Office of

Rep. JACK ENRILE

1st District Representative, Province of Cagayan
S-401 House of Representatives, Quezon City
Phone: 931-5001 local 7242, 931-6621; Email: jack.enrile@gmail.com

BANGKO SENTRAL FAILS PINOY CONSUMERS

by
REP. JACK ENRILE
1st District, Province of Cagayan
31 January 2011

Mr. Speaker, my dear colleagues, ladies and gentlemen – a good evening to all of you.

I am sure that most of us – if not all of us – are familiar with horror stories concerning the
dangers of credit card use in the country. Among others, these stories include complaints made
by credit card users regarding fraudulent transactions, exorbitant interest rates on outstanding
balances, and late payment penalties charged to credit card holders even if the billing
statements were delivered late if at all by the credit card companies.

Merchants too, have their share of these horror stories – particularly those whose transactions
have been charged back to them for one reason or the other, and without prior notice or
consultation.

Today, I stand before this august chamber in the effort to protect the rights and the interests of
millions of Filipino credit card holders and the tens of thousands or so accredited merchants
who for reasons of market convention or competitive parity, are compelled to transact their
business through credit card companies.

Today, I seek the support of this august chamber in the pursuit of consumer protection and
financial reform that, among others: will place a cap on the interest rates charged on deferred
payments made on credit card purchases to one percent per month, strengthen the provisions of
the Electronic Commerce Act to protect merchants against arbitrary chargebacks, and to
promote accountability, responsibility and disclosure in the credit card industry.

Mr. Speaker, my dear colleagues. The use of electronic fund transfers to facilitate purchase
transactions became popular bank products among the local consumers since the turn of the
millenia. Those with poor credit ratings opted for prepaid debit cards for the security and
convenience that it offers, while those with good credit standings found themselves deluged with
offers to a surfeit of pre-approved credit cards with the promise of making all their consumer
aspirations – quote and unquote - “affordable” the minute they activate the cards offered them.

Today, the credit card industry consists of some fifteen major credit card companies that process
over one hundred billion pesos worth of credit card transactions on an annual basis. They
facilitate the transactions made by over four million credit card holders and thirty thousand or
more retail and service establishments nationwide.

This industry, ladies and gentlemen, is not an insignificant segment of the Philippine economy,
and neither are the transacting public an inconsequential part of our respective constituencies.

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 Office of
Rep. JACK ENRILE
1st District Representative, Province of Cagayan
S-401 House of Representatives, Quezon City
Phone: 931-5001 local 7242, 931-6621; Email: jack.enrile@gmail.com

The issues and concerns that are prevalent in the credit card industry not only merits
Congressional scrutiny, but also legislative attention.

It is understood that the six-year term of Bangko Sentral ng Pilipinas Governor Amando M.
Tetangco, Jr. will expire on July 3, 2011. There are talks going around in the business
community that he has been offered a second term in office – something that the country has
not seen since the re-appointment of then Central Bank Governor Jose “Jobo” Fernandez to a
second term by then President Corazon C. Aquino.

Governor Tetangco – a career official with more than 30 years of experience in the Bangko
Sentral tucked under his belt – has strengthened our banking system and provided stability to
our economy. We have no debate on that. But just as important to this representation are the
issues of consumer welfare and basic financial literacy which are also the responsibility of the
Bangko Sentral. We refer specifically to the credit card users whose rights have been largely
ignored by credit card companies, and entrepreneurs whose merchant accounts have been
compromised by chargebacks unilaterally implemented by these same credit card companies.

What then has Governor Tetangco done regarding these matters?

We ask this question, Mr. Speaker, my esteemed colleagues, because of the feedback that we
have received regarding the apparently unfair practices being implemented by credit card
companies. “They charge a penalty for late payments,” according to one who spoke to us. “But
they slap the interest not only on the amount that you did not pay for the month, but also on
any additional amounts you charge for the coming months.“ The reason that the credit card
company gave was that as soon as anything new is charged, those new charges forms part of the
card holder’s unpaid amount. Worse than this, no one in the credit card company can explain to
the cardholder how the penalty charges were computed.

Another person suggested that we look into the methods and practices of collection agencies
which border on outright terrorism and coercion – to the point of threatening to expose the
extent of the cardholder’s obligations to their neighbors and co-workers as a means to collect
payment.

The issue of reform in the credit card industry is no longer the exclusive purview of those in our
society with an excess of disposable income. There are likewise a number of horror stories
concerning the dangers of credit card use among OFW’s, teachers and office workers who could
not afford the services of a legal counsel to help them fight for their rights against the abuse of
credit card companies. Not all are like Ms. Ileana Macalinao, who was able to secure a favorable
decision from the Supreme Court against the excessive charges levied by a credit card company,
which states and I quote:

“We need not unsettle the principle we had affirmed in a plethora of cases that
stipulated interest rates of three percent per month and higher are excessive,
iniquitous, unconscionable and exorbitant. Such stipulations are void for being
contrary to morals, if not against the law. While Central Bank circular number
905-82, which took effect on January 1, 1983, effectively removed the ceiling on
interest rates for both secured and unsecured loans regardless of maturity,

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 Office of
Rep. JACK ENRILE
1st District Representative, Province of Cagayan
S-401 House of Representatives, Quezon City
Phone: 931-5001 local 7242, 931-6621; Email: jack.enrile@gmail.com

nothing in the said circular could possibly be read as granting carte blanche
authority to lenders to raise interest rates to levels which would either enslave
their borrowers or lead to a hemorrhaging of their assets.”

Ladies and gentlemen. There are other similar decisions made by the Supreme Court on the
matter of exorbitant tariffs charged by credit card companies. But it would seem that neither
the Bangko Sentral ng Pilipinas nor the Monetary Board has enforced the jurisprudence laid out
by our courts.

Tayo po ba ay kakampi na lamang sa pagtapak ng mga dambuhalang kumpaniya ng credit card

at ang pagbubulag-bulagan ng Bangko Sentral sa sitwasyon ng mga credit card users?

What about merchant chargebacks? A typical chargeback situation occurs when a card holder
refutes a transaction recorded in the statement of account, informs the credit card company that
said purchase was not authorized and subsequently requests that the transaction be “charged
back” to the merchant.

It is understood that upon receipt of said requests, the standard operating procedure or “SOP”
for the credit card company is to take the amount charged back out of the merchant’s bank
account without need of any authorization from or prior notice to the merchant. If the merchant
is sizeable enough to maintain substantial sums in their bank account, then there should be no
problem. However, if the merchant is relatively a smaller establishment, a significant
chargeback may serve to clean out their bank account and compromise the clearing of their
checks earlier issued to suppliers and business partners.

Should there be insufficient funds in the merchant’s bank account to cover the charge back, the
merchant stands to lose its accreditation and be blackballed by the credit card company by
placing its name in the “terminated merchant file” list – a negative list of merchant
establishments that have breached the provisions of their memorandum of agreement with the
credit card company. Inclusion in this list will preclude the said merchant from receiving credit
card processing services in the future – unless of course, the merchant can expeditiously settle
the amount charged back in an alterative manner.

The question that begs asking, Mr. Speaker, my esteemed colleagues is this: In this era of
increasing fraudulent credit card transactions, how many entrepreneurs and small to medium
enterprises have been deleteriously affected by these unilateral charge backs? How many have
been forced to close shop because of these adverse industry practices?

In January of 2004, the Bangko Sentral created the BSP consumer education committee whose
mandate is to address the financial literacy needs of consumers of financial products and
services. In October of 2006, Governor Tetangco created the financial affairs group under the
supervision and examination sector of the Bangko Sentral ng Pilipinas, for purposes of ensuring
the protection of depositors and investors, and to guarantee the smooth and orderly functioning
of the entire financial system. Why then are credit card holders and merchants left on their own
to fight for what is just and fair?

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 Office of
Rep. JACK ENRILE
1st District Representative, Province of Cagayan
S-401 House of Representatives, Quezon City
Phone: 931-5001 local 7242, 931-6621; Email: jack.enrile@gmail.com

Have credit card holders been informed of the consequences of paying only the “minimum
amount due” as stated on their statement of accounts? Are they aware of how the interest rates
charged on their outstanding balances are computed? Were they informed that the late
payment charges will not only applied against their unpaid balances, but also to the purchases
that they make until payment has been made?

Have merchants, especially the small ones, been given the requisite financial literacy training by
the Bangko Sentral ng Pilipinas? Have they in fact been informed of their liabilities or remedies
on a chargeback situation?

On the other side of the proverbial coin, Mr. Speaker, credit card companies should not only
abide by the disclosures required by law, but also charge interest rates that are not exorbitant,
excessive and unconscionable. They should not interpret the Supreme Court ruling on the
Macalinao Case as being applicable only to the credit company involved, but to the entire credit
card industry.

The Macalinao ruling is a landmark jurisprudence that should set the direction for the entire
credit card industry. Despite this, the Credit Card Association of the Philippines (CCAP) and the
Bangko Sentral ng Pilipinas have yet to incorporate the ruling into their policies and procedures.
The credit card association quibbles about the Supreme Court decision as being merely a
“ruling” and not a “law” - but Mr. Speaker, my dear colleagues, are not jurisprudence part and
parcel of the law of the land? Is the regulator in this case being co-opted by the industry that it
is supposed to regulate?

The Credit Card Association of the Philippines places the blame on the consumers when it
stated, and I quote, “If everyone paid their bills on time and use credit prudently, the card
issuer’s risk would be greatly reduced, and rates would surely follow. Perhaps we don’t need a
new law as much as we need restraint and responsibility.”

Ang sisi po pala ay sa mga card users? Sila na nga ang kinulit ng mga face-to-face marketeers sa
malls, sila na nga ang kinulit ng mga tele-marketeers sa telepono at cellphone nila at sila na
mismo ang pinapadalhan ng SMS para kumuha at pumirma sa application forms ng mga credit
card companies na ito – sila pa pala ang may kasalanan.

Hindi po ba nararapat ng magdahan-dahan ang mga credit card companies na ito sa

pagmumudmod ng kanilang application forms sa kani-kanino nalang, at di po ba dapat ay
nakasulat ang paraan ng pagkuwenta ng interest rates sa balanse ng credit card na di
binabayaran ng buo?

Ang tanong ng inyong abang lingkod sa Bangko Sentral ng Pilipinas at sa mga kasapi ng Credit
Card Association of the Philippines ay ang mga sumusunod:

Tama po ba na ang isang menor de edad na 13 years old ay maging beneficiary ng isang
supplemental card?

Page 4 of 7
 Office of
Rep. JACK ENRILE
1st District Representative, Province of Cagayan
S-401 House of Representatives, Quezon City
Phone: 931-5001 local 7242, 931-6621; Email: jack.enrile@gmail.com

Tama po ba na ang anunsiyo o patalastas ay tatlo hangang tatlo’t kalahating porsiyento lang ang
interest kada buwan, pero wala naming sinasabi tungkol sa katumbas nitong apat na pu’t
dalawang porsiyento kada taon?

Tama po ba na hindi alam ng mga gumagamit ng credit card kung paano magkuwenta ng
interest nito? Sino nga ba ang dapat tumakda ng tamang pag kuwenta, o kanya-kanya na lang
kuwentahan ang bawat credit card company?

Tama po ba na mabubulaga na lang ang mga consumers sa dalawang daang pisong monthly
account maintenance fee ng isang credit card company sa mga card holders na may outstanding
balance? Ito po ba ay may permiso ng Bangko Sentral?

According to the records of the Bangko Sentral, credit card receivables as of the third quarter of
2010 amounted to some one hundred and thirty four billion pesos. Even if the twelve percent
loss ratio is deducted from this amount, and the average three and a half percent interest rate is
applied to the remainder, credit card companies still rake in a minimum of four hundred fifty
eight million pesos a month in interest income alone – without the other fees, charges and
penalties which even this representation is at a loss to explain because again, it boils down to
what formula is being applied.

The credit card business therefore, Mr. Speaker, my dear colleagues, is not a losing proposition.
The industry cannot only live off the usurious rates that they charge the unwary card holders,
but also make a hefty profit from it.

Apparently, the Bangko Sentral does not see a market failure here, and cautions those pushing
for an interest rate cap as creating unintended consequences. The BSP governor was even
quoted as saying: “an environment where there is more competition to naturally temper prices
and improve services” is the solution to curb the excesses of credit card issuers.

So, Mr. Governor, who then shall moderate the greed of credit card companies? Or are you
saying greed is good as a certain Gordon Geko once said?

Without Bangko Sentral intervention, the same rules will prevail for good and bad credit card
users - with the prime users covering the default of the sub-prime users.

Without intervention, compounded interests and penalty rates can skyrocket to 42% per annum
due to deferred or late payments - even if the proximate cause was the failure of credit card
companies to deliver the billing statement on time or failure of other banks to post payment on
time.

Without intervention, chargebacks based on fraudulent credit card purchases will be par for the
course.

Ladies and gentlemen. A board member in my home province of Cagayan recently narrated her
experiences regarding the use of her credit card to me. She purchased an airline ticket on-line
and charged it to her credit card with the understanding that if the flight was cancelled, the
funds will automatically be credited back to her account. In her case, the flight was indeed

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 Office of
Rep. JACK ENRILE
1st District Representative, Province of Cagayan
S-401 House of Representatives, Quezon City
Phone: 931-5001 local 7242, 931-6621; Email: jack.enrile@gmail.com

cancelled, but instead of an automatic credit, she needed to make a claim and fill out numerous
forms before she could get a refund – which she did after several months of following it up.

She also availed of the auto-debit payment facility of her credit card. It was a good thing that
she conscientiously reviews her statement of account. Otherwise, she would not have discovered
the other charges and fees that were included in the auto-debit facility that she was not made
aware of or were otherwise not disclosed to her.

There was even a time when she did not receive her statement of account for months on end –
but was nonetheless charged for late payment fees by the credit card company.

In the Philippine Star Column of Mr. Jarius Bondoc dated September 22, 2010, credit card
holders shared their collective horror stories: people who are clamoring to know their rights as
credit card holders, card holders who have been charged exorbitant interest fees on their
outstanding balances, and even those who paid more than double the value of their purchases
due to the accumulated late payment charges.

Reports came out last Friday, 28 January 2011 that BSP governor Tetangco has accepted the 2nd
term offer of the president.

Mr. Speaker, my colleagues, may I ask the Bangko Sentral what is the real, honest-to-goodness
formula in computing interest rates on credit? As policy makers, we should know this so we can
initiate our own financial literacy campaign rather than rely on Bangko Sentral. Si Juan dela
Cruz ng Cagayan, ng Pangasinan, ng Cebu, ng Davao, at iba pang lugar ay di kilala si Governor
Tetangco. Alam po naman natin na kapag pumunta ang ordinaryong mamamayan sa Bangko
Sentral, walang haharap sa kanila upang sila ay tulungan kung di nila alam ang pasikot sikot
doon.

Belatedly as it did, I understand that Bangko Sentral issued Circular No. 702 last December 15,
2010. Under the new guidelines, the issuance of pre-approved credit cards will no longer be
allowed. Credit card companies are now mandated to inform all card holders in writing seven
days before their account may be endorsed to collection agencies. Likewise, disclosure
requirements have also been expanded to require the printing of a table of applicable fees,
penalties and interest rates on credit card transactions using easily-readable font sizes.

In another media offensive, BSP came out with an advisory in the Philippine Star last January
25, 2011 on collection practices considered unfair. So I ask Mr. Speaker, my colleagues, if the
banks persist with their ways are there sanctions Mr. Governor? Are the banks meted out
penalties for every violation they make?

In fine Mr. Speaker, my dear colleagues, it is imperative that we bring this information to our
constituents. Information is power and right now, it is all tilted in favor of banks.

Pushing such reforms in the credit card industry is not new. In May 22, 2009, the U.S. Congress
passed their Credit Card Accountability, Responsibility & Disclosure Act of 2009. It limits when
issuers of consumer credit cards can increase interest rates and bans billing and payment
practices that are “unfair and deceptive”.

Page 6 of 7
 Office of
Rep. JACK ENRILE
1st District Representative, Province of Cagayan
S-401 House of Representatives, Quezon City
Phone: 931-5001 local 7242, 931-6621; Email: jack.enrile@gmail.com

We believe that the time is ripe for such a legislation to be enacted in this House of
Representatives.

Mr. Speaker, my esteemed colleagues. Let us assist our entrepreneurs and give them the
financial breathing space they need when it comes to “friendly” chargebacks. Let us mitigate the
losses incurred in transactions using fraudulent credit cards by promoting a shared risk concept,
if not totally limit the risk of charge backs to credit card companies as to the process and
authorize credit card transactions themselves.

Let us join hands in this effort if we are to build a nation of fiscally responsible citizenry who are
well informed to better manage their financial resources. Let us create a business environment
where socially responsible credit card companies may flourish, and not those solely focused on
the Geko dogma of greed. The fact that the BSP acted is already proof of market failure.
Therefore, let us cap interest rates to 1% per month; let us help our consumers, entrepreneurs,
and small merchants by insisting that the Bangko Sentral ensure and promote accountability,
responsibility and disclosure in the banking and credit card industry.

Gov. Tetangco, the Supreme Court has been consistent: “interest rates of 3% per month or
higher are excessive, iniquitous, unconscionable and exorbitant.”

Greed is not good, Mr. Governor.

Thank you, Mr. Speaker.

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