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Interest free credit cards take on the BNPL

In Practice

“If you can’t beat ’em, join ’em,” as Bugs Bunny would say. This is exactly what NAB and CBA have done to take on the Buy-Now-Pay-Later (BNPL) phenomenon. NAB was the first to launch its new StraightUp credit card, which is aimed at millennials by offering interest-free purchases on credit anywhere that accepts Visa. Credit cards always charge interest, so this is an Australian first: a no-interest credit card. Here are features of the new NAB credit card:

    • NAB will charge a flat monthly charge for customers to access to a line of credit of up to $3,000.
      • $1,000 credit limit: $35 per month ($10 monthly fee included in your balance)
      • $2,000 credit limit: $75 p/m ($15 monthly fee included in your balance)
      • $3,000 credit limit: $110 p/m ($20 monthly fee included in your balance)
    • This means the customer is NOT required to pay the charge if the card isn’t used. 
    • The card will NOT charge interest.
    • The card does not have any annual fees, or late payment fees or  foreign currency fees

    CBA quickly followed suit, launching its foray into the interest-free credit card space, with its new ‘CommBank Neo’ card which also offers cash-back incentives to attract customers. Both NAB and CBA are playing catch-up after their traditional credit cards have been put aside in favour for Afterpay and Zip Co’s BNPL platforms.

    It’s about time the banks evolved their credit cards to suit a generation of young millennials that have different demands. According to the Reserve Bank of Australia (RBA), credit card usage in Australia has fallen by about 6.6% during 2019-2020, in favour of BNPL platforms. The stats clearly show credit use is on the nose as the growing millennial sector starts to conduct a lot of its digital transactions through the platforms offered by companies such as Zip Co (ASX: Z1P), Splitit Payments (ASX: SPT), Sezzle Inc (ASX: SZL) and AfterPay (ASX: APT).

    Features of the CBA card include:

    • CommBank Neo will provide customers with up to $3,000 credit
      • $1,000 credit limit: $12 monthly fee
      • $2,000 credit limit: $18 monthly fee
      • $3,000 credit limit: $22 monthly fee
    • Monthly fee dependent on your credit limit
    • No interest payments, no late payments, and no foreign currency fees
    • Monthly fee will be refunded if there are no purchases and the card balance is zero

    If we compare the two cards, the NAB StraightUp Card has a $10, $15, and $20 monthly fee for the same credit limits respectively. But the CommBank Neo offers eligible customers a range of benefits through cash-back offerings through more than 80 retailers.  

    So let’s compare the two. If you were to spend $1000 and it would take 12 months to repay:

    • NAB StraightUp Card would charge $240 in fees
    • CommBank Neo would charge $264 in fees
    • On a standard credit card with no annual fee and an interest rate of 14.0%, you’d be charged around $140 in interest.

    So instead of paying interest, a no-interest credit card holder is charged a monthly fee, which seems to equate to more than what an interest-rate-paying credit card holder would normally pay. In this example at least, it would seem that the interest-free card holder is actually paying more than regular fee-less ones.

    Our opinion: We think the big banks need to think a little harder before trying to pull the wool over the millennials’ eyes, because it will take a little more than interest-free credit cards to pay off in this sector.

    There is also an option to increase the credit limit to $3,000, which comes with a monthly fee of $20, or $240 annually regardless of whether you’re using the card for purchases or not.

    Comparatively, NAB also offers its traditional low-interest credit card where customers can get a $3,000 limit for an annual fee of $59, but will be charged 12.99% per annum on purchases, but only if those purchases are not paid off within 55 days. Yes – that is an interest-free period of 55 days where customers can get the exact same functionality of buying now and paying later.

    But hang on! Doesn’t Afterpay offer four easy fortnightly repayments? Yup, but let’s not bother calling it 56-days interest-free before we slug you with late fees.

    Frustratingly for many financial analysts, there is nothing new to BNPL, which has just become a very well-marketed concept between lay-by and credit cards.

    Assad Tannous, Head Trader and Founder at Asenna Capital, summarised the BNPL market obsession succinctly in a recent Tweet:

    “While Afterpay has risen to become the darling of the ASX and flagbearer of Australia’s tech capabilities, investors have been happily overlooking the fact the company reported a $19.8 million loss for FY20, and is facing intense competition by service providers rebadging existing products as BNPL for the sex appeal. This includes payments conglomerate PayPal (NASDAQ: PYPL) which is preparing to launch its BNPL product shortly, which will be made available to its existing 300 million customers. Comparatively, Afterpay has 9.9 million customers globally”.

    Credit to NAB for launching a world-first interest-free credit card but let’s be honest, there’s nothing new about it – they’re going to make more from monthly fees than they would have from the interest anyway.

    If this can get tongues wagging, how many synonyms can we find for the words “interest” and “fees”?

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