Changes to the usury rate came into effect recently and herald a new era of competition among banks, especially in the credit card market.
Moreover, the introduction of the National Credit Act will open a whole new market for the banks.
Says Sim Tshabalala, CE of personal and business banking at Standard Bank, banking will never be the same again. Banks will start to price for risk and the bank that gets its risk model right will reap the benefits.
Banks increasingly will be tailoring products at different rates for different clients and bringing new competitive offerings to the market. For example, while FNB’s best customers are charged 15,5% on outstanding balances of R10 000, others will pay 23% on the same balance.
The usury rate, which stipulates the maximum a bank can charge a client on a loan, has been increased to 20% for loans exceeding R10 000 and 23% for loans of R10 000 or less. Yet not all the banks have taken the opportunity to increase their rates, despite facing margin squeezes over the past eight months. It would appear that the banks are watching each other carefully and assessing their options.
While FNB and Standard Bank have increased their rates across their various credit card offerings, Nedbank, Absa and Virgin Money are taking a wait-and-see attitude. Absa says a rate hike is under consideration, while Graeme Holmes of Nedbank consumer card services says: “Nedbank is currently assessing its options around changing the interest charged on credit cards.”
Banks have been under margin pressure since June last year when interest rates were raised, but the usury Act prevented them from increasing the interest rate on loans beyond the maximum of 17% and 20% for loans of more and less than R10 000 respectively. The reason for not changing the usury rate was the implementation of the National Credit Act, which comes into effect on June 1 this year and provides a new pricing framework. In fact, banks will be able to charge far higher interest rates under the Act, based on the Reserve Bank’s lending rate (repo rate). That means technically banks would be able to charge as much as 28% on credit cards. But with increased competition, banks will start to price for risk and lower-risk customers will be offered more favourable rates. At the same time the banks will be able to enter the lower end of the market, where they can charge far higher rates than are currently allowed to offset the risk and costs of servicing lower-value accounts.
It remains to be seen whether any bank will charge the full 28% — the rate charged is likely to form part of each bank’s competitive arsenal to win and maintain customers.
An important change in the usury rate is that it is now linked to the repo rate and, therefore, becomes more flexible. Banks will no longer require the Government Gazette to stipulate the new rates when the repo rate changes, avoiding the margin squeeze they have recently experienced.
Gavin Muller of Virgin Money says this also allows for a gradual move to align with the Act.
The Act will only govern loans that are entered into from June 1. Existing credit cards, therefore, will not fall under the National Credit Act. According to Mike MacMillan, head of retail credit at FNB, only if a customer changes his or her credit limit will the contract be deemed new and the Act rates could apply. But, Muller says, it is unlikely the banks would actually hike rates to those levels as they would lose competitive advantage. He says that under the usury rates banks are already making good profits on middle- and upper-income earners. The real benefit of the Act’s rates is that it will allow banks to price for risk, compete on interest rates and to extend credit cards to the lower end of the market. “Currently interest rates are not a talking point; under [the Act] it will become one,” says Muller.
Tshabalala says Standard Bank is working hard on coming up with appropriate risk ratings to be competitive and enter new markets. “We will be able to enter risk grades we have not entered before and price accordingly within the bands of legislation,” says Tshabalala, who adds that there is no doubt that there will be an increase in competition.
MacMillan points out that, under the Act, banks will be allowed to charge a monthly service fee of up to R50. This is in addition to the annual card fee and in lieu of penalty fees, which will be scrapped. So a low-risk client who never defaults may have a service fee of R10 a month, while customers who are more inconsistent in making their monthly payments will have a R50 service fee.
With banks now able to enter a whole new market, the frenzy of new credit cards we have seen over the past year is just the tip of the iceberg. However, MacMillan argues that under the new code of conduct, affordability will be a major driver. “We can’t dish cards out, we must do affordability tests,” says MacMillan, who argues that despite some interpretations that cold calling will not be allowed under the Act, they will be able to contact an existing customer after assessing if they can afford the credit to make a serious offer.