The issue of credit is central to modern life except perhaps in the most rural of settings. It’s so central to life that credit card usage habits are socio-political issues to be spoken about in public settings. These are not matters confined to business pages and closed door discussions by bankers and finance specialists only.
Credit card use needs to be encouraged particularly in an economy that’s struggling to recover from the type of calamity we faced in 2022. People need to spend to get economic activity going, and spur growth. Healthy growth is the only way forward in an economic recovery that cannot possibly rely on other indicators which are mostly reliant on external factors.
But yet, credit card use is being obstructed by those who should be encouraging it. The more cards are used, the greater the benefit to shopkeepers, vendors, merchants, call them what you will. They would have more sales, and that ought to be elementary. Customers who prefer to use cards because they don’t either carry the cash or don’t have the liquidity to use cash at a given moment would use a card. A sale that would otherwise not have occurred would happen due to this elementary dynamic.
STATUS QUO
Who would resist such increased sales? Apparently certain vendors would. They would — they do — insist on surcharges for certain purchases in the form of passing on the swipe fee to the customer. The swipe fee is the fee, or more precisely the percentage fee, that’s charged from the vendor for each card transaction. The swipe fee is charged precisely because the cards bring more custom to merchants. But instead of paying this up, some vendors pass on this fee to the customers who are already paying a swipe fee themselves at the card user’s end, plus interest payments, to the customers as a surcharge.
These merchants are shooting themselves in the foot, not factoring in the money they would earn if they indeed had all the customers that turned away from their establishment because they didn’t want to pay an additional surcharge on their credit card transactions.
The Central Bank recently weighed in. A Senior Deputy Governor Yvette Fernando said recently that the banks have been asked to ensure that the customers are not passed on this unfair surcharge. But the banks have not been assiduously trying to catch culprits. For long, all types of bankers — no bank is particularly remiss here — have let the vendors who pass on the surcharge to get away with their business-unfriendly tactics. These bankers can’t bring themselves to change this status quo now.
It means that credit card use is hampered — no doubt to a limited extent — at a moment cards have to be encouraged, as the Central Bank higher ups have stated. Card use has increased according to all reports, and some surveys indicated that there was a significant uptick in terms of credit transactions using cards, starting last December.
Some vendors adopt other tactics that are equally deplorable. They do not accept cards unless the transactions are over a certain minimum amount that’s decided on by them. The logic of such a business practice is hard to understand.
Small transactions can add up and that’s business too. Those customers that want to use the card for minor transactions below say two hundred rupees may not be carrying the cash on a given day and want to use a card. There can be accumulated transactions that bring in profits for the merchants collectively, if they allow transactions for any nominal amount that the customer wants to use the card for.
Offending vendors who use these rather absurd business strategies have not either thought things through or are still languishing in the dark ages or worse, in a world of their own. But it’s the banks that have to reign in these businessmen that cause card users to avoid purchases.
Why can’t the banks take more consistent and effective action? Though banks have a stated policy of suspending the accounts of those vendors who continue with surcharges and adopt other unreasonable business strategies when it comes to card use, bankers have essentially adopted this policy in the breach.
Bankers don’t seem to care. They are too accustomed to the status quo and don’t want to adopt the mechanisms by which they could in fact suspend accounts.
This needs to change and the Central Bank guidelines need to be followed. But ingrained habits seem hard to break. Perhaps the Central Bank or some other authority ought to coax bankers to make sure that some vendors don’t pass on the swipe fee as a surcharge to customers.
This is an example of the general attitude in this country to favour businesses over the needs of customers and general interest of society. The issuers of cards themselves such as Master card and Visa also don’t want these surcharges passed onto customers. But they don’t enforce policy with regards to cards in this country or any other country. The domestic banking folk do that.
The policies with regard to credit are not all necessarily weighted towards customer welfare. The entire concept of credit at a price, is sometimes questioned. But credit transactions and credit cards are here to stay. The future of the economy depends on how credit is granted, and how credit card transactions are encouraged, while factoring in other forms of loans and facilities into this lending equation as well.
SURCHARGES
Banks have recently converted credit card debt of some defaulters into regular loan payments, and this is after the Covid-related concessions were lifted. This means that people are encouraged to pay back even if the conditions for repayment are eased somewhat.
Credit card interest rates are high and this is the nature of this type of unsecured credit. However, when surcharges and other unnecessary costs are passed onto customers the growth of credit is discouraged and despite banks settling card debt under concessionary terms, all these policies with regard to surcharges are not being closely scrutinised and reconsidered.
Also banks don’t necessarily teach good credit related practices. That’s not a good thing even though the cynical may say banks care only about short term gains and couldn’t care less if the customer is saddled in debt.
But it’s better to have the customer in sustainable debt and keep him or her paying interest rather than have him neck deep in debt so that he becomes an outright credit risk and has to be removed from the credit system altogether.
The rapacious money motive reigns among merchants. But they too should be taught the positive aspects of credit transactions. If they don’t know business increases due to the ready use of credit cards, have some seminars and events to educate and convince them. Banks sponsor various CSR events, why can’t they do this amount of CSR for something that concerns them directly?
Ultimately amassing credit card debt would be far from the best solution for people irrespective of their financial goals. But with some amount of discipline, credit cards can be assets because there is credit within easy reach as long as you’d be willing to pay the relatively high interest rate.
This is why credit cards are popular and bring in more business to merchants and keep the wheels of commerce moving. It needs a special kind of shortsightedness to not see this and try to get customers to pick unnecessary surcharges, making sure they’d think twice about coming back for business.
If surcharges are “allowed” by banks in certain countries, it is precisely because vendors don’t use these negative strategies. Bankers don’t have to impose rules from some lofty perch and try to enforce them. Everything is relaxed because people know the value of credit and foremost among them are educated vendors. We have a different species of vendor here, who sees credit sometimes as malevolent. Only rules can rein in these types.
