China Sidesteps Credit Card Cash Advance Controls and Limits

Aug 28, 2020

Amid the COVID-19 pandemic, China has been struggling with mounting credit card debt. Regulators have once again turned their attention to an illegal operation consisting of third party payment companies that allow both businesses and individuals to access credit card advances at lower than normal costs. 

They enable this by allowing merchants to falsify these transactions as fake credit card purchases to benefit from lower bank fees for purchases than borrowing cash. In China, these businesses are known as “cash-out services”. 

Contributing To China’s Payment Market 

According to various estimates, in the past several years, cash-out services provided between 1 trillion yuan or $141.4 billion and 2 trillion yuan to China’s payment market. This is equivalent to 2.5% to 5% of domestic credit card purchases in 2019. 

Closer examination of these cash-out services reveal that third-party payment companies and colluding merchants blatantly exploit loopholes that directly contribute to China’s ballooning credit card debt. It has particularly skyrocketed due to the pandemic. 

Central bank data showed that, at the end of March, credit card balances that were overdue by six months almost topped 91.9 billion yuan. This was an increase of 23.7% from the end of the previous year. 

The sheer scope of this business was enough to spur the People’s Bank of China to release a draft of regulations to prod banks and third-party payment companies to stiffen surveillance over credit and debit card transactions. 

A bank employee voiced their concern:

“The risks will begin to threaten the financial system if 10% of cardholders who use cash-out services become high-risk clients who fail to repay their debts even after using new loans to pay old ones. At the national level, the government must fix the cash-out business to stop it from growing further.”

A High-Risk Business

The entire cash-out business is risky. It gives access to cheap money for businesses and individuals. Plus, borrowers can avoid paying it back permanently. 

A common practice among cash-out customers is to pay off the entire balance of one credit card using the cash borrowed from another credit card. If they have several cards, they can continue to borrow more money only to roll out the debt from one card to another. 

By simply using a POS machine, any small business or individual can tap their credit card in order to get a cash advance without having to interact with a merchant. In just the last several years and as economic growth has lagged, cash-out services have become the most prominent way that small businesses can have access to credit. Even getting loans from banks and other financial institutions has become difficult. 

Just looking at the overall performance of these payment companies during the pandemic clearly shows that cash-out businesses are the preferred way for financing struggling small businesses and individuals. 

This spells a massive headache for banks as they are the “ultimate holders” of all the debt produced by cash-out businesses. They stand to lose if cash-out users cease to pay off their balances. It might be enough of a catalyst to compel banks to keep a close watch on credit card transactions originating from third-party companies. 

The Effect Of Non-Compliance 

With the ongoing pandemic and its destructive force on the economy, coupled by the ensuing, adverse effects of unemployment and the shut down of businesses, many are looking for ways to get quick cash when no other sources are available. Banks would be wise to keep track of these credit card transactions before they are saddled with a crippling amount of debt.

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Having a merchant account allows an account holder to take advantage of merchant cash advances. When a merchant is approved for an advance, the business agrees to receive a lump sum of cash in exchange for an agreed-upon percentage of future credit card sales.

Pricing varies depending on the merchant’s industry, past credit card processing history, the type of business seeking the account, average ticket sales, and average transaction volumes.

Yes, EMB works with merchants who are building their credit, as well as those who have poor credit. EMB also approves merchants that have no credit card processing history and businesses that have lost their merchant accounts due to high chargebacks.

Several factors influence a merchant’s risk level. Though only one factor likely will not get a merchant classified as high risk, a combination of these may: business size, location, and industry, credit score, credit card processing history, a industry’s reputation for excessive chargebacks, a prior history of high chargeback ratios, and whether a merchant exclusively sells online.

Virtual terminals are stationed on a merchant’s website, making it easy for customers to make a payment or purchase online. Merchants or a payment processor can easily set up virtual terminals, so online businesses can accept credit and debit card and e-check transactions.

A merchant account is a business account with an acquiring bank. Without this business account, which actually works more like a line of credit, a merchant cannot accept and process credit and debit card transactions. Businesses need a merchant account to accept major credit cards via a static point-of-sale terminal, mobile card reader, or through a virtual payment gateway.

After filling out EMB’s simple online application and submitting any necessary, requested documents, many merchants get approved within 24 and 48 hours.

EMB specializes in working with high-risk merchants. EMB works with many merchants, including but not limited to businesses in these industries: gambling and gaming, adult entertainment, nutraceuticals, vaping and e-cigarettes, electronics, tech support, travel, high-end furniture, weight loss programs, calling cards, e-books and software, and telecommunications.

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