Banks are considering proposing a gradual reduction in card installments and revolving interest – 09/30/2023 – Market

The banking sector is already evaluating different alternatives to reduce interest on revolving credit cards. There are numerous proposals under study, according to Sheet found, but among them a model is being analyzed that could gradually, on the one hand, lead to a reduction in the revolving interest level and, on the other, help reduce the period for interest-free installment purchases.

Banks argue that the lack of a limit on the term for paying in installments for purchases worsens the dynamics of consumer debt and the functioning of the financial system, because it helps to put pressure on interest rates, including those on credit cards.

The proposals being debated in the sector have premises.

Basically, banks state that, if the payment is affordable, the consumer does not want to know what the interest rate is embedded in the product, and retailers, as they need to sell, offer softer installments over longer terms.

This, say financial institutions, increases the risk of non-payment of final installments. As banks bear this cost if the consumer does not pay all the installments, the risk puts pressure on interest rates to rise. It’s a vicious cycle, they argue.

Fintech and small retail associations reject this relationship between installments and non-payment of debts. According to data from members of Abranet (Brazilian Internet Association), which represents part of the digital payment companies, customers who buy in installments have lower defaults than customers who only buy in cash

But defenders of the gradual reduction model say they believe it is possible, over a transition period, to shorten the term of interest-free installment purchases, which would reduce the risk, and make the cost of credit as a whole also gave in. There would then be no risk of disruption of the current system, which supports the consumption structure in the country.

As rates and terms vary greatly in Brazil, simulations on the implementation and effects of the change are almost conceptual. However, in general, the idea is, over a transition period, which can vary from three to five years, to gradually reduce the deadlines.

Today there is no limitation, but most retailers work with terms of up to 12 installments, reaching up to 24 months. In the schedule, a ceiling would be established, not yet defined, with a progressive reduction to 15, 12, 10 months, reaching 6 or another floor that can be negotiated.

The proposal from fintech and small retail associations to reduce revolving fees, on the other hand, does not involve limiting interest-free installments. The suggestion is to increase competition, with debt portability between different banks and open banking. Furthermore, they suggest that issuing banks be more careful when issuing cards. Financial education programs are also among the proposals.

There is nothing closed, because among those involved in the discussion it is clear that it will be necessary to evaluate alternatives with all links in the card chain, which includes issuing banks, brands, card companies and retailers.

Reducing the term, advocates of the measure estimate, would simultaneously open up space for interest rates to fall for the consumer.

In August, the average interest rate charged by banks to individuals on revolving credit cards was 445.7% per year (from 12% to 15% per month), according to data released by the Central Bank this Wednesday ( 27). That is, three digits.

The big banks’ argument — different from what the small machine companies argue — is that, with the gradual reduction of the term, throughout the transition period, the annual rates could fall to double digits and the monthly rates, to single digits.

Fintech and small retail associations are against the reduction in the number of installments, as it affects consumption and the economy.

Datafolha research published on August 29 showed the support of traders for interest-free installment purchases in the city of São Paulo.

According to the survey, eight out of ten (81%) responsible for small establishments in the capital of São Paulo are against the end of interest-free installment sales on credit cards.

The discussion on how to reduce revolving interest rates is foreseen in the Desenrola Brasil bill, the government’s debt renegotiation program.

The rapporteur in the Chamber, deputy Alencar Santana (PT-SP), proposed that banks have 90 days, from the enactment of the law, to present a proposal that defines a level for revolving interest and for the payment of card bills in installments overdue.

The deputy warned that, if a consensus is not reached during this period, the revolving interest will be, at most, double the debt principal.

The Senate rapporteur, Rodrigo Cunha (Podemos-AL), made minimal changes, and the text should be voted on in the plenary next Monday (2), in a remote session.

During the 90 days reserved for debate on the topic, the financial sector expects the BC to coordinate the discussion and mediate with members of the chain.

This role of the BC was even signaled by Congress. The wording that the Chamber approved, and must be confirmed in the Senate, determines that banks make the self-regulation proposal through the monetary authority. The suggestion will still need to be approved by the CMN (National Monetary Council), through the BC.