Statement In Response To The Star Commentary “Credit Card Rates Can Be Lower”
Dear Editor,
We refer to the commentary by Mr P. Gunasegaram the Managing Editor on page 22 of the Star dated February 17th 2009.
The Association of Banks in Malaysia wishes to reiterate that the recent revisions to the credit card rates, which are already one of the lowest in the region, have taken into consideration all relevant factors. Moreover, we would like to reiterate that in addition to the funding costs, there are very real and substantial costs surrounding a credit card operation, a point we highlighted in our press release of February 12th 2009.
Given the complexities of the credit card business, these costs include credit risk (non-performing credit) particularly since the credit card debt is not backed by any form of security or collateral and the banks can only look to the credit card defaulter for repayment, fraud risk, administration, infrastructure (credit card users enjoy prompt and fast service anywhere in the world due to a sophisticated and costly worldwide network and back-end system) and marketing and promotion. In turn, the credit risk component encompasses credit bureau charges, collection costs as well as fees and expenses for bad debt collection.
The costs mentioned above are firmly in double digit ranges. Indeed, the bad debt collection cost alone can already be as high as 6 percent. In a worsening economic environment, credit risks and associated bad debts will rise.
Furthermore, each bank has its own business model and because its card business portfolios differ, the net margin for each bank is different. At best on an average in respect of the three Tiers, it does not exceed 5 percent over all. Banks are constantly seeking to improve its cost base and pass savings to its customers.
It must be also be appreciated that banks are in fact
funding the outstanding RM22.8 billion in credit card loans (and which is growing at approximately 10 percent year on year) as they would have paid the merchant the day after transactions have been made but would only receive payments from the credit card holders 21 to 50 days later. Interest is earned based on the applicable Tier bracket only in respect of the revolving balances.
Despite rising costs, the interest rate band for credit card users in Malaysia was recently lowered effective March 31st 2009 downwards to 13.5 - 17.5 percent per annum. The Malaysian banking system operates one of the lowest pricing regimes in the world. In addition, credit cardholders are at the liberty to shop around for the best rates or to take advantage of the “no frills” card being offered.
Checks on information available on relevant web-sites reveal that credit card rates in Asia, the United Kingdom, U.S.A and Canada can be as high as 45 percent as illustrated below:
| Australia |
9% – 19.5% |
3.25% |
| Hong Kong |
17.8% – 36% |
2.00% |
| Singapore |
24% (standard rate) |
0.38% |
| Taiwan |
3.99% – 20% (risk-based) |
1.50% |
| Thailand |
20% (standard rate) |
2.00% |
| India |
18% - 39% |
5.50% |
| Indonesia |
33% - 45% |
8.75% |
| South Korea |
18% - 28% |
2.00% |
| Philippines |
33% - 42% |
5.00% |
| Japan |
12% - 18% |
0.10% |
The Tier Rate structure which was introduced in 2007 and took effect in 2008 is unique to Malaysia. With the Tier rates, credit card members are encouraged to continuously make at least the minimum payment of 5 percent of the amount outstanding within the due date in order to stay at Tier I at all times or, as the case may be, move from a lower Tier to a higher to enjoy better interest rates with a steadily improving repayment track record. In this manner, there is no cross-financing of credit cardholders unlike strong payees who have to finance the credit cost of those who do not make at least the minimum payments promptly under a standard rate system. The Tier Rate structure provides the relevant incentives for cardholders to be financially responsible. Hence, in the win-win situation presented by the Tier Rate structure, credit cardholders who continually make the minimum payment on time can enjoy low rates and banks can reduce their credit cost.
Banks are always willing to engage with credit cardholders who are unable to repay their outstanding credit card debt. It is in the banks’ interest to manage such situations before the debt escalates to become non-performing. Likewise, the affected credit cardholder would benefit if the credit card debt can be resolved sooner rather than later. Credit cardholders are thus encouraged to approach the banks to review their financial position as and when necessary.
The credit card industry is also an important employer in the country.
We hope our response would be reported in entirety so as to better enable your readers and members of public to understand the banks’ perspective and the issues involved.
Yours sincerely,
The Association of Banks in Malaysia
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