Which4U – Finance Blog

Payday lenders are out to exploit the most vulnerable in the centre of the domestic slowdown, welfare bodies are warning.

The South Australian Council of Social Service has spoken out against payday lending companies after receiving a volume of complaints from concerned consumers.

Borrowers are being unfairly lured into taking out loans which, in some cases, appear to be interest-free, but which instead incur massive fees.

Cash Converters is one firm that has come under particular scrutiny for this practice. Despite their claims that no interest is payable on their loans, the charges often result in huge return rates for the lender.

The Advertiser reported that a desperate mother who took out a loan of $1,500 from the Cash Shop faces repayments totalling $2,600 in just four months – 73% interest.

Consumers turning to payday loans because of their struggles against the increasing cost of living are finding their problems exacerbated by interest rates and/or fees in excess of 100%.

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It hasn’t been a particularly good year for banks across the globe.

Many are still being downgraded by credit ratings agencies. Standard & Poor’s, addressed in the last post here, upset leading European figures when it issued a threat of widespread sovereign downgrades on the eve of the European summit.

Many banks and governments alike are struggling to raise funds or to find manageable rates at which to borrow. Those that can, on the other hand, are exploiting every drop of political advantage they can muster.

Many banks are commiting various kinds of atrocities. Many are simply finding ways – even unwittingly – to frustrate their customers.

Scandal-Struck

A number of UK banks have been caught up in scandals involving the elderly. As reported on our sister blog in the UK, a succession of banks have been caught and fined for mis-selling risky investment products to vulnerable consumers. Pensioners of 83 years on average were pressured into investing six-figure sums of their inheritence into long-term risk-heavy products, often when they were not even expected to survive the investment term. Collectively, banks have faced compensation payments approaching £150 million ($233 million).

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Consumers might have been forgiven for thinking that a timely boost was set to come their way in time for Christmas.

It is widely predicted that central interest rates, which had remained untouched since April 2009, will fall for the second consecutive month when the Federal Bank’s committee convenes next week for the final time in 2011.

But the untimely downgrading of Australian banks by credit ratings agencies this week has put a new complexion on the immediate forecast for bank funding, irrespective of whether a central rate cut is announced or not. Consumers are set to lose out when they may have expected to benefit.

Downgrading

Standard & Poor’s have downgraded a number of major banks worldwide, including Barclays, HSBC, Goldman Sachs, UBS in Switzerland and the Bank of America. In Australia, the Commonwealth Bank, ANZ, National Australia Bank and Westpac all fell by one grade to AA[-], the agency’s fourth-highest rating. Macquarie Group was cut by two levels to BBB, a grade which anticipates a level of risk from adverse economic conditions.

What these reductions do is heighten insecurity for banks to lend to one another. This, in turn, raises the cost of lending as banks insure themselves from that elevated level of risk.

Such costs will no doubt be absorbed by consumers through less competitive savings and loan rates. A central interest rate cut may prove welcome only insofar as it prevents loan rates from rising.

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Are we being taken for fools on the essential banking products that we choose?

An interesting parallel has emerged between Australia and the UK in the world of personal finance: an enquiry into value for money on fee-driven banking products.

Australia: Credit Card Fees

About half of all Australian credit card holders are getting no value from their credit card rewards because of fees, it was reported last week. In most cases, annual fees are outweighing the value of rewards such as air-miles, and only very high levels of spending – roughly $60,000 per year – could make such benefits count.

Contrast this with the average annual Australian credit card spend of $17,000, which itself is artificially heightened by very high spenders, and we see the degree to which fees outstrip potential rewards.

A monthly spend of $1,000 could see fees exceed potential benefits by as much as a third in value even before interest is factored in.

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The ban on mortgage exit fees introduced in July have been making their first impact this week, following the 0.25% interest rate cut made by the Reserve Bank.

All major lenders have been compelled to respond in the knowledge that home loan holders are now able to walk away from any home loan deal without incurring financial penalties.

November’s interest rate cut from 4.75% to 4.5%, the first cut in 2 ½ years, has provided the first real pretext for banks to respond amid concerns that, under the new legislation, loan holders could easily defect to banks offering better deals.

Were the full 0.25% cut to be passed on to consumers, the average standard variable mortgage rate would be falling from 7.79% to 7.54%, saving roughly $50 per month on an average mortgage.

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The future of financial transactions for the next generation may now be upon us.

With the increasing number and popularity of mobile apps, major financial bodies have been looking towards innovative new payment systems for mobile devices.

The prospective launch of these new mobile payment systems could now spell the beginning of the end for the trusty plastic credit card.

Commonwealth Gold: KaChing!

Last month, Google announced their new ‘Wallet’ app, a system using Near Field Communication technology (NFC) which is designed to make payments easier for consumers while offering retailers more ways to offer loyalty programs.

But they may be beaten to the chase by Australia’s Commonwealth Bank, which has launched ‘Kaching‘, an app which allows smart phones / iPhones to connect with cash registers and to make payments by email and Facebook. It will be available before Christmas to iPhone users with operating system iOS4 or above, and makes CommBank the first commercial provider of a mobile payment system.

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