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Axing merchant fees for bankcards may hurt lenders

By Katie Chen (Shanghai Daily)

09:34, December 06, 2012

THE People's Bank of China circulated a notice earlier in the month stating that the State Council had approved lower merchant fees for bankcard transactions, effective February 25. Bankcard merchant fees would be 1.25 percent for entertainment-related purchases, 0.38 percent for purchases related to daily living, and 0.78 percent for other types of purchases. Lower merchant fees are credit negative for Chinese banks because although the card business is a minor contributor to income and profits, lower merchant fees will undermine a promising channel for banks to grow their fee-based income.

We estimate that for the commercial banks we rate, the reduction in merchant fees would reduce their merchant fee income by nearly 30 percent and cause aggregate pre-tax profit to decline by 1.0-1.5 percent. During the first-half of 2012, bankcard fee income1 surged 36 percent year over year for the Chinese banks we rate, while total fee and commission income grew 6 percent. Without the increase in bankcard fee income, these banks' total fee and commission income would have risen only 0.4 percent because other fees, such as those related to consultancy and advisory services and lending, declined. Indeed, many banks have come to view their bankcard business as a key growth engine that will help offset the negative pressure on their lending business owing to lower interest rates and deregulation and help stabilize their more cyclical advisory and consulting businesses.

Currently, the merchant fees that banks and merchants negotiate average 1-2 percent depending on the type of purchases, including service fees charged by the banks issuing the cards, clearing institutions and the banks handling the payment for the merchants.

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