David Chaston's article the curious case of credit card interest rates).

McLachlan argues high credit card interest rates charged by many other banks, up around 20%, can't be justified.

"When you look at what has happened to nominal interest rates in New Zealand over the last five, six, seven years, and you look at what the level of credit card interest rates were then and where they are today, it seems to us to be very hard to justify rates where they are. And I think there are pretty good profits being made in the industry in this product category," said McLachlan.

"I think that the fact that there's 2.5 million credit cards out there demonstrates that the core proposition of a credit card is extremely powerful and of great use to consumers. The average spend is around $12,000 a year, which is $1,000 a month, so it's a significant vehicle that's used to help people live their daily lives."  

"I think there's a strong relationship and that's going to stay. I think what we've got to do is get the economics around that relationship way better than what it is today," McLachlan said.

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