If I go into a bank and ask for a loan, the bank will consider my proposal and certainly will consider security. If I go into a bank and ask for a credit card, after considering my income and general details, the bank will perhaps offer me a credit card with a limit of $2 000 or $3 000 – it may insist that I open an account.
If I respect that limit but always operate at the maximum of the limit, the bank may probably increase the limit to $5 000 – it earns more interest on my residual balance.
There is a difference in approach. On the one hand the bank will charge an interest rate on the loan of eight or nine per cent; if it is a mortgage it will be as low as six per cent.
On the other hand the bank interest charge for the credit card will be in the region of 30 per cent with a $50 to $75 charge for each late payment even if it is a day.
One may well ask why the difference? The answer is risk. Or perhaps opportunity. The markets are different. Is this fair?
The argument that in each case the bank is engaged in lending may be considered valid, but more realistically the aspects of opportunity and risk combine to validate the difference in interest rates. That is, as far as the bank is concerned.
In today’s depressed market, reaching out to the wider public with credit cards gives the bank an opportunity to increase its profitability in new areas as the traditional areas of profit making are now fraught with problems.
The question therefore arises whether or not it is fair for the banks to charge such a usurious interest rate for credit cards. Maybe yes it is justified, maybe no. From the time the customer purchases an item and the bank says yes, the bank is at risk.
The bank’s record in this area is not always good. Write-offs are frequent and customer relations with the bank may not be strong. The customer pays for the convenience of an expensive mechanism intended to serve 24 hours a day, including weekends.
The bank must be aware that customer’s credit rating is always at risk if it declines a transaction. Therefore the bank feels that it is justified in making a higher charge.
In the United States, where the economy has been going through hard times, the banks tried to compensate for losses in other areas, especially mortgages, by unconscientiously increasingly credit card rates and charges.
President Obama stepped in and placed a restriction on the practice. His argument was that he was helping out the banks and that they should show some social responsibility.
I believe that banks are making up for their reluctance to take loan risks by increasing their interest rate on credit cards. The Central Bank should carry out a check to see whether the risk in credit card lending justifies the exorbitant interest rates charged seemingly to maintain high profitability.
This is being done at a time when people are highly taxed. The Government then should be made aware of the findings of the Central Bank.
Those influential pundits and economists that figure that a national bank should not be owned by the government of a country ought to think twice about supporting the sale of the Barbados National Bank as it could make a difference at this time as a catalyst in the system. Imagine what a national bank with interest on credit cards of 10 to 15 per cent would do for citizens of this country.
As if not satisfied with the interest, banks usually earn a commission from the main credit issuer (Visa, American Express) for participating in using its system. Today we see banks producing balance sheets that say despite the hard times, that Barbadians are savers.
This too is putting pressure on the banks’ profitability. Banks want to hit back by lowering the savings rate. The Central Bank does not concur – so far.
• Harold Russell is a retired banker.