Posted Date : 30 Oct 2009
MARC believes that the proposed annual credit card tax of RM50 per primary credit and charge card and RM25 per supplementary card is unlikely to have an impact on the overall transaction value of cardholders over the medium term. According to Anandakumar Jegarasasingam, MARC’s Head of Financial Institutions Ratings, should the tax be implemented as proposed and the effective tax burden fall on the cardholder, the more likely consequence would be a reduction in the number of issued cards, as most cardholders will cancel extra cards to minimise their tax burden since the tax is proposed to be levied annually on a per card basis. He adds that as most cardholders are normally expected to be prudent and spend within their financial means, he expects that they will limit their spending to one or two cards and hence the overall transaction value generated by cardholders will remain largely intact.
MARC also opines that the proposed tax will result in aversion to applying for multiple cards on the part of new applicants. Hence, the growth rate of issued credit cards will lose momentum from the compounded annual growth rate (CAGR) of 13.2% recorded over 2004-2008. However, should the card issuers bear the tax burden, the growth momentum may in fact remain intact. These considerations aside, socio-economic factors prevailing in Malaysia, in MARC’s view, will support the continued use of credit cards despite the imposition of the tax. The main factor would be the convenience offered by credit cards, which have become an integral part of our payment system, not only for point of sale transactions but also for rapidly expanding online transactions. In fact, since 2006 the number of credit card transactions in Malaysia has exceeded the number of cheque transactions. According to data obtained from Bank Negara Malaysia (BNM), the total value of credit card transactions has grown at a CAGR of 17.0% over 2004-2008, while the number of transactions has increased by a CAGR of 12.3% over the same period, underlining the increased popularity of credit cards. In addition, the ability to use credit cards for high value transactions without the risks of carrying physical cash as well as the various tie-ups and promotions offered by the card issuers and their affiliated merchants have resulted in credit cards firmly establishing its foothold, not only as a mode of payment, but also as a lifestyle choice.
As for card issuers, currently comprising 21 banks and 3 non-bank financial institutions, this tax will have mixed effects depending on their existing market share and brand positioning. Anandakumar says that he is expecting the larger and more established issuers to retain their market share or perhaps even grab a larger share of the eventual pool of credit cards. The smaller issuers, including non-bank financial institutions, are more likely to see a reduction in their card base. He adds that even in the scenario of the card issuers fully absorbing the proposed tax, MARC does not expect any significant impact on their profitability. With the advent of ‘free for life cards’ most issuers are now dependent on merchant fees from card transactions and interest income on outstanding balances as their main source of card-related income. Hence, even if the card base of the smaller issuers were to be affected as a result of the tax, the actual impact on earnings may still be low considering these card issuers had only a limited share in the overall value of card-based transactions. As for the larger issuers, they may directly or perhaps even indirectly pass on the tax burden to the cardholders as their market position would be strengthened by the churn in the issued card base, thus perhaps even experiencing an earnings boost over the medium term as a result.
Although the actual credit card debts in the commercial banking sector have increased at a CAGR of 18.1% between 2004-2008, MARC notes that it has remained relatively steady at 3.4%-3.6% of total commercial banking sector loans (June 2009: 3.4%). The government’s concern behind the imposition of this tax is better illustrated by the non-performing credit card debts, which in absolute terms have increased by 5.4% in 2008 and a steep 15.3% during the first six months of 2009. This resulted in the non-performing credit card debts to outstanding credit card debts ratio weakening to 2.7% at end-June 2009 from 2.4% at end-2008. However, MARC notes that this ratio as well as the overall household sector NPLs to household sector debt ratio of 3.9% at end-June 2009 still remains below the commercial banking sector NPL ratio of 4.4% according to data obtained from BNM. Anandakumar also noted that these credit card delinquencies were recorded when the Malaysian economy was at its weakest since the unfolding of the global economic downturn and with the economy currently on the path to recovery, he believes that the likelihood of a credit card debt driven destabilisation of the banking sector remains rather remote at this stage.
Rather than a flat annual per-card tax, in MARC’s opinion, the government’s objective of instilling more prudence in consumer spending would have been better achieved had the tax been linked to the total transaction value or to the volume of use. In both instances the tax would have been proportional in nature and hence better positioned to influence credit card-based consumer spending. That said, MARC opines that the introduction of this tax runs counter to payment system sophistication that the government should perhaps seek to promote. Elsewhere, such as in Australia and the European Union, where credit cards have firmly been established as a mode of payment, the government’s focus has been on lowering the cost of transactions by capping merchant fees in order to lower the burden on consumers and to protect the retailers’ profit margins.
From a fiscal policy perspective, this tax has effectively created a new source of revenue for the government, which in MARC’s view should provide a stable stream of income once the immediate reduction in the number of cards in circulation stabilises. That said, if the motive behind the introduction of the tax had been to instil prudence in consumer spending, the direct targeting of credit availability would have been a better policy option. This is especially true in the case of safeguarding the interests of the more vulnerable lower-middle income segment from the tendency of indebtedness as a result of the immediate purchasing power afforded by credit cards. The introduction of a maximum card limit per cardholder, such as the two times the monthly salary limit stipulated in Singapore, or applying a higher across the sector minimum income eligibility requirement for applicants may have been options that could have generated better long-term results.
All in all, MARC believes that the government has secured a relatively steady source of tax revenue through the imposition of the proposed tax. However, in MARC’s view, the proposed tax is unlikely to succeed in encouraging prudent consumer spending, as the actual consumer expenditure incurred through credit cards is likely to remain intact despite the reduction in the number of issued cards.
Anandakumar Jegarasasingam / 03-2090 2250/ firstname.lastname@example.org