Moody’s: China’s decision to cut merchant bank card fees to negatively affect banks

Moody’s Investor Service said on Monday that the decision by the People’s Bank of China, the country’s national bank, to reduce merchant fees for bank cards would have a negative effect on banks.

“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 one to 1.5 percent,” Katie Chen, an associate analyst at Moody’s, said, according to China Daily.

The central bank circulated a notice in November saying that the state had approved a reduction in merchant card fees beginning Feb. 25. Merchant bank card fees would range from 0.78 percent for miscellaneous purchases to 1.25 percent for entertainment-related purchases.

Bank card fee income increased 36 percent year-over-year during the first half of 2012 for Chinese banks rated by Moody’s, and total fee and commission income grew by six percent, China Daily reports.

The current merchant fees average one to two percent based on the purchase category, including the service fees charged by issuers, clearing institutions and bank networks.

Chen said that the fee reduction could up the risks within a bank’s credit card portfolio as some institutions attempt to rapidly increase transaction volume in order to account for the reduction in fee income.

“Using the entertainment segment as an example, the reduction of merchant fess to 1.25 percent from two percent implies that banks would need a 60 percent jump in transaction volume just to maintain current income,” Chen said, according to China Daily. “This is far higher than the 36.6 percent growth recorded in the third quarter and raises the risk that banks will adopt more aggressive competitive strategies, including lowering their underwriting and card issuance standards, to expand their volume.”

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