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

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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I use my Credit Card wisely, I pay it off every month and get rewards. People know what they are getting into when they get a credit card, so maybe personal responsibility should be higher. I would not really care if it was 30%, 40%.
But I suppose it is pricks like me that help keep rates higher.

I do the same, but must say the reward cards are pretty average. Got my last 'reward' $120 from ANZ on a cashback visa, but have a $60 annual fee. Hardly cash back. But looking around there is not that much else that is better. Closest thing I can find is amex air nz airpoints because it has no annual fee, but then not sure how widely accepted amex is these days.

Same here, and yes AMEX seems not worth it if you cannot use it.

So really the credit card cost you nothing to operate, and you got a small reward at the end of the year. There is no free lunches. The other reward schemes are a joke, you think you are getting something for nothing, Flybuys is a big joke.

The people paying the high interest rates on credit card balances subsidize the ones who manage their cards well. It is as it should be. No free lunch but survival of the fittest.

Most sensible people would have some sort of revolving credit mortgage facility for borrowing money at a reasonable interest rate. This works best if you are a frugal person and only purchase things that you need. Credit cards can be topped up using this if you really need to draw on credit. I get reward points but find it very difficult to spend them and they just keep building up. Free travel insurance is a bonus worth having and the conditions now seem identical to purchased travel insurance. I get an email from the bank confirming that travel is cover is activated. A lot of people don't know that credit card travel cover is still valid even if you don't use the credit card for airfares - you need to carefully check what the requirements are though.

"revolving credit mortgage " You need to be very disciplined IMHO. My view is people are not enough. I think its just bad news, better to get a simple table mortgage, over-pay and if you have to either drop back to minimum or draw down a lump sum and suck up the penalty payment as a self inflicted wrist slap.

"Free travel insurance is a bonus worth having and the conditions now seem identical to purchased travel insurance. " Certainly with my CC travel insurance it is a requirement that you notify them before hand and that is an opportunity they take to up sell, and they do it at a huge rate. So much so that I found it cheaper to pay "full insurance" from scratch than pay for the "upgrade" to cover a pre-existing condition, so frankly I think its of dubious value.

I thought that too about the travel insurance and started to worry about it when I first decided to use it. I even phoned the Insurance company that did the cover for the bank and asked them if I could get confirmation that I was covered as I bought air tickets by Internet banking transfer and not credit card, and if I should buy some extra insurance. They wouldn't confirm the cover by email but assured me I was covered and that I need not buy more. I considered getting more cover through a different provider but then worried about having two policies for the same thing which can then cause complications with who pays out. I then realised I have a personal manager at the bank and got them to provide me with a confirmation email. I do feel more comfortable with a proper policy with a policy number I must admit. What do other people think?
With revolving credit I have a will of iron when it comes to buying things it's like drawing blood unless, maybe, a new tool, so no problem for me. It is very handy for writing out cheques when buying at auction which you will probably find that is problematic too as it makes property too easy to buy.

"will of iron" indeed in which case such a use case makes good sense but I think it oversold. I know people on it and I know their lifestyle looks way better than my one (2 way newer cars than my old one, private education for kids etc), I have on the other hand 1 year left on my mortgage. As another example, 30 years ago I had the option of a table mortgage or an "insurance endowment policy". The idea was that with the latter you only paid the interest with the capital paid off when the policy matured and since it was sure to pay out extra that was a nice bonus to spend. Being a simple soul I went table, some of my peers went policy, it hasnt gone so well for them, way behind me.

There is a definite minority that have the financial discipline to use a revolving mortgage. I even met a financial adviser at a party and he couldn't even accept the concept of me having a the revolving credit and a couple of credit cards that I use responsibly. Although in his line of work I can imagine the large number of clients that carry credit card balances and have no remaining credit.

I also think that people use revolving credit on their house incorrectly. If they have the discipline they should split fixed terms and floating rate with the goal of paying down the floating rate prior to the next refinancing. It's a great way to demolish debt, and dramatically reduce total interest paid. Then lump sums can be moved to the floating rate during refinancing and change fixed terms from 30 years to 20 or 15 year terms.

Unfortunately there's a lot of people that don't realise they won't own their homes by the time they reach retirement, and will be stuck with mortgage payments.

It is concerning about the credit card travel insurance Zac. I spend a lot on travel insurance each year as well as having the cards with all the same benefits -supposedly. When the insurance company told you that you are covered but won't confirm in writing it's tricky. I don't want to face a $500K bill to get me home sometime, and then get declined.

Yes they just said, "We don't do that". Have you made any travel insurance claims? I was wondering if they ever ask if you have credit card insurance as many travellers will have Gold/Platinum cards and if it ever causes complications like the Insurance company attempting to split the cost of a payout.

I have filed an insurance claim from an AMEX card for a delay. I provided by the book details and met all of their conditions. I received a payout promptly without any arguments. If there was any splitting I was not made aware of it.

I think Zac that what I want from the insurance is simplicity and certainty that I am covered - but the cards don't quite give you comfort on that. I can handle things like delays, or lost luggage. But I do want certainty of cover for big ticket items, which are almost always going to be injury or health. There can be lots of zeros there.
All I am saying is that because of the confusions or unknowns I probably end up double covered.

Perhaps an annual interest of 12.95% isn't "ridiculously high" compared to AMEX 20%, but it sure is still "high".

Why are people carrying balances on high interest rate cards? That should be the first question.

Now with respect to AMEX they do have high rates on their rewards cards, but rewards cards are not worth it if you carry a balance. Instead there is an AMEX low rate card that only charges 12.69%. So this is a poor comparison.

https://www.americanexpress.com/nz/content/low-rate-credit-card/

Aside from the chronically poor, I suspect it's an innumeracy issue - balance carriers just look at the minimum payment they have to make for the next month and leave it at that, without bothering to figure out how long it'll take to clear the card, or how much interest they're paying over that time.

I suspect if the statements included a graph showing how long the balance would take to pay off and the total interest paid over that period, (just as the mortgage calculator here does), you'd see a lot fewer people carrying balances.

What I've found with helping people out of their bad financial positions is that this is often the case. Concepts such as paying off cards, paying the highest interest rates first, etc are no even considered. It doesn't even enter into conscious thought until people realise they cannot maintain lifestyle and minimum payments.

There is also a separate effect from the poverty mindset. If you have credit available you spend it now and then just make payments. A lot of commenters on this site would find this to be a very unusual way of thinking but poverty is a mindset where money is scare, and if you have money/credit then you share it.

It's sad when people turn up looking for advice with $25k to $100k of credit card debt and they are struggling to make minimum payments on their cards.

Yep, even smart people can be awful with money.

People don't like acknowledging that maybe they're not as successful as they feel they should be, or they think their friends are.

Hell, if I didn't earn well above the median wage I'd be in trouble as well. Keeping up with the Joneses (or even worse trying to live the lifestyle the media presents as normal/desirable) really is a huge source of pressure for people to borrow for stuff they don't really need.

Good on you dictator for helping people too.

AMEX has always been high and when i gave it as a reason for cancelling my card the nice lady told me that they couldn't lower the rate because they were not a bank.

Its is simply this, if you use it you pay for it. Don't complain about the interest rate after you have spent someone else's money

Credit cards are great but shouldn't be given to stupid people. Pretty simple really you don't spend more than you earn. They are a convenience tool that pays for my $19 mobile phone plan each month using the rewards points and you pay it off before you get stung the interest. They are not idiot proof but someone with half a brain can use them to their advantage. If you cannot afford it then don't buy it. Try the old fashioned method of saving for it then buying it, its far more rewarding.