The Commonwealth Bank has joined NAB in offering interest-free credit cards, as the big four try to compete with Afterpay

• The Commonwealth Bank has become the second bank to announce a foray into interest-free credit cards after NAB launched one on Thursday.
• To be launched in November, the ‘CommBank Neo’ card follows a similar model but will also offer cashback incentives to attract customers.
• Banks have been forced to play catch up after traditional credit cards have been ‘wiped out’ by buy now, pay later companies, Canstar financial services group executive Steve Mickenbeck told Business Insider Australia.
• Visit Business Insider Australia’s homepage for more stories.

In what is quickly shaping up to be a new arms race, Australia’s biggest bank is plunging into the now one day old interest-free credit card market.

After NAB launched the first one in the country on Thursday, the Commonwealth Bank spent little time announcing it would soon come out with its own version, named Neo.

An identical product to NAB’s StraightUp card in almost every way, the card – due out in November – will carry slightly more expensive monthly fees and boast one small distinction.

“CommBank Neo will also offer access to discounts and cashback offers with a range of retailers through CommBank Rewards,” retail banking group executive Angus Sullivan said.

The rewards program is applicable when customers spend with around 80 approved retailers, offering up to $15 cash back on purchases.

To be eligible, customers have to be older than 21, not be in hardship and not have default on another CBA product.

Spokespeople for Westpac and ANZ confirmed to Business Insider Australia that neither plans to launch an interest-free credit card of their own.

The banks are fighting a ‘diabolical’ decline in credit cards

But while NAB and CBA’s interest-free products are novel, the change of credit strategy isn’t surprising, according to Canstar financial services group executive Steve Mickenbecker.

“The credit card debt accruing interest has been on the decline and the last four months have just been diabolical – it’s been absolutely wiped out,” Mickenbecker told Business Insider Australia.

Reserve Bank data showsalmost 400,000 credit card accounts were terminated in the four months to July while separate figures show more than $5 billion in outstanding debt was paid off.

While Mickenbecker suspects it’s “one-off” money, from sources like superannuation withdrawals paying off debts, it indicates that consumers want simplicity and transparency.

Meanwhile, the gauntlet has been thrown down by booming buy now, pay later products – a proposition attractive enough for the Commonwealth Bank to bet $US100 million on Swedish giant Klarna.

That hasn’t stopped it trying to tie a tourniquet around its haemorrhaging credit card offering. Mickenbecker says the competition has left the banks grappling to come up with a new model, with interest-free credit cards the “hybrid” result.

Whereas Afterpay forces the individual retailer to cough up for the service, credit card customers will still pay monthly fees.

“But they’re also similar in that both are ‘no use, no debt, no pay’,” Mickenbecker said.

“You’re also able to let the debt drag on longer than with Afterpay for example so it might appeal to some people who struggle to pay off their purchases in six weeks.”

Who are interest-free credit cards for?

Exactly how many people will take them up, however, is another matter though. While buy now, pay later platforms have amassed millions of users and convinced retailers to pay to acquire them, the pitch for these cards isn’t quite as clear cut.

“The issue with the cards is that if you use it every month, you’ll find yourself up for a very high fee. If you have a $1,000 credit limit and use it every month, then you’re paying $144 a year to the Commonwealth Bank one or $120 a year to NAB,” Mickenbecker said.

“The sweet spot for these cards are really occasional users of credit, for something like a big repair or one-off purchases like a fridge or a TV or something.”

In this respect, interest-free cards can actually more expensive than regular fee-less ones. If used responsibly, and if their balances are paid off each month, customers can use them frequently and not pay any cent more than they spent.

But it’s clear the big banks had to try something. Now to see whether it pays off.