1.6 per cent Transaction Processing Fee levied on the value of all transactions

 By Syed M. Aslam
Sep 20 - 27, 1999

Tens of thousands of credit card users across Pakistan were shocked to find that they were required to pay an additional fee on every single purchase, when they received their bills recently. They were simply sent a note by the issuing banks which summarily informed them that every single purchase by them or their supplementary card member(s) would now include what the banks called a 1.6 per cent ‘Transaction Processing Fee (TPF) on the value of all transactions.

The note also informed the card holders that the TPF would appear in the monthly statement and would be included in the minimum monthly payment. A user showed PAGE the typed note received along with his recent bill which told him that the Citibank would be charging a 1.6 per cent TPF from now on.

Another source close to one of eight authorized agents in Karachi, appointed by the Bank to market its Visa and Mastercards, told PAGE that no clarification had been provided by the Bank about the reason for imposing the TPF.

The Citibank which previously marketed Visa and Mastercards has now decided to out-source the job to appointed agents. The Bank provides training to the sales staff hired by these authorized agents while the salary and commission are paid by the agents.

The source declined to tell PAGE the exact amount of remuneration paid to the sales staff on each sale but said that the eight agents appointed by the Citibank in Karachi are given a target to sell a minimum of 100 cards each month.

Observers say that the imposition of TPF by the two market leaders of Visa and Mastercard in the country— Citibank and ANZ Grindlays Bank— is actually an attempt to pass the 2 per cent Central Excise Duty imposed by the government in the Federal Budget 1999-2000 on the banks. By imposing the fee on the card users these financial institutions have negated the claims made by the Finance Minister Ishaq Dar in his budget speech in which he had said that the CED would be borne by the banks and it would not be passed on to the card users.

It is a customary for the banks, the world over, to deduct a fixed percentage on all credit card transactions, usually 2.5 per cent, from all participating outlets. This is one of the primary sources of revenue for the banks besides the compound interest they earn on the minimum monthly payments. Over the years the increasing public opinion has forced the banks in the developed West, where plastic money has replaced cash to a great extent, to cut their interest rates substantially from 22 per cent a decade ago.

The use of credit card is still in the nascent phase in Pakistan, a country where the credit card population is very low— there are only about 150,000 credit card holders or just 0.1 per cent of the population. Pakistan does not only have a small number of credit card holders but also a limited number of outlets which honour two of the best known credit cards in the country, Visa and Mastercard. There are some 10,000 outlets nationwide which accept Visa and Mastercard, 6,000 of them in Karachi alone.

In a country, where the concept of plastic money has yet to take roots and where its use is restricted by being acceptable in such major businesses as the prominent hotels, airlines and retail outlets, there are many other factors which discourage the use of credit cards.

Number one, banks in Pakistan charge a fixed annual fee on a card besides renewal fee. In addition, card users are also required to pay a one-time ‘joining fee’ to get the card. For instance, Citibank, which is marketing both the Visa and Mastercard, charges an annual fee of Rs 4,000 for the issuance of Gold version and Rs 2,000 for the silver version of any of the two cards.

Apart from deducting a fixed 3 per cent from all transactions from the participating outlets it also charges the users an interest on the unpaid balance on compound basis. Now it has also chosen to charge the users a fixed 1.6 per cent TPF to pass the major portion of the 2 per cent CED meant to be absorbed by the bank alone.

Many smart credit card users who chose to pay the entire balance in the initial billing to avoid paying interest would now have to absorb the mandatory 1.6 per cent TPF. Others who are lured by the credit cards to ‘spend now and pay later’ and chose to pay the minimum 5 per cent of the remaining balance over long period of time have to realize that a 3 per cent interest charged by Citibank and 2.33 per cent charged by ANZ Grindlays, would incur extremely high interests. Simply, the longer you chose to pay the bigger interest you have to cushion. The mandatorily slapped TPF, of course, would always make a part of bill on all transactions irrespective of the value.