Overcharging customers for card payments

Banks should intervene and get this unethical and illegal practice of merchants stopped
Representational Image
Representational Image kalingatv [Creative Commons]

Some time back, I observed a unique situation at a bank branch. At a time when people are hungry to obtain a credit card and embrace digital mode of transactions, I found a group of customers surrendering their credit cards to the bank. Even as the bank official was trying to convince them not to surrender the cards, the customers revealed that the card was expensive and the shopkeepers were charging 2 to 3% more than the actual bill. They also told the official that the merchants even charge extra bucks for payments through mobile banking App.

The situation described by the customers was unbelievable, though some decade back merchants would charge a few percent extra than the actual bill. The situation prompted me to cross check what the customers told the bank official. I stepped into a medical shop to purchase some medicines. I asked for the discount on the bill amount. The chemist offered me a conditional discount.

“Discount is not available if you use credit or debit card for making payment of the bill amount. Making payment through mobile App or in cash will make you eligible for the discount,” said the chemist. When I asked him the reason behind the denial of discount for payment of bills through cards, he explained: “See, the bank is charging us 2%-3% for every transaction through a card. And we are compelled to pass it on to the customer. It’s the bank that is charging the extra amount, and not us.”

Basically, these are not stray incidents. Over a period of time, the merchants have made it a norm to make their customers pay a few percent extra for making purchases through cards. During the peak years of pandemic, a lot of incidents were reported where even a good number of schools were found involved in charging extra amounts from parents for using online payment mode of depositing the tuition fee. They opened up online payment channels for fee collections including via credit and debit cards and charged Rs.50-70 over and above the monthly fee. The school management blamed banks for levying charges on using their digital channels.

Notably, COVID-19 pandemic gave an unprecedented push to digital banking transactions and digital payment channels like mobile banking, e-banking, credit & debit cards, point of sale machines, electronic funds transfer through National Electronic Fund Transfer (NEFT) & Real Time Gross Settlement (RTGS) etc. became the preferred mode of financial transactions. Today, even small value household transactions are taking place in large volumes through electronic payment channels.

However, going digital doesn’t mean customer convenience alone. Banks too have been garnering a lot of benefits in the way of technology. Digital payment platforms have reduced their cost of transactions drastically and have helped the banks to generate revenue through these multiple channels. Besides, digitization has considerably reduced human error and has simultaneously enabled a strong reporting system of each and every transaction.

But, it’s the cost at which digital transactions are made available to the consumers which has surfaced as a major concern. Even as most of the cardholders show resentment against the merchants, they also take a dig at their card issuing banks for not coming clean on the issue. They say the banks while issuing the card didn’t mention that the cardholder has to pay a certain percentage as commission to the merchant while making purchases through these cards. The banks promote their card services free of cost while making purchases through these cards.

Why does a merchant or shopkeeper ask cardholders for such ‘commission’?

When a cardholder swipes a debit/credit card on the PoS machine to make payment against the purchases, the merchants have to pay some fees (1%-2%) to the Bank or the rental fees for the PoS machine. This is the Merchant Discount Rate (MDR), the fee to be paid by shops, businesses, merchants and others to the card issuing banks for facilitating digital payments.

In other words, these charges are to be borne by them as the cost of running the business and availing the convenience of taking the payments without hassles. On one hand, they feel burdened to pay these charges and on the other, they want to retain the facility for customers as payment through cards has been surging. Amid this dilemma, the merchants pass on these charges to the customers and force them to pay some percentage of the bill amount as commission for using cards for payment. If a customer refuses to pay the commission, they ask him/her to pay by cash and even guide them to a nearby ATM. If any customer argues, they wrongly justify the charging of commission by stating that the amount goes to the bank.

If a bank charges the merchants for PoS facility, why are merchants wrong to ask customers for extra amount while making payment through cards?

See, there are no freebies in business. The banks are offering their products and services to their customers at a cost. Point of Sale (PoS) machines are one such facility which enhances the business environment of a merchant establishment. Over a period of time, the electronic mode of payment has become the preferred mode to conduct financial transactions. People do not generally carry a large amount of cash when they go out to make purchases. In this scenario, PoS works to a merchant’s advantage. If credit/debit cards have enhanced the purchasing power of the cardholders, it’s the PoS facility at a shop which makes the merchants capitalize on the cardholders’ enhanced purchasing power and sells more than what it would have with only cash purchases. Precisely, having a PoS machine is in the best interest of the merchant. When a customer uses cards, the merchant is assured of getting his money immediately after the transaction is approved. And the merchant gets the amount directly credited into his account, which means he is absolved of storing the cash at his shop and then engaging a person to get it deposited in the account. In other words, the merchant saves time by offering PoS facility to his customers and helps him to garner more business during the day.

So, it’s not justified for a merchant to charge customers for using the PoS machine. Merchants need to understand that they are utilizing the facility for their own business convenience alone and bank charges are justified for such a facility. It’s unethical, rather illegal to ask customers to pay for a facility which they avail to run their business.

What should a cardholder do, if the shopkeeper insists on paying extra charges?

When any shopkeeper or a merchant asks you for extra charges on making purchases through cards, file a complaint against him to the bank. The RBI has asked all the banks to break their relationship with those merchants/shopkeepers who are forcing customers to pay this commission.

However, it has been observed that most of the time customers shell out this commission and avoid confrontation with the merchant. This way such cardholders are lending support to such merchants to flourish this unethical and illegal practice of charging ‘commission’ on purchases made through credit/debit cards. It requires some time and effort from the side of customers to end this practice.

Last, but not the least. Banks also need to gear-up their surveillance mechanism where they can reprimand the merchants misusing PoS facility. They should terminate their relationship with them if they fail to fall in line with the stipulated guidelines in this regard.

Let me share what the RBI says in this regard. “…merchant establishments levy a fee as a percentage of transaction value as charges on customers who are making payments for purchase of goods and services through cards. Such fees are not justifiable and are not permissible as per the bilateral agreement between the acquiring bank and the merchants…Any such instance can be used as a strong argument by the bank to terminate its POS-linked relationship with such merchants.”

(The views are of the author & not the institution he works for)

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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