Credit surge

Why are the region's banks seemingly falling over themselves to offer consumers credit cards?

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By  David Ingham Published  November 6, 2003

|~||~||~|National Bank of Dubai's (NBD's) latest card initiative shows just how competitive the regional credit card market is becoming. Gold Card credit holders of any bank or financial institution in the UAE can now transfer their outstanding balance to an NBD instalment scheme that offers what the bank describes as 'lower than average' interest rates.

"If anyone finds their current credit card is weighing them down, we are offering a 'low-cost diet' alternative," says AbdulFattah Sharaf, divisional head, cards business, National Bank of Dubai (NBD.)
"All credit card holders have to do is submit their current gold card to us and we will convert the balance to an NBD instalment scheme with only a 9.95% annual interest rate."

According to Sharaf, other privileges include Internet banking, personal & travel insurance and emergency medical services.
"Not only will there be benefits from a lower than average interest rate, anyone who decides to opt for NBD's Balance Takeover Scheme will automatically receive an NBD Gold credit card if they qualify in terms of our policy," adds Sharaf.

A generous offer, it would seem, but this is not the only example of the region's banks seemingly falling over themselves to offer credit cards to consumers. Newspapers are full of adverts for credit cards, the perks you receive for using one are becoming more and more attractive and the amount that you need to earn to qualify for one has fallen as low as Dhs2500.

The reason, according to industry executives, is that credit cards are an excellent way to get into the retail banking sector and, in particular, the consumer loans industry.

The thinking is that if a consumer has a good experience with a bank's credit card division, he or she will then be more likely to take out loans with the same bank.

"A credit card is a tool for banks to get into the consumer lending industry: home loans, car loans, insurance," says Priyan Attygalle, senior cards manager, HSBC Middle East Managment Office. "Therefore, it's very important for them to get their credit card business right. A credit card is a hook to get the customer into the bank and you can then start cross selling.

"In the olden days, people looked at corporate lending to be the most profitable business and now banks have realised that the money is in consumer lending. That is why you find that banks that were known to be corporate lenders are now entering the consumer segment and the credit card is one of the major strings in their bow."

It may sound strange to hear that the consumer business is more profitable than the corporate one, but Attygalle's explanation makes perfect sense.

"It's a good way for a bank to spread its risk. You have smaller amounts spread amongst a large population, and the margins are better," he explains. "If a company goes bust, the employees are going to get back on their feet. But, if the company goes bust, you've lost the money altogether."

All this explains why Arab Bank is moving aggressively with its new Visa Credit Card product. That's right: one of the most conservative, most corporate oriented banks in the region says it is deadly serious about moving into the retail segment, as its senior management readily acknowledges.

"Steady steps have been successfully accomplished to start and develop retail banking services at Arab Bank UAE," says Mohammed Azab, senior vice president and United Arab Emirates area manager. "We have initially started with personal loans and then expanded into auto loans and now the Visa credit card, which will complement our product offerings to our retail customer base."

The Arab Bank card comes with features such as 52 days of interest free credit and up to 40% of the customer's credit limit available in cash advances. The bank claims its interest rate on purchases is one of the lowest in the UAE market at 1.5% per month.

Interest on cash advances on the new card is 1.75% per month. Arab Bank also launched the card to coincide with Visa's 'Win Your Dream Home' campaign, which allows people who have made five credit card transactions in a month to enter a draw for a $275,000 home anywhere in the world.

The bank's move into the retail segment comes after years of operation in the UAE. Arab Bank's global strategy calls for expansion into individual and retail banking services and the UAE is part of that global movement.

More products are planned, the bank insists. "The bank's global strategy calls for expansion into individual and retail banking services, and thus the UAE operation's steps into retail banking is part of a global initiative," explains Mohammed Azab.
Of course, many customers take a credit card by default because their bank is offering it. Attracting customers that don't have their current accounts with you and making people spend on credit depends on repayment rates and the perks attached to the card.

As the market becomes more competitive, banks are becoming more and more creative, and generous, in the benefits that they offer. Dubai Bank, a relative newcomer to the banking market, is offering a generous host of services to its credit card holders, including household and life insurance.

Citibank has recently done a deal with E-Vision, the cable TV provider. The agreement allows holders of the Citibank Emirates credit card to pay their annual E-Vision subscription fees in three interest free instalments, in return for which they receive Skywards Miles. Users of other Citibank credit cards will be awarded triple the annual subscription amount in CitiDollars, which can be redeemed for gifts.

Co-branded cards like Citibank's Emirates card are a growing trend. Samsung Electronics, the Korean consumer electronics giant, and UAE-based Mashreqbank launched a co-branded card earlier this year.

The card allows customers to purchase Samsung products through interest free payment options, as well as receiving extended warranties on all products. As an introductory offer, early subscribers received bonus points to redeem against either a VCD player or a microwave oven.

"This is the first time a global leader in digital technology and a leading UAE bank have joined forces to offer a unique loyalty programme of this magnitude," says D K Byeon, president of Samsung Gulf Electronics.

"Today's consumers want more from their loyalty programmes and as such the Samsung Mashreqbank credit card offers the type of premium rewards that they rightly expect."

As the number of credit cards in circulation increases, the need to be vigilant about bad debt increases.

No figures exist to reveal the size of the problem, but surprisingly, major banks say that bad debt is not such a problem in the UAE and even in the wider Gulf.

Although there are no credit ratings agencies in existence, something that they agree would be welcome, banks are perfecting their own methodologies for screening customers.

"There are no ratings agencies, but what we do is 'score' customers, using models that are tried and tested," explains HSBC's Attygalle.
"It takes a group of customers that have certain traits and we compare those with data that we have compiled before."

Mashreqbank is another organisation that has made much of its internal screening procedures. It uses modelling software to try to predict consumer habits and it admits to taking nationality and occupation into account when fixing limits and making decisions on who gets a credit card.

"We have made a big investment in a retail credit lending system," explains Abdul Aziz Al Ghurair, Mashreqbank's CEO. "We now have centralised credit approval."

At the end of calendar year 2002, there were believed to be 829,000 credit cards in circulation in the UAE and the average spend per card was $2500. The good news, according to Attygalle, is that the market is far from saturated. "If you take most of the people here, they still make their payments using cash," he says.||**||

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