Why banks still have the last laugh on BNM’s new credit card tiered pricing
On 27th, BNM announced a lower interest scheme for credit card balance. Instead of a flat 18% p.a. for all, now those with good payment history can lower their rate to 15% p.a., which is 16.7 percentage point reduction. “The objectives are to promote credit card as a payment instrument and to promote prudent financial management and to inculcate good financial discipline,” said BNM.The detail is still sketchy at this moment. The new finance charges and its calculations, will be communicated by individual card issuers soon. Starting from 1 July 2007, credit card issuers will begin to track the repayment behaviour of their cardholders. Here is the new low interest rate:
- Tier 1 at maximum 15% p.a. – For those who make payment on time for 12 consecutive months.
- Tier 2 at maximum 17% p.a. - For those who make payment on time for 10 out of 12-month cycle.
- Tier e at maximum 18% p.a. – For those who failed to make monthly payment on time most of the time.
So should the 9 million cardholder cheers?
Not so soon. This new low interest rate (tier pricing) will only take effects on 1st July 2008 – 12 months from now. This is because “banks need to track the repayment behaviour first” i.e. the next 12 months payment. This is the lame excuse because cardholder payment pattern is well captured by the banks’ elaborate computer system. In fact, the new scheme can be implemented immediately if some one in the bank starts punching some codes on the computer keyboard. The most likely reason therefore is to safe guard banks ‘interest’ first. Currently the credit loan (outstanding balance) stands at RM20 billion and imagines the ‘losses’ the banks would suffer. The one full year time line is thus a time buffer for the banks.
The immediate effect for card holders is none to very little; whether you belong to the 1/3 who always settle your bill in full promptly, the 50% majority who pay the monthly minimum payment on time, or the few who are late in payment or lapse in payment.
What are the implications?
For those that always paid on time and in full, the new scheme would have little or no at all – they already developed a good discipline and behavior, and by ‘default,’ they will be in the tier 1. However, being crown the ‘tier 1’ status will further reinforce the prudent behaviour and not to mention a great boost to one’s ego. A ‘smart’ bank could immediately implement the new scheme for this group of people to bankrolls the good well and gains the early mover advantage, with zero cost.
For those struggles to make minimum payment, the new scheme would also have no whatever effects on them – they can’t get worst from what there are now at the maximum 18%.
This left us those 50% majority who mostly pay on time but not always and not necessary in full –full –the ‘most preferred’ customers for banks. For this group of people, the new scheme will be a strong incentive to make prompt payment in order to take advantage of the lower rate, consistent with BNM’s objective. However the new low rate might also ‘encourages’ some to carry more debt! Probably that’s why the BNM assistant governor proclaim “It will be neutral” when answering the financial impact of the lower rates on banking sector.
Bottom line
The new tier-pricing scheme is a good move. But like saving, it takes an awful long period of time and discipline to see the effect; first you need to have a 12 month ‘probation’ period, then if you failed to keep up, you will be ‘demoted’ to lower tier. To climb up again, another 12 months are needed. All-in all a 24 months journey. It takes time to build good reputation yet it is fragile and easy to destroy. Always pay full and on time – aimed and stayed in Tier 1.
On the other hand, I personally think that banks will waste no time to “creatively” turn the tier pricing into recruitment overdrive, run more frequent card usage promotions and balance transfer, etc. Collectively this will create a ‘conducive’ environment to incur credit card debt, for those less discipline.
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