Disputes have risen recently regarding the decision by banks to charge card users an annual fee.

Banks insist the charge is important to cover costs of their card systems, whereas consumers argue it is unjustified because most cards do not offer services other than such basic functions as making deposits and payments.

The dispute, on its surface, is about the rate the banks charge. But in fact it is an issue related to the banking sector's ongoing reform.

The charge on bankcards is a natural thing under market conditions. Bankcard service incurs a series of costs including card issuance, transaction settlement and investment in infrastructure.

It takes 400,000 yuan (US$48,300) to introduce a card making machine, which runs out of use after producing 400,000 or so cards, and 300,000 yuan (US$36,600) to set up an ATM (automated teller machine) unit. The 10 yuan (US$1.2) annual charge many banks have introduced is equivalent to the yearly maintenance cost for a bank card account.

An annual fee for bankcards is very normal in many countries. Current disputes over the charge here reflect a lack of understanding of the nature of bank card service.

With the deepening of banking reform, the equity structure and operational pattern of State banks has changed dramatically, and there is no free lunch any more when it comes to banking services. The banks are by nature service enterprises that generate profits by providing customers with sound products and services.

Admittedly, in some ways we can still see the inertia of the planned economy system, in which State banks relied on government support and did not care much about their own efficiency.

But now domestic banks are facing unprecedented challenges with the country's accession to the World Trade Organization, and competition in the industry is increasingly fierce. The importance of bankcards in their services is also rising.

The past practice of free use of card accounts was unreasonable because it ran counter to the basic norms of a market economy. It was also wrong to issue cards on a mass basis, regardless of the real effect of the cheap marketing tactic.

Statistics show 80 per cent of the 200 million or so cards issued by the Industrial and Commercial Bank of China and the Agricultural Bank of China have never been used. But banks have to devote systematic resources to taking care of those "dormant" cards even if there is only one cent in each account.

Those sleeping cards not only add to banks' management cost but also hinder efficiency in serving regular customers. Charging an annual fee is therefore a method to sort out the dormant accounts.

When enjoying the convenience of zipping a card to pay daily expenses, card users should understand it is fair to pay some fees for the service.

From the consumers' perspective, however, the banks should make every effort to improve service and make sure the service customers receive is worth the fee.

As a matter of fact, the efficiency of some banks' card service is quite poor, and sometimes there are mistakes that cause financial losses to customers. These problems have dampened public trust in bankcard service.

As long as domestic banks can make substantial improvement in their service, the card charge will not be a problem.

Meanwhile, domestic banks can consider introducing a differential charge system in line with the development of banking services.

Western banks usually charge clients according to their contribution to profits, credibility and specific demand for service, a practice that helps sustain the input-output balance on one hand while avoiding an exodus of customers on the other.

The effect of domestic banks' flat-rate card fee seems to have some problems. In some places, unsatisfactory customers have even lined up to cancel their accounts. Although customers' refusal of the charge is not unexpected, it in a way indicates the flat-rate charge policy is not the best option.

Some foreign banks issue every client a card as soon as he or she opens an account. They also charge the card service, but when a client's deposit exceeds a prescribed amount, the charge is waived.

Many Western banks also encourage customers to do transactions via ATM units to save labor, and sometimes there are fees for small over-the-counter transactions.

China's banks should learn to combine Western banks' advanced experience with local conditions, and implement a differential fee system based on better customer resources management.

Another priority should be to complete banking laws and regulations to make customers better accept charged services.

As bankcards are related to ordinary citizens' everyday life, the public does not question the charge on the card itself. What they question is the rationale behind charging for something that was previously free.

The banking industry needs standard rules regulating charged card service to ensure customers are getting their money's worth.

(China Daily June 24, 2004)