Whether for the season’s latest couture, that fancy dinner or more significant bills such as our children’s school tuition, plastic cards are popping out of our wallets three times more frequently than they did five years ago.
According to Banque du Liban (BDL), Lebanon’s central bank, there are 600,000 credit cards and more than 1 million debit cards in active use in Lebanon today. While at first glance it might seem Lebanese consumers are drowning in plastic, the main activity for which they use cards is to draw cash from ATMs, making Lebanon far from becoming a cashless country.
Credit cards were first introduced in Lebanon in 1995 and were mainly distributed by banks to their wealthy clients and frequent travelers, according to Mazen Raham, deputy general manager of CSCBank, which specializes in payment services for financial institutions. Around 2002, explains Raham, the concept of the revolving credit card became more accepted and the market opened up to those at the medium income level, creating a spike in credit card issuances through those tempted by the concept of a mini-loan to tide them over until their next paycheck.
Bank officials Executive spoke to reported an average annual growth of 25 percent in the number of credit card users over the past five years.
There are many reasons for consumers to favor credit card usage, say the banks. To begin with, bank conditions for obtaining credit cards have become very easy to meet.
Raham explains that all one needs to be accepted for a credit card is to have proof of a fixed income in order for a bank to set up a credit line compatible with one’s salary.
Randa Bdeir, head of group cards payment and business solutions at Bank Audi, believes consumers prefer using a card as it is less of a hassle and more secure than writing a check or carrying around a wad of cash. With a card, explains Bdeir, customers can also track all their transactions, which allows them to manage their finances better.
All banks interviewed view loyalty and reward programs as major incentives contributing to the increase in credit card usage across the country. Afaf Zeidan, customer service manager at CSCBank, explains that the most successful program is mileage reward points, followed by cash-back rewards — where you get back cash for making purchases with your card — and, finally, loyalty points, which you redeem for gifts.
According to Elias Aractingi, deputy general manager at Blom Bank, people find paying in credit attractive in difficult financial times, such as the ones we are passing through now, as it eases their payment burdens. This is especially true with big payments, in which case credit cards can replace the hassle of applying for a personal loan.
Banks reap rewards if consumers use cards instead of cash at the 21,000 point-of-sale (POS) machines in Lebanon, according to numbers obtained from MasterCard. To begin with, banks charge merchants certain fees. Credit card usage also decreases the security risks and costs that banks incur from storing cash and transporting it to reload ATMs.
Are the Lebanese culturally averse to credit cards?
In terms of credit card usage awareness, banks told Executive that, for the most part, they have few problems with users settling their dues in a responsible manner and they view Lebanon as being far from the debt problems experienced in other economies.
Banks argue that accepting cards can be only good for merchants because they avoid the safety risks of holding cash in the till and are also protected against fraudsters who pass counterfeit money. Merchants in touristic areas, luxury retail environments and shopping malls have a vested interest in accepting cards and may even need plastic to remain competitive, as illustrated by the latest card collaboration of the Beirut Traders’ Association and Blom Bank.
Cash is still king
The situation is not that simple, though. In those rural areas where fewer tourists wave their wallets and in the parts of Beirut’s suburbs where average-income families and small merchants make ends meet, POS terminals are absent from many stores.
Also, since banks charge a fee that ranges between 1.5 to 2 percent of each transaction value when merchants use their POS terminals, small merchants often reject being connected to the system or refuse payments by credit card even if they are hooked up to a network.
Other merchants tell their customers that they don’t accept card payments for minor purchase amounts, while still others will either offer customers small discounts if they pay cash or even charge card-using customers a fee on top of the purchase amount.
Bearing this fact in mind, CSCBank’s Raham agrees that it is difficult to envision Lebanon as a ‘plastic nation’ and that financial transactions in significant parts of the economy will always necessitate the use of cash.
Indeed, Maher Mezher, marketing manager at First National Bank (FNB), says that their statistics, which correlate with those of colleagues in the banking sector with whom he has spoken, show that 50 to 60 percent of Lebanese card usage is to withdraw cash from ATMs, and that people withdraw parts of their salaries from ATMs an average of three times per month. The latest numbers obtained from BDL show that in May 2012, 75 percent of the $675 million worth of transactions by Lebanese residents made through cards were cash withdrawals through ATMs, as opposed to POS payments.
Beware of withdrawal fees
Withdrawing cash from an ATM is only free when one pops a debit card into the issuing bank’s ATM; when using another bank’s ATM, the customer is charged a withdrawal fee.
Due to these fees, which vary between the several national payment processing networks that banks subscribe to, the convenience of pulling cash from an ATM comes with a major inconvenience: fees that are subject to change and nontransparent — banks do anything but highlight them — and that can mount up heftily when consumers are not careful.
For example, a debit card holder at Lebanon’s two largest banks, Audi and Blom, could pay anywhere from $1 to $6.75 for taking out $300 from an ATM not bearing the respective bank’s logo. Neither bank provides this information on its website.
According to a worker at the Audi call center, Bank Audi Visa Electron debit card holders pay $1 for a cash withdrawal from an ATM within the Interbank Payment Network (IPN), Lebanon’s largest ATM network to which 18 banks are connected and whose shareholders include Audi and Blom. However, if they use an out-of-network ATM, Audi cardholders automatically contribute $3.75 to banking sector revenues plus 0.5 percent per transaction, with a minimum fee of $5.
A debit card withdrawal of Lebanese lira from an ATM in the IPN range costs the holder of a Blom Bank Visa Electron card LBP 1,250 ($0.83) or 0.8 percent of the transaction value in US dollars, but the fees for pulling cash from ATMs in other networks currently stand at 2.25 percent, a customer relations agent at the bank’s call center said.
Think credit card instead of debit, and life does not get cheaper. When using a credit card to make cash withdrawals from an ATM, the customer is charged between 1.5 and 2.9 percent, according to numbers published by Bnooki, a Lebanese banking portal. When a credit card is used for deferred payment, the consumer incurs debt and has to pay a monthly interest fee. Under the most extreme rate scheme shown by Bnooki, they can end up paying interest equal to 27.42 percent if calculated annually.
And some Lebanese are unenthusiastic about having their credit card purchases tracked and recorded; they prefer the more untraceable method of cash payment.
This contrasts with the trend in advanced markets which, according to Blom’s Aractingi, are increasingly discouraging cash because governments want to be able to trace people’s financial dealings in the context of fighting tax evasion.
Despite the many users of credit cards, it seems that we Lebanese are still unable to completely give up on cash, and banks feel that we are still far from relying solely on cards in our transactions.
“It is a cultural issue, and Lebanese like the feel of cash in their wallet,” explains FNB’s Mezher.
CSCBank’s Raham speaks eagerly about how credit cards will become extinct in the next 10 years, as we move toward payments through our mobile phones — an easier and more secure way of making payments.
However, considering the limited track record of plastic usage and our mobile phone network issues, it appears unlikely that apps could eradicate our cash habits, and one can bank on it that paper money will continue to have a home in Lebanon when Executive will publish its 2030 special report on banking.