Credit cards are far less prevalent in the Kingdom than in other countries, but the day will come when they have been widely adopted.
It's important, therefore, for Cambodians to understand the benefits and pitfalls associated with this form of lending.
A credit card is issued by a financial company, typically a bank, to a cardholder. It allows the user to purchase goods and services, based on the holder’s promise to pay.
The arrangement is structured as a revolving credit facility with a borrowing limit.
Outstanding balances do not have to be paid in full, and the cardholder is usually required to make a minimum monthly payment, which can be re-borrowed as long as the cardholder stays within the approved credit limit.
The issuing institution normally charges the cardholder an annual fee and interest on borrowed amounts, typically after a grace period for goods and services purchased.
For the cardholder, the main benefit is convenience, allowing for the instant purchase of goods and services, wherever and whenever the holder wants. Credit cards are accepted at 30 million locations in 170 countries.
Transactions are on credit, usually unsecured, eliminating the need to carry large amounts of cash.
The cardholder normally has a grace period, the time within which the balance must be paid before interest is charged.
A grace period, essentially interest-free credit, can vary from 15 to 60 days, and is expressed as a number of days from the billing date.
Additional benefits are accurate record-keeping and tracking of purchases, online and telephone purchases, and the potential to withhold payment for defective merchandise.
Some cards offer rewards programs and discounts.
The main disadvantage of a credit card is the interest rate, known as the annual percent rate, which is applied to balances beyond the grace period.
Rates, unregulated in most countries, can vary from 10 per cent to 79.9 per cent, the latter being the infamous rate levied by First Premier Bank in the US at one point.
As well as lack of regulation, rates are excessively high to cover fraud, significant profit margins, higher-than-normal default rates, and the interest-free period for customers who pay off their balances within the grace period.
As well as an annual fee, issuers will charge late fees and fees if limits are exceeded.
Use of credit cards requires discipline to avoid plunging into substantial and prolonged debt, a serious problem in many countries.
In the US, the average credit-card debt per household is US$15,800.
When a consumer pays cash, it is tangible and visible money out of the wallet. With a credit card, the pain is usually felt when the bill arrives.
Cambodia introduced credit cards in 2001, but the Kingdom’s credit cards are generally offered on a secured basis, meaning the cardholder collateralises the available limit on the card, normally at 110 per cent, with a time deposit.
Essentially, the bank is charging double to triple the normal rates on a loan that is secured by the cardholder’s cash.
It also earns an interest spread on the time deposit and, of course, merchant commission and interchange fees, which merchants at times attempt to pass on to cardholders in the form of surcharges.
The Cambodian market remains under-developed, with a low user and merchant penetration rate, few benefits and reward programs, lack of competition on rates and fees, and very few merchant discounts.
Expect this to change, as it has in most evolving markets, with widespread, everyday credit-card use among the population as banks grow more comfortable with the market risk and competition intensifies.
Anthony Galliano is chief executive of Cambodian Investment Management. [email protected]