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By Maricel Burgonio Business, Reporter
The most number of credit-card
holders’ complaints are about wrong billings, inaccurate balances,
collection harassment, usurious interest rates, excessive charges
and penalties, high annual membership fees and difficulties in debt
restructuring.
There are complaints, such as the
cardholders’ loss of privacy, when the credit-card company sells
their customers’ data to third parties who use the data to call
the cardholders’ and sell them insurance schemes, appliances and
other products.
In The Manila Times’ interview
with credit-card company executives and the Bangko Sentral, which is
tasked with supervising the credit-card companies and the banks, the
problems were attributed mostly to the consumers’ or
credit-cardholders’ improper and unwise use of their cards.
It was claimed to The Times that
issues of interest charged and problems of restructuring debts
happen only to credit-card holders who overspend, and as a result of
overspending, are not able to pay on their monthly dues on time.
It was also claimed to The Times
that some of the problems come from the customers’
“illiteracy”—their failure to read the fine-print provisions
of the credit-card application and contract they signed in order to
get the credit card and their failure to read their monthly
statements.
The card company executives told
us that there are basically two types of cardholder.
The first type is the
“revolver”: this is the one who pays only the minimum balance or
even the greater portion of the balance but does not pay the whole
balance due in full.
The second type is the “transactor.”
This is the cardholder who pays in full or before the balance due
date.
Transactors rarely encounter
problems.
Revolvers often do.
Most cardholders in the
Philippines are revolvers.
They are the ones who complain
about being charge high interest rates.
Compounded by their
“illiteracy” the revolver kind of cardholder does not realize
that as long as his debt has not been paid in full he has to be
charged for the entire amount of the original debt—for example the
purchase price of an appliance or the price of the dinner.
In this way, since the debt is
assessed for interest monthly, the payment a cardholder ends up
paying for an original P1,000 debt could be much more than 200
percent if it takes him several months to liquidate that debt.
The Bangko Sentral created its
Consumars Affairs Unit in October 2006.
Since that time, credit-card
complaints, inquiries and requests (CIRs) have ranked second in the
number of complaints received from consumers.
The No. 1 rank is held by CIRs
about bank deposits.
Despite the high number of
complaints against credit-card companies, however, no credit-card
company or financial institution (bank or finance company) involved
in the credit-card industry has been charged with any crime or
wrongdoing.
Of the reported CIRs, no
financial institutions were charged with excessive charges as
credit-card rates and charges are normally market-driven and are
determined by the industry itself.
Elvira E. Ditching-Lorico, head
of the Consumer Affairs Unit of BSP, told The Times that complaints
of “excessive credit-card charges consists of the fees and
penalties on credit-card holders that are overspending, paying only
minimum balance monthly or not paying dues on time.” There are no
complaints of this kind from cardholders who pay in full and have no
balances, which are subject to further interest charges.
As a result, more and more
credit-card holders are consulting the BSP on how to restructure
their debts. The restructuring can be done by doing balance transfer
to another bank and balance conversion within the bank. But this may
cause other complications if in the end the consumer really does not
have the means to meet his payment schedules.
So, Lorito advices: “Spend
within your means. Don’t overspend or you will suffer.”
How about complaints about
wrong balances?
This happens rarely. And the
problem is quickly resolved with credit-card companies and the
banks.
How about surcharges?
These are absolutely not allowed.
Surcharges are charges placed on top of the original retail price of
the goods or services purchased by the card-holder. This is illegal
and prohibited, she said.
If there is surcharging, it is
done by the merchants or retail outlets.
One-half of all the CIRs about
credit cards, Lorito said, were resolved in February 2007.
“We, in the BSP, have resolved
cases of erroneous billings/unauthorized use of credit card,
excessive charges and penalties and collection harassment. However,
we cannot divulge complainants names since these are
confidential,” Lorico said.
No limit on fees on charges
On complaints about high fees and
charges, it seems that the BSP has no power over the banks and
credit-card companies.
The laws do not allow the Bangko
Sentral to curtail banks’ charges.
“BSP does not limit the amount
of fees or charges that banks may collect from their clients. We do
require, however, that banks properly disclose these charges to the
public so help them an informed choice or decision in transacting
with banks and their credit-card issuers,” she said.
No financial institutions can
ever be charged with the crime of levying excessive charges and
interest rates, since the rate of interest, including commissions,
premiums, fees or other charges, on any loan or any forbearance of
any money, goods or credits regardless of maturity and whether
secured or unsecured is not subject to any regulatory ceiling.
The 23 credit-card banks’
authorized and regular charges
There are now 23 supervised
credit card issuing and/or acquiring banks, both foreign and local.
Their interest rates vary since
the cost of doing business varies from bank to bank.
The costs/charges to a cardholder
are as follows:
Annual membership fee, finance
charge/interest, late payment fee, overlimit fee, cash advance fee,
lost card replacement fee, returned check penalty fee, other
applicable fees like litigation fees, etc.
All these fees are in the
credit-card issuance and acceptance contract between the bank-card
issuer and the credit-card holder.
Reports submitted by banks to the
BSP are on consolidated basis, hence the average profit for the
credit-card business segment of a bank cannot be determined.
Five parties
A typical credit-card transaction
generally involves five parties, namely the cardholder, card issuing
bank, merchant-retailer, card acquiring bank or merchant bank,
network-based system.
A typical credit-card purchase is
described as follows:
The cardholder selects an item,
agrees to pay the retail price to the merchant and represents
credit-card payment.
The merchant submits the purchase
details, including the card details to the acquiring bank for
approval;
The acquiring bank sends the
purchase details to the issuing bank.
The merchant receives a payment
guarantee and the cardholder receives the item.
The issuing bank remits to the
acquiring bank the retail price less the merchant service charge or
merchant discount.
The acquiring bank remits to the
merchant the retail price less the merchant service charge or
merchant discount.
The cardholder is billed for the
retail price by the issuing bank.
The interchange fee is a fee paid
by the acquiring bank to the issuing bank each time a global network
is used. It may be a bilateral fee, which has been negotiated
directly between the issuer and the acquirer, or it may be the
default multilateral rate, which is normally set by the global
network.
Merchants’ fee/service
charge/discount is negotiated directly between the acquiring bank
and the merchant.
It is calculated as a percentage
of the value of the goods purchased or services availed of by the
cardholder.
Meanwhile, profit for a
credit-card company consists of earnings through finance/interest
and other charges it imposed on the credit-card holder less
marketing and other operating expenses relative to credit-card
business.
A credit-card company’s profit
is also affected by provisioning for probable losses on cardholders
default.
Industry determined
rates and charges
Credit-card rates and charges are
determined by the industry itself. There are several contributory
factors leading to high finance charges.
Aside from the normal operating
and advertising/marketing expenses related to doing a credit-card
business, card issuers also have to recover losses from default
borrowers.
There are two ways banks use to
compute for finance charges: average daily balance and ending
balance.
In average daily balance, card
companies total your balance each day in a billing period, add them
up, then divide them by the number of days to arrive at the average
amount. The interest rate is then applied to this amount.
In ending balance, the interest
rate is applied on the amount of your balance at the end of the
billing period. This will include purchases and payments made during
the billing period.
BSP survey
Banks reduced interest rates on
credit-card transaction owing to stiff competition and low-interest
rate environment.
The BSP’s recent survey showed
that in the aftermath of different product promotions, banks have
lowered interest rates to a range of 2.25 percent to 3 percent a
month from 3.5 percent.
It is the BSP that pushed to
lower interest rates.
BSP Deputy Governor Nestor
Espenilla Jr. said that “promotions such as balance transfer [have
reduced] interest payments” such that they have encouraged
competition in the industry.
“We’re beginning to see
reduction in overall rates in a range of 2.25 percent to 3 percent.
Before, most were in 3 percent,” Espenilla said.
In light of low-interest rate
environment, the BSP has been urging banks to lower credit-card
interest rates instead of putting a cap through legislation.
BSP has a residual power to
implement a cap in imposing credit-card interest rates.
Banks impose high-interest rates
because of the risks involved as credit-card consumers are not
required to put in collateral to buy on credit.
Banks’ credit-card
receivables
Banks’ credit-card receivables
(CCRs) come from purchase of goods and services, cash advances,
annual membership and renewal fees and interests, penalties,
insurance fees, processing and service fees and other charges.
Universal/commercial banks (U/KBs)
still had the biggest exposures at 75.2-percent share of total CCRs.
Credit card and TB subsidiaries of U/KBs followed with a
19.7-percent share of total CCRs and the non-U/KB affiliated TBs
held the balance of 5.1 percent.
BSP’s latest report showed that
CCRs of U/KBs and thrift banks (TBs), inclusive of credit-card
subsidiaries, settled at P99.6 billion as of end-December 2006. The
sum is 15.2 percent higher than last quarter’s P86.5 billion, and
represents a 20.3-percent expansion from last year’s P82.8
billion.
These receivables were generally
current in status, except for some P16.3 billion, or 16.4 percent,
which were past due.
Credit bureau
As the credit bureau will be
centralized when the proper law is passed, it will expand its scope
in monitoring borrowers profile and seen to lower credit-card rates
because the banks will be more careful in picking clients.
However, the proposed
establishment of the credit bureau appears to suffer further delay
as Congress failed to ratify the bill in a special session last
February.
In the ownership structure of the
credit bureau, the bicameral committee took out the participation of
multilateral institutions, allowed only 10-percent share for each
industry association and diluted the shares of the BSP to 40
percent.
The next Congress will resume in
June this year.
A credit bureau provides
information on the historical credit performance of a prospective
borrower as well as information on the borrower’s total level of
debt.
This helps financial institutions
to conduct credit investigation in a timely manner and at less cost,
thereby mitigating the inherent risks that are often brought about
by the asymmetry of information between borrowers and lenders.
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