Banks likely to come up with a scheme for users

PETALING JAYA: Banks are likely to absorb the RM50 service tax on credit cards, considering that they already provide cardholders with rebates worth more than this.

For example, RHB Bank gives a 2% rebate for cardholders who shop at Tesco and Citibank does the same for its members using their credit cards at Giant.

Banks are also providing similar rebates for petrol purchases. “A 2% rebate on a RM200 a month bill works out to close to RM50 a year. So it is no big deal for the banks to subsidise the RM50 service charge, but it would only wish to do so with active users (of the credit cards),” noted an industry player.

Hence, it is understood that banks may come up with a scheme where only users who spend a certain amount on the cards will enjoy a waiver of the service tax.

Under Budget 2010, the government said it would impose an annual RM50 service tax on each principal credit and charge card, including free cards, and RM25 for each supplementary card from January next year.

Until the banks decide on the service tax waiver, cardholders with unused credit cards may decide to cancel them.

Indeed, the measure is expected to promote prudent spending with the number of credit cards having increased from more than 2 million in 1997 to 11 million as at August 2009, excluding 285,000 charge cards.

Meanwhile, analysts said the impact of the service charge on credit cards was expected to be “mildly negative” for the banking industry.

A Kenanga Research analyst who covers the sector said credit card loans in the country’s banking industry made up less than 5% of total loans.

“It’s pretty hard to quantify the impact at this juncture, but based on this alone, I would say the impact would be mildly negative,” he said.

Jupiter Securities head of research Pong Teng Siew said he was expecting about 25% of current cardholders, especially those with more than one card, to cancel their inactive cards following this proposal.

“On the whole, the banking industry’s profitability might not be affected much, but in the case of some banks, especially those which have depended on their credit segment to drive growth these past years, the impact could be substantial,” he said.

There are currently 9.7 million and 2.3 million principal and supplementary cards respectively circulating in the system, up from 2.8 million collectively in 2000.

In a note to clients yesterday, ECM Libra said the service tax could well see the banking system incur up to RM542.5mil in additional expenses arising from this measure should they wish to maintain existing levels of business.

Alternatively, they could “lose” as much as 50% of the cards issued but the “subsidy” to potential spenders from the system (on the assumption of the current 21.6% utilisation rate) may be reduced to about RM280mil, the research house said.

OCBC Bank (M) Bhd head of consumer financial services Charles Sik said it was “probably too early” to establish the specific implications of the move to impose the across-the-board service taxes.

“Details have yet to be made known to the banking fraternity, and much would depend on how it is implemented. In any case, the consumer or the banking industry would have to bear the cost for this new source of income for the government.” Sik told StarBiz.

Most major banks declined comment when contacted.