I. Highlights of the New Regulation
On September 6, 2016, a new Chinese regulation regarding fees for the use of bankcards (“Interchange”) in the PRC became effective. For these purposes, Interchange is comprised of fees charged by the card issuer, fees charged by the payment network and fees charged by the acquirer. The new regulation is called the “Notice of the National Development and Reform Commission and the People’s Bank of China on Improving the Pricing Mechanism for Fee Charges for the Use of Bankcards” (“New Regulation”). Text of the New Regulation in Chinese can be found here. The New Regulation applies to bankcards issued in the PRC when used for domestic transactions in the PRC that “ride the rails” of domestic Chinese payment networks.
The New Regulation includes the following provisions:
- A new, uniform issuer fee table supersedes and replaces a legacy pricing policy which was based on different types of merchants. The new issuer fee table differentiates by card type (debit vs. credit) rather than by industry/merchant type.
- Different issuer fees now apply to debit cards and credit cards. The issuer fee for a debit card transaction is capped at 0.35% of the transaction amount and the issuer fee for a credit card transaction is capped at 0.45% of the transaction amount. Aggregate fees collected by a card issuer for a single debit card transaction shall not exceed 13 yuan. Issuer fees on credit card transactions are not subject to a similar aggregate yuan cap.
- The rate of payment network service charges on both debit and credit transactions is capped at 0.065% of the transaction amount, and the obligation to pay such network charges is shared 50/50 by the card issuer and the merchant (with the rate of payment network service charges collected respectively from the card issuer and the merchant each capped at 0.0325% of the transaction amount).
- Certain non-profit medical institutions, educational institutions, etc. may be exempt from all or some issuer fees and payment network service charges; and certain merchants of goods and services related to people’s livelihood, such as supermarkets, large warehouse stores, etc. may be eligible for reduced issuer fees and payment network service charges.
- Acquirers are not subject to government mandated rates and fee caps like the new rates and caps on issuer fees and payment network service charges. Acquirers are free to charge market rates for acquiring processing and other related services.
II. Impact of the New Regulation
- Issuer fees and payment network service charge rates have been lowered significantly overall by the New Regulation. This will directly reduce retail business operating costs in the PRC.
Because the legacy rates, now discontinued, were differentiated by industry/merchant type, different industry sectors will realize varying benefit from the New Regulation. For example, for the food and beverage industry, the per transaction cost of issuer fees plus payment network service charges for use of a business credit card will be reduced by approximately 53% by the New Regulation, and for use of a debit card such fees will be reduced by approximately 63%; while for department stores and other business sectors, such fees for a business credit card transaction will be reduced by approximately 23%, and for a debit card transaction by approximately 39%.
- The New Regulation is intended to help standardize the bankcard market and promote the orderly development of the bankcard.
The New Regulation should eliminate certain “gaming” by merchants some of which changed their merchant code to an industry type with lower rates under the previous pricing mechanismin pursuit of higher profits. Commentators indicated that such behavior disrupted the normal market order and impinged upon the legitimate rights and interests of consumers.
- The New Regulation is intended to facilitate economic growth.
By dramatically reducing merchant fee expense, the New Regulation should improve the business operating environment, enhance merchants’ willingness to accept bankcards, expand the use of bankcards to further stimulate consumption and domestic demand for goods and services, and promote economic growth in the PRC.
- The New Regulation will promote fair competition in the bankcard industry.
With the opening of the bankcard clearing and settlement market in the PRC as the result of the China State Council circular to open the bankcard network market (which took effect on June 1, 2016) and the Bankcard Networking Entity Administration Rules (which took effect on June 6, 2016), both domestic and international bankcard clearing organizations may establish business entities in China to engage in RMB bankcard transaction and clearing services. All such organizations will be subject to the New Regulation, creating a level playing field for such businesses, regardless of where they are organized.
- In general, the food and beverage industry will benefit more than other industries from implementation of the New Regulation. However, since credit card transactions will not be subject to Interchange caps for a single transaction, issuer fees and payment network service charges for large purchases, such as automobiles, real estate, etc. can be expected to increase. From recent news reports, some merchants have refused to allow consumers to use credit cards to make such substantial purchases or have passed on the fees and service charges directly to consumers. We expect implementation rules and policies to clarify application of the New Regulation to such businesses in the near future.
PLA will continue to monitor Interchange developments in the PRC to provide readers with information on statutory and regulatory developments.