Easy credit cycle holds little for you

This article appeared originally in Gulf News: link to original article

I decided this time to talk about banks, not the way they operate, or the loose grip of the central bank; but the quality of their services prior to and post the crisis — more precisely their credit cards.

Very recently, I had an unfortunate incident with my credit card. Here is what happened: I deposited cash using the ATM, but no receipt was produced, and the money didn’t get credited to the credit card!

And like any good citizen, I filled a ‘cash deposit failure’ form, three times, and sent it to the bank by e-mail and fax (it’s okay, I was shocked too). Anyways, the issue took one month to be processed because the bank, at first, stated that I didn’t provide them with a receipt when that’s the core of the problem.

After that, they asked me to provide the ATM number when I am not in any way associated with the company that built the machine. When all of that was sorted out, the bank checked the wrong date and time!

When a month was over, I received a text message from the bank saying that my issue had been resolved. It was not to be. They just closed the case.

If we were discussing telecommunications, it would make total sense to talk about a monopolistic or a semi-monopolistic market — a duopoly. In the banking sector; we have more than 50 operational banks in the UAE with more than 1,000 branches as per the UAE Central Bank’s updated figures for 2010. And that’s after the post-crisis acquisitions and mergers.

Therefore, can we call the credit cards market, within the banking industry, a perfect competition? The natural logic is that the more players in a market, the higher the competition, which in turn is reflected in prices.

And producers, banks here, are price-takers, not price-influencers like in the telecommunications sector. Interest rates are determined by interbank rates published by central banks, and banks can only add a few points to attract enough customers.

As for consumers, who are savers and borrowers, they should have been at an advantage. This is not because of lower prices but because the quality of service provided should be critical to who gets the most business.

Yet, this seems to be so only in cases when cars are being abandoned in airports, or when banks offer special discounted interest rates for the sole reason that you are a UAE national.

Now you must know that I didn’t go after the bank for that credit card. Do you remember when banks were desperate for any kind of business between the years 2009 and 2011? During that period, banks managed the biggest marketing campaign for credit cards that the UAE has ever seen. ‘Free cards for life’, ‘0 charges’, and ‘unlimited skyward miles’ are just a few examples of the slogans that were the highlights of personal banking.

Brochures about different cards with all sorts of benefits were found everywhere. Call centre agents from banks that neither you nor your family members had accounts with would badger you with calls.

Well, that was the time when I got my credit card. At that time, people were too scared to put their money anywhere but in banks, or in huge gold investments.

And banks — being conservative and more careful with their lending — were keen to only lend money to those with clean records, those working for companies with secured pay, and those who had been working for the same company for many years. Since credit cards carried less risk in terms of the amounts being lent and you only had to pay a maximum of 5 per cent whenever your monthly financial situation deteriorated, they were “the thing”.

The logic behind the credit cards business is to issue as many as possible. Through annual fees for a few, the charges because of delayed payments, and the issuance of supplementary cards to your family members or for your own online shopping, the business model does fine.

This is not cash that you own, but rather loans of small amounts. What makes this worse is that psychologically, you seem to spend more when you pay with a card than when you pay with cash.

And even worse is when you spend what you won’t be making before the payment is due. So you end up paying the minimum amount required, allowing banks to charge interest and others to charge 3-5 per cent as ‘Murabaha’, not interest.

An example of the latter is someone buying aluminum contracts, selling them to you, and then selling them on your behalf to finance what some banks refer to as ‘covered cards’. The last thought that I want to leave you with is this: What happens when one person can get multiple credit cards from different banks?

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