The month-long deadlock between local retailers and bankers has finally been breached after the banking industry compromised, according to a Shenzhen Banking Association (SBA) spokesman.

In a victory of sorts for retailers in the highly publicized case, the banks have reduced their card fee by 0.2 percentage points to 0.8 percent.

More than 40 retailers had banded together to make a plea to banks to slash their 1-percent bank card transaction fee by half, the same level as in big cities like Beijing, Shanghai and Guangzhou.

The retailers complained that the fee in Shenzhen, the booming southern metropolis which is blessed with the highest per capita gross domestic product in China, was eroding their already razor-thin profit margins.

According to a survey conducted by the Shenzhen Retailing Association (SRA), consumption revenue via banking cards in the city reached about 16.5 billion yuan (US$1.99 billion) in 2003, up 135 percent year-on-year, exceeding the country's average level.

Last year, the 46 retailers, whose revenues make up nearly 80 percent of the city's total, paid 46.6 million yuan (US$5.63 million) in handling fees to China Unionpay (Shenzhen), 4.82 times that of 2002. China Unionpay is the only official credit card clearance provider in the city.

"Sales handled via bank cards have accounted for 80 percent of our overall revenues, and 90 percent on weekends and during holidays. But our gross profit is merely between 1 and 3 percent," said a local retailer. "As a result, we are working for the bankers."

The SBA, which represents 17 local bankers, turned down the retailers' proposal to cut the fee as soon as it was presented, due to the high costs of point of sale (POS) purchases.

Moreover, the banking industry attributed the deteriorated situation within retail industry to the sector's vicious price competition.

Seven rounds of talks later, still with no sign of progress and in a bid to be heard, the retail coalition held a two-day boycott on bank cards at the start of the month.

The move aroused much attention from around the country and was followed by retailers in other major cities such as Ningbo, Nanjing, Shanghai and Beijing, where the fee is 0.5 percent lower than in Shenzhen.

Under heavy pressure from the media, public and government, the banking association was forced to go back to the negotiation table.

But it continued to stall, drawing more fire from the retail industry, even after the SBA's announcement last week.

Regardless, the SRA has stated on its official website that the only way to fully resolve the disputes is to break China Unionpay's monopoly in Shenzhen.

Its network subsidiary can sign contracts with retailers at a fixed price.

While conceding the positive function of China Unionpay, the retail association wants to be able to discuss fees with banks individually.

"We are not asking for the disbanding of China Unionpay, which should continue to serve as the platform between the banks and us since we both benefit from the convenient POS machine service," an SRA spokesman said.

"But if we can talk to the banks face-to-face, the fee might come down. Also, the market should be deciding the price, not the banks."

Cai Shutao, associate professor at the Guanghua School of Management at Peking University, said the conflict is a reflection of the different degrees of competition within the two industries.

"After years of conflict between consumers and retailers and heated competition among the sector, the retail industry in China has developed into a quite mature market economy business," Cai told Business Weekly. "When disputes happen, it believes that negotiations are the way out."

In contrast, the State-owned banks ooze arrogance while having failed to adjust themselves to the rules of a market economy. When conflicts arise, they choose to slam the door shut.

Also, Cai argued that it was very irresponsible for the banks to attribute the low gross profit of the retail industry to its fierce pricing competition.

In fact, "both banks and retailers are in the same industry chain. It is short-sighted to say that the retailers' losses are none of the banks' business," he said.

Achieving a positive situation for both groups and gaining maximum profits should be the priority of both sides. The banks will suffer in the future if they fail to co-operate with their downstream partners.

Cai also suggested that competition should be encouraged by introducing other financing channels to break the current price cartel.

Yi Xianrong, a financial expert with the Chinese Academy of Social Sciences, agrees.

Bank card charges were formulated in a regulation set by the People's Bank of China late last year, he said.

The measures, which stipulated the profit distribution ratio between the banks and China Unionpay, set the tone for bank card charges. There is little room for the banking industry to adjust the price according to the market.

(China Business Weekly June 24, 2004)