On Credit Cards and Cashline

Jan 5, 2006
Banks to end spending on credit line-linked cards
They will remove Nets use from ATM cards that draw on personal lines

By Kelvin Wong
THE days of being able to make purchases on ATM or so-called 'debit' cards which actually draw on personal credit lines are coming to an end.

No longer will consumers be able to charge and sign, or even use Nets on these quasi-credit cards, essentially reducing them to the sole function of cash withdrawal from ATM machines.

The change, which is being implemented by both local and foreign banks here, stems from a meeting which the central bank reportedly had with the industry in the middle of last year.

The Monetary Authority of Singapore (MAS) is understood to have argued that these cards are really credit cards and should therefore be governed by its rules on credit cards, including a cap on credit.

Credit cards are charged interest at 24 per cent a year while credit lines, which are meant as personal overdraft accounts, usually attract lower annual rates of between 13 per cent and 17 per cent.

Standard debit or ATM cards, which draw on savings accounts that have money deposited in them, are unaffected by the changes.

In a recent circular to customers, DBS Bank said it would end the Nets facility on its Cashline ATM card from Feb 5. This was due to 'recent market and regulatory developments'.

When contacted, OCBC Bank said it had already made the change for its EasiCredit customers from Sept 30 last year while United Overseas Bank said it would replace its CashPlus debit cards, which can be charged and signed on, with ATM cards over the next two months.

But United Overseas Bank added that Nets transactions will 'still be available to customers with credit or positive balances'. Purchases made this way do not draw on borrowed funds.

MAS' policy is that a card by any name that draws on credit for spending is still a credit card. As such, 'banks that offer unsecured credit facilities linked to debit cards must comply with the credit card rules', it said.

The most pertinent rule in this case is a limit on how much credit a bank can offer on its credit cards - double a customer's monthly salary.

Customers who apply for a bank's credit line that comes with a debit or ATM card are usually also offered a separate credit card.

But since MAS also considers the debit or ATM card to be a credit card, the two - credit and debit - are still collectively subject to a cap of twice a customer's monthly wage.

Faced with this, the decision by banks to disallow spending on their ATM or debit cards that draw on credit lines is then largely a commercial one.

Once these cards are no longer deemed to be credit cards, credit line accounts will have a separate and equivalent cap of twice the monthly salary. Taken together with the credit card, this is potentially, four times.

Banks merely said that the measures were to ensure that customers did not breach the twice-monthly salary cap on credit cards.

Mr Wang will explain. First, the MAS set a rule (specifying a limit on the amount that a bank can lend to a customer via credit card). Then the banks found a way to work around the rule (they lent to customers not just through credit cards, but through debit cards linked to personal credit lines). Now the MAS is stepping in again to close the loophole (declaring that such debit cards function like credit cards, and therefore are also subject to the original rule).

However, the heart of the matter still eludes MAS. The real crux is - how much should a bank be allowed to lend to a customer for his general spending? If the limit is set at twice his monthly expenditure, then in principle that should be the limit, whether the lending is effected via credit cards, debit cards, personal cash lines or whatever other tool.

Otherwise the banks will just come up with new ways to circumvent the rules again (if they haven't already). For example, let's just put aside all the debit cards for a moment. If a customer can draw on his personal credit line to make early partial repayment on his credit card, then effectively he is borrowing from the bank (on the personal credit line) to repay what he had already borrowed from the bank (on the credit card), and by making such early partial repayment, he frees up his credit card limit, enabling himself to borrow some more on the credit card.

So the root problem - customers being able to easily borrow more than is good for them (or the bank) - manifests itself again.