The South African credit card industry is bracing itself for a new round of innovation and competition, as the National Credit Act — which is a year old this month — obliges many banks to re-think their processes and strategies.
Doug Walker, managing executive: Absa Cards, says that in the initial period after the introduction of the National Credit Act (NCA), there was a noticeable fall-off in the number of successful applications for new credit cards, with volumes across the banking industry down by as much as a half.
”Previously risk used to be measured on propensity to pay,” Walker points out. ”Now the criteria are propensity to pay as well as affordability — with affordability representing the surplus money available to service debt.
”On the other hand, the introduction of the NCA has resulted in a levelling of the playing fields, in which all players — banks, retailers and micro-lenders among others — are all playing by the same rules. From that perspective, it’s a fundamentally fair and equitable process.”
Adds Walker: ”We at Absa, in common with the rest of the industry, had to get used to the new processes. But at the same time — regardless of the NCA — we were already becoming more conservative in terms of granting credit. We recognised early on that the economic cycle was turning, and we had already put steps in motion to tighten up our credit limit lending criteria, by the time the NCA was implemented.
”Now a year down the line, we have become more familiar with the process, we understand the needs of the Act, and those of our customers — and we are reviewing our processes all the time to ensure that they are as efficient as possible. While the application cycle now takes longer, we are trying to make it as easy as possible for customers — and as easy as possible for our own staff — to give effect to these processes.”
One of the positive benefits flowing from the Act, Walker points out, is that there are new opportunities around pricing and in aggregating information at a customer level.
”We have [a wealth] of data and we are able to make better and more accurate decisions. So while the volumes may have fallen off initially, customers have now got used to the fact that it’s a new process, that it’s a new credit Act and that it’s being implemented in their interests, as well as those of the country.”
Today, the volumes of new credit cards are in fact higher, and every year there are 300 000 to 400 000 people entering into legitimate jobs. ”So there is an opportunity to take a market share of that, as well as to cross-sell competitively and bring people over from other banks,” says Walker.
The Act distinguishes between customers who were already credit card holders before the implementation of the National Credit Act on June 1, 2007 (to whom the former Usury Act provisions apply) and new customers who applied for credit facilities on or after June 1 last year, to whom the new NCA criteria apply.
Existing card holders thus remain subject to Usury Act conditions, until such time as they either elect to take a different product, or apply to their financial institution to upgrade the card, or change the basics of the business relationship, for example.
”This has added to the complexity of the process from a technical perspective,” says Walker, ”because within our systems, we now recognise both Usury Act and NCA customers.” These portfolios are managed slightly differently, because of the varying conditions (such as those governing interest rates), although there are certain activities defined in the NCA that are now prohibited across all products.”
For new customers, the interest rate comprises a formula based on the repo rate. Effectively, this means that the usury cap is about 26% and the NCA cap is in the region of 35%. While this may seem at a glance to be unfair to new customers, the NCA interest rate cap takes into account that some former micro-loan operators operating on the fringes of legality, such as ”loan sharks,” have now all been brought under the same system. The NCA thus lays down ”one rule for all”.
”This is where we see the full levelling of the playing fields,” Walker emphasises.
Before the new credit Act became law, the cost of credit could previously have ranged from 70% to 80% (the micro end of the market) to as low as 20% to 24% for a traditional bank customer. The Act now provides for fair pricing across the lending spectrum — and in fact enshrines this in the legislation.
A credit card is a transaction tool, Walker emphasises, one which gives customers the opportunity and ability at the point of sale to decide whether they want to pay for the purchase over a longer payback period, or in full or a portion of it at the end of each month.
South African credit card holders also have access to the ”budget” facility (payment over an extended period of up to five years in some instances), which is relatively uncommon worldwide, but which can be used at point of sale locally to pay over an extended period for ”big ticket” items, for example, without having to apply for a personal loan to finance it.