Bank Funding Problems Need Not Impact Credit Card Fees

Funding remains a problem for most banks, forcing them with no other recourse but to transfer the burden of the rising costs on their customers. This is most likely the direction that banks will take rather than face lower profits with bigger funding problems. The manner how the finance sector plays the game over the years is decisively being set and altered by the burgeoning cost of capital. Banks and credit card providers alike are seen as choosing to pass the costs to their customers.

The global financial crisis has dealt a heavy blow on the banking system. Before the shakedown, costs were considerably low and liquidity was overflowing. With the crisis there was a heightened rivalry to get wholesale funding, which entailed cash loans from other entities, making prices very volatile. In fact, it has been said that capital may remain a scarce commodity for the next ten years. Funding will consequently be very costly for everyone.

It only follows that when the capital cost increases so do the funding cost. For instance, for people who are selling their mortgages, they have two options, which are to accept a reduction to their profits or pass on the price. The Australian banks have chosen their option that is to increase interest rates after several weeks of decreasing profit margins. Clearly this does not coincide with the steps taken by the Reserve Bank of Australia. Credit card providers are more likely to follow suit.

Incidentally, GE capital, a subsidiary of the General Electric Company of the United States and also one of the major non-bank entities in the finance sector in Australia has opted to leave the mortgage and car loan markets during the peak of the crisis at the closing of the year 2008. This is a clear example of choosing to accept the inevitable because GE knows that passing the cost to the consumers can be counter-productive and eventually leading to losses.

The group transferred their home loans to the Commonwealth Bank and sold out their Wizard Home Loans. What was left of the mortgage books, with $9 billion worth in assets, is about 60% less than its original size and is in the process of being ran down. Potential buyers are lining up regularly in the doorstep of the company, which will only sell with the right offer. Because the company has freed itself from a problematic industry, it now can focus on improving its existing businesses as it provides the engine for its credit card programs, which is operated by retailers like Myer and Harvey Norman. The company provides the needed finance for business secured against equipment and supervises business automotive fleets.

GE Capital Australia has been a major player in the domestic market since 1995 by buying the Coles Myer’s cards business. With the decisions made by the company as a response to the financial crisis, they hope to correct the growing perception they are trying to charge exorbitant interest rates on their marginalized customers. This perception is opposite the existing practices of the company where 80 percent of its credit borrowers were not charged with interest while 70 percent were repeat and loyal clients. GE Capital has the advantage of keeping their clients satisfied by not choosing to increase interest rates. They can do this by ridding themselves of funding-strapped endeavors and working on what remains a viable business, the credit card program.

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