MANILA, Philippines - Credit card companies extract charges estimated at some P24 billion a month from some 5.7-million cardholders around the country, making far more money than most banks make in extending loans to commercial borrowers.
This is based on data obtained from the Bangko Sentral ng Pilipinas (BSP) and from estimates showing interest charges on card purchases averaging 35% in most cases, to the horror of some legislators.
Regulators also said they understand the motivation behind ongoing efforts to cap credit-card charges to no more than 1% a month but fear that legislation, rather than market forces, alone will only introduce price distortions and other unintended consequences in the P136-billion credit-card market if the legislators were to prevail.
BSP Governor Amando Tetangco Jr. stressed this point in an e-mail over the weekend, where he said competition and price discovery are far more effective mechanisms against exorbitant credit-card charges.
“We may be creating unintended consequences if we regulate interest rates on certain credit products and not on others. Determining what level is appropriate for one type versus another may create distortions that could unduly weaken the credit transmission power of monetary policy,” Tetangco, who has just returned from the annual meetings of the International Monetary Fund/World Bank Group in Washington, D.C., said.
Sen. Ramon Revilla Jr. is scandalized that card companies exact their pound of flesh as high as 35% a year on hapless credit-card users, and wants to limit such charges to no more than 1% a month or only 12% a year.
Tetangco said what one really needs is not a law that artificially caps credit-card charges but “an environment where there is more competition to naturally temper prices and improve services.”
“With more competition and improved information, those who have funds to lend will be able to offer these at appropriate prices to targeted borrowers.
“And those who have projects for funding or even those with funding needs for consumer goods will be able to ‘shop around’ for the best lender that would suit their needs. We need to empower both lender and borrower,” he said.
The high charges of credit-card companies may be attributed to the high incidence of credit-card defaults of around 14% at present, a top bank executive said in an intereview.
With inflation averaging 3.5%, this means card issuers still make money off card users at an extravagant rate of 17.55 and still way above the 12% cap Senator Revilla has proposed.
This means a cool P23.8 billion for card companies each month that card users do not settle their dues in full, and a multibillion-peso incentive for the industry to keep the charges where they are.
“There may be irresponsible card users in some of them but the card companies are really screwing cardholders,” the bank executive said.
For Tetangco, the issue of exorbitant card rates can be solved by getting the approved Credit Information System Act (Cisa) working at once and by appointing capable officials and immediately funding its operations.
Securities and Exchange Commission chairman Fe Barin, upon whose shoulders the Cisa commmissioning had fallen, said board members have started organizing already but have yet to receive funding.
In any case, Barin, a former secretary of the Monetary Board, the policymaking body of the BSP, said “loose” credit standards borne of extreme competition among card issuers were to blame for the high card rates rather than the continued absence of the Cisa agency.
Tetangco, however, believes otherwise, saying card companies have been forced to price the irresponsible behavior of some credit-card borrowers in charges that apply to both good and bad credit card holders.
“In the absence of an extensive working credit information bureau to allow credit companies to more efficiently determine which is good and which is poor credit among borrowers, they resort to such a pricing scheme,” he said.
He allowed that some cardholders do not fully understand the procedure for extracting charges or do not read the fine print and, worse, have not been sufficiently informed.
“The issue of ‘surprises’ in credit-card fees in statements could be addressed by tightened disclosure practices and improving consumer financial literacy. These will help consumers determine, before they purchase using a credit card, if such a purchase is something that their cashflow could sustain.
“The BSP has a financial education program. We have recently beefed this up and energized this, and have brought this around the country. One could say this is of a medium-term perspective. In other words, it’s not a quick fix. But I believe a change in spending and consumption patterns in the public is necessary to engender a more lasting solution to the problem,” Tetangco said.