Auditing and financial advisory firm KPMG is warning New Zealand banks they should proactively assist customers struggling with credit card debt to stave off potential regulatory action and loss of business to competitors such as 'buy now, pay later' schemes.
In its annual Financial Institutions Performance Survey (FIPS) for banks, KPMG notes an Australian Securities and Investments Commission (ASIC) report on credit card lending issued in July last year. The report showed 18.5% of consumers with credit cards fulfilled at least one problematic debt indicator being severe delinquency, serious delinquency, persistent debt, and repeated low repayments.
Given this ASIC said credit card providers should be more proactive in addressing problematic credit card debt, ensure products are appropriate for borrowers, and the regulator expects efforts from credit providers to tackle these issues.
In New Zealand, as interest.co.nz has highlighted on several occassions most recently here, credit cards and their high interest rates are yet to be specifically targeted by any regulator. However in December The Co-operative Bank CEO David Cunningham told interest.co.nz the Commerce Commission should turn the attention of its new market study powers to the credit card market. Cunningham described credit cards as "a real area of customer harm," and a "gravy train" for banks.
The Co-operative Bank launched a credit card two years ago, charging annual interest of 12.95% for both purchases and cash advances. KPMG points out the weighted average interest rate on interest bearing credit card debt is 17.9%, and of the $6.77 billion of debt outstanding, $4.13 billion is interest bearing.
This suggests "a number of Kiwis may not have the most appropriate credit card for their spending habits," says KPMG.
The firm goes on to say that, with the Reserve Bank asking NZ's big four banks to prove they are different from their Australian parents, an opportunity exists for banks to improve credit cards for customers with problematic debt.
"This could be done by proactively following up with customers who are failing to repay their credit cards to ensure they are on lower rate credit cards, or even offering to put their debt onto their mortgage where possible," KPMG says.
"While banks are unlikely to reduce interest rates, with the Commerce Commission seemingly content to let interest rates be constrained by the competitive market, it is an area where they earn a lot of interest income."
In 2016 the London-based Lafferty Group cited NZ as the seventh most profitable credit card market out of 72 countries it surveyed. At $105 per card, profitability in NZ was up $17, or 19.3%, over five years.
"Pre-tax profits reached $275 million in 2015, an increase of 2% compared to 2014. It is forecast to reach $297 million by 2018. Profit per card reached $105 in 2015, compared with $88 in 2010. It is forecast to reach $114 by 2018," Lafferty said.
KPMG goes on to say that, given credit cards are a source of strong profits for banks, the sector is already being targeted by competitors.
"We may already be starting to see this with the impact of 'buy now, pay later' schemes, where customers are purchasing products using these services. Customers are also using different methods of payment, such as POLi, which allows them to purchase online without a credit card and allows them to avoid a transaction fee, with more likely to come with application programming interfaces (APIs) and open banking."
"One of the concerns expressed by many [FIPS survey] participants was that these new entities are not regulated nor subject to some of the regulatory requirements of existing players, eg responsible lending, on the basis they are not lending. Another concern is that many people are using their credit card to pay off their buy now pay later debt," KPMG says.
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