Apr 21, 2006

Merchant surcharges on credit card purchases in India

Check out this site where consumers exchange experiences with credit card surcharges in India. It’s worth the effort of reading through the various threads. When you get through the whole page of comments, you get the feeling that using your card in India is a real hassle that costs you lots of money. It’s depressing to see merchants clearly working very hard to discourage card usage.

How does this impact banks? It has a very direct impact, resulting in low card activation and usage, with a strong customer preference for cash.

HSBC was the first bank in India to eliminate credit card surcharges. In 2002, they announced that they “want to get rid of the concept of 'surcharge' in India” and that the bank would bear the cost of the surcharge, not the cardholder. “The bank will extract no surcharge on HSBC credit cards processed at HSBC's own electronic data terminals in petrol pumps. For purchases at pumps that have terminals of other banks, the HSBC credit card holder will pay the 2.5 per cent surcharge, but will receive a consolidated matching reversal of this surcharge on his/her monthly bills.”

So the bank loses 250 basis points whenever an HSBC card is not used at an HSBC terminal. In comparison, the UK banking industry went through a major upgrade to Chip & PIN when card fraud approached 30 basis points, considered a crisis threshold.

Most other banks in India have followed and now offer the same feature to their cardholders. Even though India is a growth market for credit cards, the pure focus on price makes this a textbook case of an ultra-commoditized payments market. If customers will use their cards only if it doesn't cost them anything, and if merchants will accept cards only if they don't have to pay, that's a totally commoditized market where price is the only motivation. Maybe banks are comfortable with this approach during the current high growth phase in India, as a way to buy market share. But at some point, they will have to stop subsidizing their payments services and apply a normal business model that earns money from both cardholders and merchants.

If banks can't get merchants to prefer cards over cash, it will be very difficult to avoid low card activation and usage. And losing an astronomical 250 basis points per transaction cannot be the right solution.

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