Business Times

Costs from interest free credit cards offers come from merchant’s commissions

By Jagdish Hathiramani

A new 60-month installment, 0% interest credit card scheme which is said to be the first of its kind in Sri Lanka, has subscribing merchants paying "credit card merchant commissions" as well as other interest costs to the bank; according to Nadeesha Senaratne, Head of Cards and Consumer Assets at HSBC, the bank which is offering this scheme to its cardholders along in conjunction with retailers Singer, Softlogic and Abans.

He added that in return ‘they get immediate payment with no credit risk whilst giving a payment plan to their customers’. Responding to a Business Times query, Mr. Senaratne also stated that this "0% product is structured for the merchant to take the interest cost as they will induce impulse sales to drive incremental sales and have improved cash flows with immediate payments. Also the bank takes the credit risk that they traditionally take on higher purchase". He also reiterated that "there are no extra fees to cardholders from the bank and this is a value addition we provide. All transactions will be strictly within the available credit balance / limit".

Meanwhile, according to website, 0% interest installment credit cards schemes usually provide revenues to credit card issuers by allowing them to charge merchants higher rates than their usual 3% for participating in this scheme. In return, merchants who join this scheme are rewarded by higher stock turnover and full payment up front for goods that might otherwise be just sitting in stores. Resulting volumes of sales may even eventually offset any extra charges paid to banks.

There are also other known negatives of 0% interest installment credit card schemes, especially for cardholders; one that has come up often in many countries across the world is added fees designated as transaction fees, processing fees, handling fees and the like. In some situations this fee may prove legitimate but in others it is related to this specific transaction and can range from a one time payment to a monthly charge; all of which adds a further debt burden, even higher if payments get delayed or if the minimum balance is paid only.

Another pitfall is that, since credit cards have the highest interest of any credit option, easily over 40% per annum; if only the minimum balance, usually equalling 5% of the total credit card limit, is paid then the transaction ultimately results in a situation which is much more expensive than any other borrowing option. Also once one's credit limit is eaten up and if credit card use is continued, there are additional charges such as over the limit fees to the tune of as much as Rs. 300 or even higher. If a cardholder is frequently over their limit, this could add up quickly and even substantially impact one's overall debt burden.

Other possible repercussions of 0% interest installment credit card schemes include retailers jacking up the prices of their products before the scheme kicks in or even that the products sold being no longer manufactured so after sales service and warranties do not apply.

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