A lot of Islamicly users question about how some companies which seem to be involved in interest/credit based businesses are deemed Shariah compliant on Islamicly app?
Some major names in this sector are Mastercard Inc, Visa Inc, American Express, Paypal and the likes. All these companies are essentially payment processors. Given the New Normal, digital payment companies seem to have a bright future. So, lets study
Payment Processors – An Overview
A payment processing company is a technology company which enables electronic payments between two parties: merchant (receiver) and customer (payer). It manages the payment network by securely communicating payment information from the customer to the merchant’s bank account.
In simple terms, a payment processor connects the merchant, customer and customer’s bank account to complete a payment transaction. So, when a customer swipes his/her ‘card’ at a merchant, the payment processor helps to move money from the customer’s bank account to that merchant’s bank account.
Hence, the payment processor just collects money from the customer and delivers the money to the merchant. This seems to be a Shariah compliant activity. So, companies like Mastercard Inc and Visa Inc and American Express should be Shariah compliant.
So Why The Controversy?
There seems to be a perception that since most ‘credit cards’ have the Mastercard, VISA or American Express logo on them, so they are as well involved in ‘promoting or enabling’ interest based transactions.
Studying the business models of such payment processing companies, it is very clear that such payment processing companies are usually not involved in interest based activities. Their revenue generally comprises of a fee on the amount of money passed on their network between merchant and customer.
This fee is a transaction fee for their service infrastructure in moving money from A to B. They are usually indifferent about the purpose of the money being moved, if its owned funds, borrowed funds, halal or haram funds – nor do they have a controlled mechanism of finding out such information. They are just pipes connecting two parties in a secure manner. Hence, payment processors are deemed Shariah compliant.
So, are Mastercard Inc, VISA and American Express Shariah compliant?
Shariah Compliance of Mastercard Inc
Mastercard in its annual report states:
“We do not issue cards, extend credit, determine or receive revenue from interest rates or other fees charged to account holders by issuers, or establish the rates charged by acquirers in connection with merchants’ acceptance of our products…” Source
It’s important to note that Mastercard Inc:
- DOES NOT issue the card
- DOES NOT give any credit
- DOES NOT get any revenue from Interest based lending/credit
Hence, in light of the above and a detailed review of its business activities, it passes the sector screening. Since it passes the financial ratio screen as well, Mastercard Inc is deemed Shariah Compliant.
Shariah Compliance of Visa Inc
VISA Inc on its annual report states:
“Our net revenues are primarily generated from payments volume on Visa products for purchased goods and services, as well as the number of transactions processed on our network. We do not earn revenues from, or bear credit risk with respect to, interest or fees paid by account holders on Visa products. Our issuing clients have the responsibility for issuing cards and other payment products and determining the interest rates and fees paid by account holders.” Source
It’s important to note that VISA Inc:
- DOES NOT issue the card
- DOES NOT give any credit
- DOES NOT get any revenue from Interest based lending/credit
Hence, in light of the above and a detailed review of its business activities, it passes the sector screening. Since it passes the financial ratio screen as well, VISA Inc is deemed Shariah Compliant.
Shariah Compliance of American Express
American Express earned USD 11.3 billion in operating interest income on their lending activities which is 26% of their total revenue for 2019. American Express, in addition to be being a payment processor like Visa & Mastercard is also involved in lending and interest based banking services. Hence, American Express Company is deemed non-compliant.
Shariah Compliance of Paypal Holdings Inc
Although Paypal is also a payment processor which is mostly online and non-card based, it seems to fail the Shariah business sector screening test as it does derive revenue from lending and earns revenue by charging interest on such lending. Since the revenue from such non-permissible activity exceeds 5% of total revenue, Paypal Holdings Inc is not Shariah compliant.
But all payment processing companies many not be Shariah compliant!
Let’s look at the potential tricky areas surrounding payment processors:
1. Is the company involved in Interest based Credit/Lending?
2. Is the company involved in Factoring and Discounting of payables?
Yes, some payment processing companies may be involved in non-Shariah compliant activities and derive non-permissible revenue from the same. Case in point are American Express and PayPal!
| Total Payment Processing Stocks | Compliant | Non-Compliant |
|---|---|---|
| 70 | 30 | 40 |
Payment Processing Stocks (Hover to view more details)
Conclusion
Shariah compliance screening is a non-binary activity. Seemingly non-compliant businesses, may actually pass the Shariah screening criteria as can be seen with payment processors! Hence, it requires in-depth research and guidance from Shariah Finance Scholars to arrive at appropriate conclusions. Don’t worry, we at Islamicly take great pains in getting you such insights so that your investments in Shariah compliant stocks are accurately classified.
There are many payment processor companies that are Shariah compliant and you may find such Shariah compliant companies on Islamicly App.
