Altercation reveals bank card market's drawbacks
By Zhao Renfeng (China Business Weekly)
Updated: 2004-06-21 11:25

The row between retailers and banks in Shenzhen has highlighted the imperfections within China's card industry, showing that a fully fledged competition system is yet to be created, according to experts and insiders.

They said the dispute was not unexpected as China's card market was developing rapidly, but related laws and regulations have not been fully established.

"The commission charge, or merchant discount rate, should be negotiable between merchants and merchants' banks," said James Angel, associate professor with the US-based Georgetown University.

He says it is inconceivable to have a fixed rate between merchants and their banks, known as acquirers.

According to a rule revealed by some Chinese media, acquirers, which sign contacts with merchants, have to grant 0.7 per cent of their sales to issuing banks, which issue cards to customers and bear most of the risks during the revolving period for credit cards. As the terminology suggests, the acquirers also give away 0.1 per cent for the interchange rate.

In the Shenzhen case, acquirers charged 1 per cent of the merchant discount rate, meaning they collected a 0.2 per cent margin for themselves.

Slashing the rate to 0.8 per cent means they will barely turn a profit.

Angel said there are no fixed rates between merchants and banks in competitive economic environments as the big traders usually have more bargaining power.

Despite all of the talk about the Shenzhen situation, industry insiders say that one important, hidden factor has long been overlooked -- the cost of cash transactions.

They say when people argue about what would be a reasonable charge, few notice that traditional cash transactions also produce heavy costs.

"This factor can be very easily ignored as, for merchants, the commission charge they pay to acquirers are more conspicuous," said James Chen, sales and business development director with MasterCard International.

Chen said if the cost of each cash transaction was taken into account, retailers could find that declining purchases with credit/debit cards would not necessarily earn them extra money.

According to a report conducted by MasterCard, a global leader in the payment industry, the costs involved in cash transactions are fairly high in an economic system.

Costs of cash normally include all the expenditure in terms of printing notes and forging coins, transporting and keeping cash safe, and calculating and allocating cash. In addition, using cash can also run into risks such as being handed fake notes.

The report said the total volume of cash transactions far outstrips that of non-cash transactions globally, even with the fast-increasing use of credit/debit cards and electronic payment methods.

In the well established European Union (EU) economy, it is estimated that 360 billion transactions are completed in cash annually -- only about one-sixth of that number is done in non-cash payments.

The costs of cash transactions are estimated at 50 billion euros a year (US$60 billion), about 0.4 per cent of the gross domestic product of the EU.

Still, traditions die hard and many people opt for cash. That is because the costs of cash transactions are shouldered by central banks, commercial banks and merchants in an intangible way.

Chen said the merchant rate of 1 per cent in Shenzhen was not as high as other nations.

He said that the dispute could have been a result of the rocketing build-up of commission fees due to customers' increasing use of credit/debit cards.

Merchants suddenly noticed the spike and then asked the banks for a cut in the rate.

According to Chen, different kinds of disputes occur in the card payment industry worldwide in the early stages.

But electronic payment is the future due to its many advantages over cash, such as convenience and safety.

Experts disagreed that China's underdeveloped credit culture was one reason behind the Shenzhen dispute.

According to Angel, even if Chinese were used to purchasing on loans and issuers had more interest income on credit cards, acquirers' income from the merchant discount rate would not change.

Experts said the dispute was merely a growing pain in China's bank card industry and their long-term views were positive.

"Electronic payment is set to be the future of the world, including China," said Angel.

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