The UAE credit card market is set for a shakeout with the National Bank of Ras Al Khaimah (Rakbank) having announced a cut on unpaid balance interest rates to a mere one per cent per month, and its scrapping of the annual fee on Visa Classic and Gold credit cards.

This is considered the lowest rate offered by any credit card issuer in the region, and among the lowest worldwide.

Bankers point out that the average rate in Pakistan could be as high as 2.5 per cent a month with the global low hovering at 1.25 per cent in Europe and the U.S.

Despite the substantial fall in the overall interest rates since the beginning of the year pulling the cost of funds for the banking sector to as low as just above 3 per cent, no bank had yet thought of passing this on proportionally to credit card holders.

Interest charged by banks on credit card outstandings still hovers around 20 per cent and above in most cases.

Reacting to the drastic move by Rakbank, most banks whom Gulf News approached said a cut this size would not be feasible and doesn't make business sense.

"On the one hand, banks incur heavy infrastructure expenditure on running credit card business, and on the other the Visa or the MasterCard fee is there in addition to the cost of the funds to be met by the bank. The default rate for credit cards in this market is more than 6 per cent," the credit in-charge of a local bank pointed out.

"On the top of this are other expenses like mailing charges, insurance, fraud risk, etc to be taken into account."

Rakbank has moved ahead on a totally different premise.

"We hope to become the leader in this market with higher volume business. We will certainly bring down the cost incurred on credit cards and rein in the default rate far below the industry average," said Dina Aslan, product manager, assets, Rakbank.

A top official at a foreign bank opined that no other banks would try to match this rate in the immediate future. He also noted that interest rates, once fixed, will not be easy to raise later. "There is no guarantee that the current low interest rate level will stay forever," he added.

On credit card outstandings, almost all foreign banks charge around 2 per cent per month, plus an annual fee, although some banks do waive these partially or fully for the first year.

In the case of national banks, the interest rate charged on credit cards is relatively lower, at around 1.75 per cent per month. There are banks like National Bank of Dubai (NBD) and Mashreqbank, which charge lower interest when it comes to their accountholders, or as part of a loan package.

The competition is so stiff that banks are coming out with different schemes like air miles and other loyalty points to be earned on the credit card spend. They also issue open invitations for balance transfers.