Cut in fees for credit-card payments to erode bank profits

Bid to boost domestic consumption through lower payment charges to badly affect lenders

PUBLISHED : Thursday, 29 November, 2012, 12:00am
UPDATED : Thursday, 29 November, 2012, 3:53am

Beijing's efforts to boost domestic consumption may weigh on banks' profits as a reduction in credit-card transaction fees will eat into their fee income.

The State Council had approved a plan to reduce transaction charges on credit-card payments, Xinhua reported on Tuesday, citing a notice issued by the People's Bank of China.

The PBOC spokesman was not available for comment.

Transaction fees on card payments would be cut by an average of 23 to 24 per cent from February 25 next year, the report said.

Banks charge retailers a certain percentage of the credit payments they receive from customers, with the percentage varying from industry to industry. The charge on credit-card payments in dining and entertainment industries will be cut the most, to 1.25 per cent from 2 per cent.

The cut in transaction fees will help boost domestic consumption and reduce retailers' costs.

Central University of Finance and Economics professor Guo Tianyong said the cut would lower the costs of merchants which were mostly small and medium-sized enterprises. "Consumers will eventually benefit as the SMEs have more room to provide discounts."

But analysts said banks' fee income would be inevitably hurt as a result. Shanghai's Oriental Securities estimates the cut will lower mainland-listed banks' profits by 1.05 percentage points, based on their income mix and assuming credit-card transaction fees account for 80 per cent of their fee income.

The measure would hurt the retail banking business in the long term and dampen banks' strategy to expand their non-interest income at a time when Beijing was working towards liberalising interest rates, it said.

The brokerage expects the impact to be particularly severe for Ping An Bank, Everbright Bank, Bank of Communications, Minsheng Bank and China Merchants Bank, which are more focused on retail banking.

But Guo said the cuts would also encourage banks to expand their sources of income by providing more mobile and e-banking services.