Accepting Credit Cards for purchases will get costlier for the Retailer
By Ankit Sharma
Sep 10, 2008
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Banks are looking forward to increase their incomes from every possible area. As the interest incomes are declining, banks have decided to raise the merchant fees on their point of sales (POS) machines in order to compensate for the losses.

A merchant fee is paid by any organization that uses a bank's POS machine for swapping the debit and credit cards. There are two types of fees that are charged by the banks. One is ‘on us' fee that is charged for swapping the cards issued by the bank itself and the other is ‘off us' fee charged for swapping the cards that are issued by other banks.

The fee is not a fixed amount and it normally differs from 1 percent to 1.1 percent for every transaction that takes place in any company. Mostly this fee depends on the merchant's capacity of running the business. There are times when just 0.6 percent is charged as a fee. But now the banks are planning to raise the fees by 0.1 to 0.2 percentage points. In fact, the fee hike in case of some premium cards will be 0.8 percentage points.

The country's largest players like, ICICI Bank, HDFC Bank and Axis Bank that hold 90 to 95 per cent of the market share in this segment have started informing retailers about the fee hike.

The bank has to pay an interchange amount to the card company- MasterCard or Visa- and with low fee incomes it is becoming difficult for the banks to sustain. A banking official said, "We were offering very low fees in order to acquire customers. But including the cost paid to the card companies, it was becoming difficult for us to sustain the low fees. We are only rationalizing prices."

This fee hike is however going to pose a problem for retailers, as most of their margins will be swiped along with the transaction.

Mr Govind Srikhande, Chief Executive Officer, Shoppers Stop, said that the company has requested ICICI Bank for not raising the merchant fee on receiving a letter on fee hike form the bank. The company's receives 56-57 percent of the payments through cards. "It is a problem for us because it will take away more from our margins. As retail prices are fixed, we have no scope to increase the Maximum Retail Price. It will hit at our profits," said the CEO.

ICICI Bank has also sent letters to Big Bazaar regarding the fee hike. Mr Rajan Malhotra, Chief Operating Officer (COO) of the company said that they are looking for options such as giving the banks a committed swipe business. "We are in various stages of implementation. Our costs are going up and we have to find ways of recovering them. We cannot pass it on to our customers," he said.

A senior official from HDFC Bank claims the bank's hike fees in some segments as a normal practice. Mr Rajanish Prabhu, Business Head - Merchant Services of HDFC Bank says, "Pricing is an integral part of our overall strategy and is reviewed on a continuous basis. Our pricing model is dynamic and is based on the overall relationship with the merchant and is in line with the Retail Bank strategy. Final price points are also decided based on cost fluctuations, margin expectations, various market developments and other similar influencing factors."

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