Next to consumer loans, credit cards are banks’ main profit source

By Jerry Maglunog

Banks are also making a killing out of lending, aside from the conventional route of bank loans through tie-ups with credit-card companies. 

Margins for credit cards, especially when used abroad, are usually one of the highest among all services offered by banks. There are also two types of interest that a bank charges for credit-card clients — the ordinary interest pegged at 3 percent to 3.5 percent per month and the effective interest rate (EIR).

The ordinary rate is for regular domestic transaction like buying Frappucino mocha dark at Starbucks or socks at a mall, while the EIR (which has various rates depending where the user uses the card) varies with standard date of 3.4 percent to 4.2 percent.

When one looks at banks policy that they only need to pay 5 percent of their purchase or P500, whichever is higher, the client would say that the bank is very lenient when it comes to charging them.

According to Eduardo Olbes, executive vice president of Security Bank, the longer the credit-card user pays debts, the bigger margin a bank gets. “Can you just imagine the 5 percent every payment. That is not a small amount especially if your credit limit is big,” he said.

This is the reason why no commercial bank in the Philippines would suggest to any of their credit-card client to leave their card at home when going abroad. At one time, Metrobank Card Corp. president Riko Abdurrahman said that the bigger cash a traveler has in his wallet, the bigger risks he faces.

If margins are the reason banks are too eager to promote the use of credit card, whether domestically or abroad, some bankers who don’t want to be identified have the answer.

“Basically, the margins are next to consumer loans. Credit card is also part of consumer loan, actually,” a banker from one unibank said. He said universal banks’ total portfolio to housing and car-loan clients reaches P7 trillion, which is almost even with the lending volume from credit cards.

Banks promote frequent use of credit card for online shopping because the interest is bigger than conventional shopping. “It’s like charging the client for having a hassle-free shopping,” said Mark Joseph Panganiban, sales and marketing officer of Shopinas, the online subsidiary of Air21.

Panganiban said the client can still save if he or she rather does shopping online than go to the mall because the latter means clients would have to spend for gasoline or fare, parking fee and even meals.

“Going out is not ideal today in Metro Manila because there are now 16 million people in the metropolis,” he added. However, the official didn’t comment regarding the rate when the card is used online.

“Ours is just P6 per transaction, flat,” he said. Natividad Alejo, a senior official of the Bank of the Philippine Islands, admitted t the issuing bank gets the lion share in the cross-currency transaction charge, the charge that makes one’s credit-card billing balloon when used abroad.

“Probably it’s 40-30-30,” Alejo said, referring to the three entities that process a credit-card transaction. Forty percent goes to BPI, the issuing bank and the 30 percent each goes to either Visa, MasterCard, Diners or American Express and the entity where the transaction is made.

When asked why paying debt incurred via the card while abroad becomes more expensive, the banker said: “It’s not easy to transact when you’re out of the country. The risks are higher that’s why there are certain add-ons.”