By NEIL HARTNELL
Tribune Business Editor
The International Monetary Fund (IMF) has urged local banks to stop “penalising” Bahamian merchants for accepting debit card payments by levying “unjustified” transaction fees.
The fund, in its newly-released financial sector assessment on The Bahamas, said there was “no economic rationale” for the banks to apply the same processing fees for credit and debit card transactions given that the former’s costs are higher.
It added that many Bahamian merchants were also unaware that they can negotiate these processing fees, known as the merchant discount rate (MDR), with the bank that maintains their business account. As a result, it said many companies were paying higher transaction fees than necessary on every debit and credit card payment they accept.
The IMF warned that card-related fees were another potential obstacle to the Central Bank’s drive to shift the Bahamian payments system from its traditional reliance on cash to electronic transactions, and called for merchants to be “incentivised” into accepting digital commerce.
“A paradox that occurs in The Bahamas is that there is no differentiation between debit and credit card merchant discount rates,” the IMF found. “There is no economic rationale for this practice given that interchange fees (which are the main driver of MDRs) are higher for credit cards compared to those for debit cards. In other words, merchants are ‘punished’ for accepting debit cards.”
Calling on Bahamian commercial banks to “differentiate between debit and credit card merchant discount rates”, it added: “The current model of applying the same MDR for debit and credit cards does not have any economic justification and serves as a disincentive for merchants to accept debit cards.
“As such, acquiring banks need to revise the current fees they charge to merchants, and ensure that a differentiation for debit and credit cards is in place given the different interchange fees they pay to (card) issuing banks.
“Even though merchants have the option to negotiate with acquirers the merchant discount rate, often times they are not aware of it and thus end up paying a high per transaction fee for every card payment they accept.”
The IMF said many Bahamian merchants “opt out” of installing point of sale (POS) systems to accept electronic payments because there are too few users to justify the costs, resorting back to cash and cheque methods.
“There are also cases where the merchants are willing to install a POS terminal but, in the absence of significant usage by buyers, they opt out since they still have to incur fixed costs for terminal maintenance, thus reverting to cash and cheques,” it added.
“This is primarily observed in areas with elderly communities or other population segments that do not have access to bank accounts and use exclusively cash, such as part of the migrant community.
“In order to further encourage merchants (particularly small ones) to accept electronic payments, the Ministry of Finance could explore fiscal or monetary incentive schemes to offer. Such incentive schemes could be of a subsidising nature for the installment and maintenance fees of the terminal, or direct monetary incentives based on the number of electronic payments accepted.”
Drawing on data from the World Bank’s 2018 global payments system survey, the IMF said the volume of annual credit and debit card transactions in The Bahamas had more than doubled between 2014 and 2017, rising from 5.466m to 11.347m
However, it warned that “an action plan is imperative” to reduce reliance on cheque payments in the Bahamian market, and even suggested regulatory intervention from the Central Bank may be necessary in “the medium term” to the extent of “banning” their use.
“An action plan is imperative for the reduction of cheque usage in the Bahamian market,” the Fund said. “Based on the industry’s indication, most cheques are used for person-to-business payments in the context of salary payments, and business-to-business payments in the context of payments to suppliers.
“The Chamber of Commerce along with the banks can take a proactive role in informing businesses about alternatives to using cheques. Presently, the higher cost to processing cheques at the ACH (Automated Clearing House) and the high cost of cashing cheques out has not deterred the different actors from using them.
“As such, in the medium-run, the Central Bank might also have to also take regulatory measures such as passing a regulation stating that transactions with high values should be made only through credit transfers and follow the model of many other countries including banning the use of cheques in the country.”
Such a ban would be a seismic event for many Bahamians and small/micro businesses which have grown accustomed to a cheque payments culture as the main mechanism for conducting commercial transactions. Yet the IMF’s report highlights the ongoing difficulties faced in transitioning many Bahamians to electronic and online banking.
To aid this objective, which links to the Central Bank’s efforts to improve financial inclusion, the IMF called on The Bahamas to consider introducing an Instant Payment System as a way “to fill some of the gaps in the current payments infrastructure”. It added that this could be operated by the Central Bank, which is the model many other countries have adopted.
“Instant payments facilitate the settlement of funds between the payer and the payee in real-time, less than 10 seconds, thus addressing the challenges that the archipelago nature of The Bahamas brings to access and usage of electronic payments,” the IMF said.
“Instant payments are used for a number of cases, including person-to-person transfers, business-to-business payments, bill payments and government payments. Moreover, instant payments have the potential to be used at the point of sale through QR code payments acceptance infrastructure that is typically easier to install and maintain. When merchants accept an instant payment, their account is credited in real-time. This could also decrease the demand for physical cash in the Family Islands.”
The IMF also warned that every Bahamas-based payments system requires matching standards and technology, so that they could facilitate the exchange of funds between each other without imposing delays and extra costs.
It added that the Bahamian financial services industry needed to reach “Account-to-Account (A2A) interoperability between bank accounts and e-money accounts, as well as among e-money accounts themselves”.
“The final objective is that an individual or merchant that has a transaction account, with any service provider, will be able to use it seamlessly with any other payer or payee throughout The Bahamas,” the IMF said.