CommBank launches 0% interest credit card to take on Afterpay, BNPL market

As the competition heats up to provide alternatives to buy now, pay later services, Commonwealth Bank has announced it is launching a new credit card that charges no interest.
Source: www.canstar.com.au - 9/09/2020. Based on personal, unsecured credit cards on Canstar's database. Calculations based on equal monthly repayments considering monthly fees or interest charges as specified. ^Effective rate based on specified monthly fee and an opening balance of $1,000, $2,000 and $3,000 at the start of the 12 months.
CBA has launched a new interest-free credit card. Image source: Mike Hewlett

Called the CommBank Neo, the bank states the card “will be available in late 2020”. However, CBA is taking expressions of interest now, providing a contact form for people to fill out that enables a customer service representative to get in touch when the card is ready to be launched.

What is the CommBank Neo card?

According to CBA, the key features of the CommBank Neo card include:

  • Three credit limits of $1,000, $2,000 and $3,000
  • A monthly fee of:
    • $12 for customers with the $1,000 limit
    • $18 for the $2,000 limit
    • $22 for the $3,000 limit
  • No monthly fee if the card is not used and the card balance is zero
  • No late fees
  • No cash advances (though “exceptions may apply”) and not able to be used for gambling
  • No foreign exchange fees
  • No additional cardholder fees
  • Minimum repayment of $25 or 2% of your closing balance, whichever is greater
  • Access to rewards via CBA’s loyalty program, CommBank Rewards, which offers cash back offerings from 80+ retailers to eligible customers.

The Neo card differs from some traditional credit cards as users cannot go over the credit limit: “Any transactions which exceed the limit will be declined,” the bank states. Users will also not be charged a fee or interest for late payment, according to the information issued by CBA.

The bank also lists the Neo’s “trade-offs”, which include:

  • You won’t earn Awards points
  • International travel insurance isn’t included
  • No balance transfers
  • Not eligible for SurePay plans or Wealth Package benefits
  • Low credit limits

What are the pros and cons of the CommBank Neo card?

According to CBA, the benefits of the Neo card include that it could give “customers certainty and control over their spending through a simple, easy to understand product”, and that it “can be used anywhere that Mastercard is accepted.”

“Other credit cards charge an interest rate and late fees,” CBA states on its website. “With CommBank Neo, you can say goodbye to interest and late fees so you have the confidence to manage your finances. Flat monthly fee based on your credit limit.”

Canstar money expert Effie Zahos said consumers needed to take care when viewing any new credit offering, and while this new type of “0% interest but monthly fee” product could be suitable for some Australians, it also added yet another layer of complexity to the wide range of products already available.

“You really need to do your homework and work out what the best card is for you,” she said. “And it is really important for customers to take care when considering an ‘interest free’ product which has a monthly fee.

“While ‘no interest for the life of the card’ sounds great, the reality is that a fee can have a big impact on how much purchases on the card end up costing you.”

She said that in many ways, a monthly fee was much like interest charged on overdue balances on credit cards, and that it was handy to be able to see the “effective interest rate” applied to purchases on a card. An effective interest rate is the cost of repayments – including fees – on a credit card over time, expressed as a percentage, which can be compared to interest rates on other types of products.

The table below shows a comparison of the effective interest rate on the  new CBA Neo card, compared to the average interest rate of all cards on Canstar’s database that don’t charge an annual fee at the time of writing.

The calculations show that for a purchase of $1,000 that was paid off over 12 months, it would be $58 more expensive to use the CommBank Neo card with a $1,000 limit than taking out a $0 annual fee credit card with a 15.45% interest rate. However, it would only be $7 more expensive over the same timeframe for a $3,000 purchase on a Neo card with a limit of $3,000, compared to a no-fee credit card.

Credit Card Balance Paid off Over 12 Months

No interest with monthly fee compared to Interest with no fee

Credit Card Balance Monthly Fee Total Paid in Fees Effective Rate^ Compared to Interest on a $0 Annual Fee Card w/ 15.45% Rate Difference
$1,000 $12 $144 25.60% $86 $58
$2,000 $18 $216 19.37% $171 $45
$3,000 $22 $264 15.86% $257 $7
Source: www.canstar.com.au – 11/09/2020. Based on personal, unsecured credit cards on Canstar’s database. Calculations based on equal monthly repayments considering monthly fees or interest charges as specified, and assume no further card purchases during the year. ^Effective rate based on specified monthly fee and an opening balance of $1,000, $2,000 and $3,000 at the start of the 12 months.

What about credit limits?

As well as thinking about product features and the effective interest rate they might pay, Ms Zahos said it was also important for anyone considering taking out this type of product to choose the correct credit limit for their needs.

“It’s human nature that if someone does find that they are eligible for the highest limit, they will take that out,” she noted.

“The trouble with this is that if they don’t actually need the higher limit, then the higher fee would have a bigger impact on small purchases. Then, of course, there’s the temptation to spend up to your allowable limit,” she said.

“Doing so could undo all the good of this type of (0% interest) card.”

She said it was important to remember, too, that any “cashback” incentives on purchases were only paid out once, while the monthly fee was charged every month the balance was higher than $0.

For example, if someone were to take out a CommBank Neo card with a $3,000 limit and purchase $3,000 worth of goods at once, they may qualify to receive a one-off $15 cashback after the purchase, which would cover part of their $22 monthly fee for the first month. However, if it took that customer four months to pay off the balance, at $750 a month, the card fees would have added $73 to the purchase price.

How does the CommBank Neo card compare to Afterpay and other similar products?

Ms Zahos said it appeared the CommBank Neo card was designed to try and attract customers who might otherwise use buy now, pay later (BNPL) services, such as Afterpay or Zip.

BNPL services typically:

  • do not charge a monthly fee nor apply an interest rate, but
  • can charge a late fee or apply a default interest rate to outstanding balances, and
  • have a smaller credit limit than CommBank’s card allows (with some exceptions).

“It will be an interesting competition to watch, as while the market leader in this area does not charge an interest rate or a monthly fee, late payment fees do apply ” she said.

“BNPL providers such as Afterpay are also very present at the point of sale, which helps to embed them in the shopper’s psyche. These new types of cards (such as CommBank Neo) do not have that type of presence yet.

“On the positive side for the CommBank Neo card, at least there is no retailers’ fee. Many BNPL companies can take a cut of a sale.”

How does the CommBank Neo card stack up against NAB’s new 0% card?

The news of the Neo card comes less than 24 hours after one of CBA’s main competitors, National Australia Bank, launched a no interest credit card to compete with buy now, pay later services.

Similar to CommBank’s new card, NAB’s StraightUp product has no interest, no annual fees and no late payment fees. NAB says customers will be charged a monthly fee, but only when they have a balance owing or use the card during the month. If the card remains unused, the monthly fee will automatically be reversed.

Among the differences between the CBA and NAB cards is the fee schedule, with many other features being fairly similar across the two products, as the table below shows:

CommBank Neo vs NAB StraightUp: A Comparison

Credit Limit / Monthly Fee
$1,000 $2,000 $3,000 Provider Interest * Annual fees** Late Payment Fee
CommBank Neo $12 $18 $22 MasterCard 0% $0 $0
NAB StraightUp $10 $15 $20 Visa 0% $0 $0
Source: CBA, NAB – 11/09/20. *Interest on outstanding purchases. **In addition to monthly fees on outstanding balances.

→ Related story: What’s the verdict on NAB’s new credit card?

The major banks’ new product launches come within days of Reserve Bank of Australia (RBA) data that showed credit card usage continues to decline in Australia, as the buy now, pay later industry boom eats into credit cards’ market share.

In July, there were 130,524 fewer credit card accounts than the month prior and 1.75 million less than in July 2019, the RBA data showed.

 

Updated 11/9/2020 by Amanda Horswill

This article was reviewed by our Sub-editor Tom Letts before it was published as part of our fact-checking process.

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