Australian lenders hope no-interest cards can arrest a decline in usage and attract younger customers.
4 min
Interest charges have been one of the defining features of credit cards for decades and so when an employee at a big Australian bank suggested getting rid of them, he was taking a risk.
“He said, ‘Well, what about a no-interest credit card?’ ” said Rachel Slade, personal banking group executive at National Australia Bank Ltd., recalling a feedback session at one of the lender’s Melbourne offices. “And everyone’s like, ‘What? That’s not how a credit card works.’ ”
Worried about dwindling credit-card usage during the coronavirus pandemic and the rapid rise of startups like Australia’s Afterpay Ltd. and Sweden’s Klarna Bank AB that allow consumers to pay for goods in instalments, some banks are rethinking what has been one of their most lucrative businesses.
National Australia Bank, known locally as NAB, launched a no-interest credit card in September. Users get a fixed line of credit and the bank levies a monthly fee, which is refunded if the customer maintains a zero balance and doesn’t use the card. Commonwealth Bank of Australia, the country’s largest lender by market value, also unveiled a no-interest card last year.
The experiment isn’t being replicated in the U.S. where most credit-card issuers charge interest when cardholders carry balances. But if they prove to be successful, Australian banks’ no-interest cards could drive change in other markets.
Fees on the cards offered by NAB and CBA vary according to credit limits. For example, a balance of $1000 Australian dollars on CBA’s no-interest card could accrue nearly $484 in fees over 40 months if there is an outstanding balance each month. The same balance on the NAB card repaid at that product’s minimum rate would cost about $292 over 29 months.
In both cases, that is more than the interest accrued by a customer making the same repayments on a regular card with a 16.6% annual percentage rate, the typical rate in Australia. And like with other cards, customers are required to make minimum monthly repayments on any outstanding balances.
Still, the banks are betting that consumers will like the products for their simplicity. No-interest cards are designed to give customers more control over their spending via a product that is easy to understand, said Angus Sullivan, CBA’s group executive of retail banking services.
According to Australia’s central bank, the country’s credit and charge card balances fell by almost 34% in the two years through October to the equivalent of $21.17 billion. More than 60% of the decline came in March and October last year as the pandemic pushed Australia’s economy into recession.
Over the same period, debit-card transactions locally grew by 4.7% in number and by 5.6% in value, to hit more than the equivalent of nearly $33 billion.
Some analysts view the no-interest cards as a salvo in an intensifying battle for share of the payments market between banks with large credit-card businesses and buy now, pay later providers like Afterpay and Zip Co.
In Australia, buy-now-pay-later services don’t need to verify income or check existing debts held by users, which makes it easier for consumers to gain access to those products than a traditional credit card.
According to their most recent half-yearly filings, Afterpay and Zip respectively count 14% and 9% of Australia and New Zealand’s combined adult populations as customers. The average age of the 3.3 million Australians and New Zealanders using Afterpay at the end of June was 35 and 33, respectively.
Ms Slade said NAB’s no-interest card aims to attract younger customers who don’t necessarily have strong ties to the bank, illustrating a broad concern among traditional lenders that they are losing out in the battle for millennials.
In the three months since launch, the StraightUp card was among NAB’s three most popular credit cards among new applicants. Demand was strongest among customers under 40 years old, the bank said.
Tom Beadle, an analyst at UBS Group AG, said it is unlikely that no-interest credit cards in Australia will be a material threat to the buy now, pay later sector. This is because the consumer still needs to pay for the cards through upfront fees of up to $22 a month.
In contrast, buy now, pay later services often charge no interest and are generally free to users who make payments on time. A survey published by UBS in October found that most buy now, pay later users valued the payment method because it helped them to budget and they considered it convenient.
“The whole beauty of Afterpay is that it’s just really simple: It’s free,” Mr Beadle said. “People just want simplicity, and Afterpay have absolutely nailed that.”
Afterpay and Zip have made no secret that they intend to challenge credit-card providers. In August, Zip said the credit card industry was fundamentally broken, citing high revolving interest, confusing terms, a lack of trust and an absence of brand loyalty that had accelerated a structural decline in usage.
Four years after its debut on Australia’s stock market with a market value of $149 million, Afterpay is now worth US$32.7 billion. Afterpay and Zip are also expanding in the U.S., recording a combined A$7.4 billion Australian dollars in transactions on their networks in the six months through June.
Still, the UBS survey, based on 1,000 respondents, found a “not insignificant proportion” of users appear to regard buy now, pay later as a line of credit. Some 25% of users said they couldn’t afford a product with their existing savings, while 12% said they couldn’t get approval for a credit card.
Australia’s experience could offer lessons to the U.S., where lenders are also seeing a decline in credit-card usage and growth in debit-card usage, although it will take time before banks can be sure no-interest cards are popular.
Credit reporting firm Experian PLC said that U.S. consumer credit card debt in 2020 contracted for the first time in eight years. After hitting a record high of US$829 billion in 2019, balances decreased by 9% in the past year.
At Visa Inc. and Mastercard Inc., U.S. debit-card dollar payment and purchase volume collectively rose 23% year-over-year in the quarter ended in September, more than double the pre-Covid-19 growth rate; the same measure for credit cards was down 8%.
Some American credit-card issuers are seeking to slow the buy now, pay later industry’s growth in other ways. Late last year, Capital One Financial Corp. stopped their cards from being used to make Afterpay purchases and payments, the Australian company said.
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Parts for iPhones to cost more owing to surging demand from AI companies.
4 min
Apple has dominated the electronics supply chain for years. No more.
Artificial-intelligence companies are writing huge checks for chips, memory, specialised glass fibre and more, and they have begun to out-duel Apple in the race to secure components.
Suppliers accustomed to catering to Apple’s every whim are gaining the leverage to demand that the iPhone maker pay more.
Apple’s normally generous profit margins will face pressure this year, analysts say, and consumers could eventually feel the hit.
Chief Executive Tim Cook mentioned the problem in a Thursday earnings call, saying Apple was seeing constraints in its chip supplies and that memory prices were increasing significantly.
Those comments appeared to weigh on Apple shares, which traded flat despite blowout iPhone sales and record company profit.
“Apple is getting squeezed for sure,” said Sravan Kundojjala, who analyses the industry for research firm SemiAnalysis.
AI chip leader Nvidia recently became the largest customer of Taiwan Semiconductor Manufacturing , or TSMC, Nvidia Chief Executive Jensen Huang said on a podcast.
Apple had been TSMC’s biggest customer by a wide margin for years. TSMC is the world’s leading manufacturer of advanced chips for AI servers, smartphones and other computing devices.
Spokesmen for Apple and TSMC declined to comment.
The big computers that handle AI tasks don’t look like the smartphones consumers own, but many companies supply components for both. In particular, memory chips are in short supply as companies such as OpenAI, Alphabet’s Google, Meta , Microsoft and others collectively spend hundreds of billions of dollars to build AI computing capacity.
“The rate of increase in the price of memory is unprecedented,” said Mike Howard , an analyst for research firm TechInsights.
That applies both to the flash memory chips that store photos and videos, called NAND, as well as the memory used to run apps quickly, called DRAM.
By the end of this year, the price of DRAM will quadruple from 2023 levels, and NAND will more than triple, estimates TechInsights.
Howard estimates that Apple could pay $57 more for the two types of memory that go into the base-model iPhone 18 due this fall compared with the base model iPhone 17 currently on sale. For a device that retails for $799, that would be a big hit to profit margins.
Apple’s purchasing power and expertise in designing advanced electronics long made it an unrivaled Goliath among the Asian companies that make most of the iPhone’s parts and assemble the device.
Apple spends billions of dollars a year on NAND, for instance, according to people familiar with the figures, likely making it the single biggest buyer globally. Suppliers flocked to win Apple’s business, hoping to leverage its know-how and prestige to attract other customers.
These days, however, “the companies now pushing the boundaries of human‑scale engineering are the ones like Nvidia,” said Ming-chi Kuo, an analyst with TF International Securities.
Demand for AI hardware is poised to keep growing rapidly. Apple’s spending growth is modest in comparison with what is being spent to fill up AI data centers, even though it is breaking records with huge sales of the iPhone 17.
Samsung Electronics and SK Hynix are raising the price of a type of DRAM chip for Apple, according to people familiar with Apple’s supply chain.
Big AI companies pay generously and are willing to lock in supply and make upfront payments, giving the South Korean chip makers leverage against the iPhone maker.
Apple signs long-term contracts for memory, but it has used its heft to squeeze suppliers.
Its contracts have empowered it to negotiate prices as often as weekly, and to even refuse to buy any memory from a supplier if Apple didn’t view the price as favorable, according to people familiar with its memory purchases.
To boost leverage with suppliers, Apple even began stocking more inventory of memory. That was atypical for Cook, who normally cuts inventory to the bone to maximize Apple’s cash flow.
Apple is fighting not only for current deliveries but also for the attention of engineers at suppliers.
Glass scientists who worked on developing the smoothest and lightest smartphone displays are now also spending time on specialised glass for packaging advanced AI processing chips, according to industry executives.
Makers of sensors and other gizmos inside the iPhone are winning new business from AI companies such as OpenAI that are developing their own hardware.
Still, suppliers said they were far from giving up on business with Apple. Working with Apple is a form of education, they said, because it remains one of the most demanding and disciplined customers in the industry.
TSMC, the Taiwanese chip manufacturer, has built successive generations of its most advanced chips with Apple as its lead customer, relying on the big predictable demand for iPhones.
Now that TSMC is doing more business with Nvidia and other AI companies, people with knowledge of the chip supply chain said Apple was exploring whether some lower-end processors could be made by someone other than TSMC.
One of Apple’s biggest profit-spinners is selling extra memory for far more than the memory chips cost the company.
Last fall Apple discontinued the iPhone Pro model with 128 gigabytes of storage.
Customers who want that model must now start at 256 gigabytes and pay $100 more—the type of move that could be repeated this year to help Apple offset higher costs, wrote Craig Moffett, an analyst at Moffett Nathanson, in an investor note.
However, Apple isn’t expected to raise the price of its next iPhone models over similarly equipped iPhone 17s, said Kuo, the analyst.
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