Fighting fraud, reducing debt? China’s revolution in bank card fees

China has officially reduced the transaction fees from bank cards to boost economic growth. This move not only pushes China closer to international norms, but also helps reduce financial crime. However beyond the façade of a low card rate is a consistently low level of consumption, which is an economic time bomb.

Editorial

Chinese financial services just saw the largest change to the country’s payment charges system of all time with the introduction of the “96 improvement” policy.

From now, fee charges among industries will be identical and debit card and credit cards will be charged differently. The new rate is about 0.6%, compared with the former charges of between 0.38% to 1.25% in different sectors. The policy means government pricing no longer exists in the acquirer section and the changes are expected to be effective in fighting against faking the Merchant Category Code (MCC) and problems with cash-back.

According to data from the central bank, there were 5.828 billion bank cards in use in the second quarter. Breaking that down, bank card ownership per head is 4.25, and the same figure is 0.31 for credit cards. Consumption via cards is valued at ¥13.68 trillion (US $2.05 trillion) and, on average; people spent ¥9,978.08 ($US 1,495.65) through card payments. The new changes will make things fairer, at an estimated ¥7.4 billion ($1.11 billion) loss in card fee income for the relevant institutions.

Booming mobile payments

Including online and offline payments there were 6.317 billion mobile payment transactions in the second quarter, pushing the total volume to ¥29.32 trillion ($US 4.39 trillion). This represents an increase of 168.46% and 10.2% respectively from a year earlier. E-wallets are gaining popularity and the rate that Alipay and WeChat pay offer is about 0.55%, much lower than the rate before “96 improvement”.

During the first half of 2016, 122 retail listed companies in China suffered from poor performance. With a net profit margin of only 2.4%, the expansion of e-commerce is squeezing out physical shops like department stores and supermarkets. Meanwhile, the card fee rate of 0.78% is taking nearly 1/3 of their profits.

In 2004, the card fee rate ranged from 1% to 2%, while the profit rate of a common supermarket was less than 3%. Shops in Chengdu, Shenzhen, and Shanghai even launched a campaign to boycott card payments.

Fighting crime

Before “96 improvement”, debit card and credit cards shared one rate. However, this was unreasonable as the risks and costs involved in issuing a credit card are higher than those of debit cards.

In addition, having different charges between industries has encouraged merchants to take risks. In the first half of 2014, there are 180,000 merchants that used fake MCCs, especially restaurants. For customers this meant that sometimes the name printed on the receipt was that of a total stranger. In this environment even the acquiring institutions helped to fake MCCs to cheat the banking and supervision sector. 99Bill, allinpay, vbill, ChinaPnR and Yeepay have all been fined by the central bank for faking merchants’ information.

Cash-back from credit cards is another long-standing problem. At the end of March this year, total credit card debt was ¥7.45 trillion, an increase of 19.55% from a year earlier. Debt that had been overdue for six months reached ¥45.809 billion over the same period, up 20.46% compared with the figure at the end of 2015. Since there is now no upper limit for credit card fees, the higher cost of cash-back may effectively reduce this activity.

Pain for customers

Industries dealing with large transactions have often decided to pass on card charges to consumers, especially during car sales and real estate transactions. Although consumers will probably not give up on buying a car or house because of this extra expense, there is disappointment about the change.

In the field of small-amount transactions, people may prefer e-wallets because they are more convenient than bank cards. In addition, Alipay and WeChat Pay offer additional services to merchants and consumers, such as delivering online coupons and recommending nearby hotels, restaurants or shops. These high-end transactions were supposed to be the stronghold of bank cards but they have failed to please. In the end, it was customers that lost out.