Monday, July 8, 2019
By NEIL HARTNELL
Tribune Business Editor
The Clearing Banks Association’s (CBA) chairman has admitted that the industry “can do better” in pushing for lower debit card fees, thus aiding the drive for a cashless society.
Gowon Bowe, pictured, told Tribune Business that the industry needed to work with both the Central Bank, and Visa and MasterCard, to lower interchange fees - the main driver of transaction/processing fees paid by Bahamian merchants - “to an absolute minimum” with the savings passed on to businesses.
Agreeing with the International Monetary Fund (IMF) that Bahamian commercial banks need to better distinguish between debit and credit card transactions, and lower fees relating to the former, Mr Bowe added that “merchant education” was also critical in encouraging both companies and consumers to make the switch to electronic payments.
He agreed that the issue “requires wider national consideration among the Central Bank, banks and both Visa and MasterCard” to address what has been a long-standing complaint among many Bahamian merchants about perceived high fees associated with debit and credit card transactions.
The Bahamas has no domestic “switch” mechanism for the settling of card transactions, Mr Bowe said, unlike the UK’s Maestro system and other countries. With its relatively small population size likely making the economics of a domestic “switch” impractical, Bahamian card payments are settled via Visa and MasterCard’s international networks.
“We need to look at how we ensure the interchange fee from the card associations are reduced to an absolute minimum and banks have only to pass the savings on to merchants,” Mr Bowe told Tribune Business.
“It’s requiring education of merchants and banking institutions to ensure we lower the actual cost associated with debit card transactions so we facilitate greater consumer awareness of a cashless society.
“There are obligations on financial institutions and the banking community, particularly the acquiring banks, and we have to sit down with the card associations and ensure we can achieve lower costs..... We can do better by working with these associations to minimise costs.”
Mr Bowe was speaking after the IMF, in a report on the Bahamian payments system released last week, said Bahamian merchants were being “penalised” for accepting debit card payments because the transaction fees levied on them were the same as for credit card payments.
The Fund argued that there was there was “no economic rationale” for banks to apply the same processing fees for credit and debit card transactions given that the former’s costs are higher, and warned that this was another potential obstacle to the Central Bank’s drive to shift the Bahamian payments system from its traditional reliance on cash to electronic transactions.
“A paradox that occurs in The Bahamas is that there is no differentiation between debit and credit card merchant discount rates,” the IMF found. “There is no economic rationale for this practice given that interchange fees (which are the main driver of MDRs) are higher for credit cards compared to those for debit cards. In other words, merchants are ‘punished’ for accepting debit cards.”
Calling on Bahamian commercial banks to “differentiate between debit and credit card merchant discount rates”, it added: “The current model of applying the same MDR for debit and credit cards does not have any economic justification and serves as a disincentive for merchants to accept debit cards.
“As such, acquiring banks need to revise the current fees they charge to merchants, and ensure that a differentiation for debit and credit cards is in place given the different interchange fees they pay to (card) issuing banks.”
Mr Bowe agreed that credit card transactions should attract a higher fee than debit card counterparts because of the greater risk involved. While debit card payments were effectively an “equity” transaction similar to a wire transfer, in that money was switched from the paying customer’s bank account to that of the providing merchant, credit cards represented an advance payment prior to the customer paying it back to the bank.
He added that the IMF report largely summarised the discussions its staff had with himself and others when it visited Nassau. Disclosing that card processing/transaction fees ranged from 2.5 percent to “as high as 7 percent”, he said many merchants had yet to realise how these charges were set.
Suggesting that the private sector also needed to help itself, the CBA chief told Tribune Business: “There are a couple of issues at play. The first one is merchant education, and having an appreciation that there is a cost associated with physical cash transactions.”
While businesses saw the cost of electronic payments on their financial statements, Mr Bowe said many did not realise bank deposit fees, safes, security systems, guards and vans represent the costs of running a cash-based operation.
He added that Bahamian merchants also needed to understand that card payments was a volume-based business, with their fees determined individually according to how many such transactions they processed.
Mr Bowe explained that businesses benefit from a lower processing/transaction fee by actively encouraging customers to use debit and credit cards, as this results in “a more favourable rate”. He also suggested that some companies were stuck with higher fee rates because they had failed to update their transaction volumes with the acquiring bank that holds their accounts.
“We have some very large merchants, in terms of retail organisations, that have a discount rate of 2.5 percent,” the CBA chairman revealed. “The average is between 5 percent to 5.5 percent.... We have to do a better job of educating clients to become more efficient and maximise their returns by lowering costs.
“This is not one where it’s to the advantage of the banks by having a higher discount rate. Banks do better by having a higher volume using cards. We earn based on the interchange fee. There’s a fixed cost associated with operating a card business, and the cost is the same whether you’re dealing with 5,000 transactions or 500,000 transactions is the same.
“It’s far better to spread the cost over a greater volume of transactions as opposed to a small number of high volume transactions as you still have the same infrastructure.”
The IMF last week reported that many Bahamian merchants were also unaware that they can negotiate processing fees, known as the merchant discount rate (MDR), with the bank that maintains their business account. As a result, it said many companies were paying higher transaction fees than necessary on every debit and credit card payment they accept.
It added that many Bahamian merchants “opt out” of installing point of sale (POS) systems to accept electronic payments because there are too few users to justify the costs, resorting back to cash and cheque methods.