BackRBI acts on credit card usage for P2P payments like rent and tuition fees: Will it ban them?
In the last few years, some fintechs have emerged that allow usage of credit cards for P2P transactions like rent, tuition fees, etc. The RBI is not comfortable with these payments as credit cards are meant for P2M transactions.
PremiumIn 2023, unsecured loans (personal loans and credit cards) were growing at a faster pace. Taking note of the high growth and to avoid an increase in the banks' NPAs, the RBI increased the risk weights for these loans in November 2023. The move has not had much impact on the growth of these loans, specifically credit cards.
In February 2024, the RBI data showed that credit card spending reached Rs. 1.5 lakh crores, a 26% annual growth. Within these spends, the usage of credit cards for payments like rent, tuition fees, vendor payments, society maintenance, etc., to individuals has picked up in the last few years.
In today's world, high-value payments are often preferred to be made via credit card by many young professionals. This aligns with the global trend of utilising credit cards for recurring payments, offering various advantages such as improving credit score, credit-free periods, etc.
The RBI is not comfortable with the usage of credit cards for these payments to individuals. Using credit cards to pay rent and tuition fees to individuals (P2P) doesn't fall within the customer to merchant (P2M) framework of credit cards. So, how are credit cards being used for these transactions, what steps has the RBI taken to prevent them, and will it ban them? Let us understand.
Paying rent and tuition fees to individuals with credit cards
In the last few years, some fintechs have emerged that allow individuals to use credit cards to make payments to other individuals. Fintech collects the payment from the credit cardholder in an escrow account. The amount is then further transferred from the escrow account to the recipient individual's bank account. The fintechs charge a processing fee of 1 to 3% + GST for facilitating these transactions.
Some of these fintech platforms that allow such transactions include:
1) Red Girraffe
2) CRED
3) Housing.com
4) No Broker
5) Paytm
6) Freecharge etc.
For example, assume that you want to pay apartment rent to your landlord. You will have to visit the RedGirraffe website and register your personal details, rent details, landlord bank account details, etc. Upon verification & approval from RedGirraffe, you can then use your credit card to make the rent payment, which will be collected via the regulated payment aggregator and transferred into RedGirraffe’s escrow bank account. The platform will further carry out checks and then transfer the rent amount from the escrow account to the landlord's bank account through a fund transfer like RTGS, NEFT, or IMPS.
Similarly, some fintech platforms allow the use of credit cards for payments like rent, deposit money, tuition fees, society maintenance, vendor payments, and some other payments.
Why do customers use credit cards for rent payments?
Customers prefer to pay rent, tuition fees, etc., through credit cards for the following reasons.
a) Free credit period: A customer can get up to a 50-day credit period depending on the number of days between the rent payment date and the last date for credit card bill payment.
b) Reward points: Some banks give reward points for using credit cards for rent payments. However, most banks have excluded rent payments from reward points in the last few months. In fact, some banks have started charging a processing fee for rent payment transactions. The processing fee is usually a flat amount or a percentage of the rent amount.
c) Completing spend-based milestones: Some banks send spend-based offers to cardholders from time to time. Apart from that, some banks have monthly, quarterly, or annual milestone spends. Rent payments can help achieve these milestones faster.
d) Achieving annual spends for annual fee waiver: Most banks waive the credit card annual fee on spending a specified amount in the previous year. Rent payments can help achieve the annual spend faster, and qualify for the annual fee waiver. Some banks have now started excluding rental payments from annual fee waiver.
Transactions like rent payments, tuition fees, etc., involve big amounts. Hence, while doing these transactions with your credit card, you should pay attention to your credit utilisation ratio. If your credit utilisation ratio increases beyond a certain percentage, it can impact your credit score adversely.
Why is the RBI concerned with the usage of credit cards for rent payments?
The RBI is not comfortable with the use of credit cards for payments like rent, tuition fees, etc., between two unverified individuals (P2P transactions). RBI officials have mentioned that credit cards should be used for verified transactions between customers and merchants (P2M transactions). If credit cards are used for rent, tuition fees, etc., wherein the funds are routed through an escrow account, the recipient must have a merchant payment account to receive rent or other payments through a credit card.
Taking note of the RBI concerns, banks have started taking steps to restrict the usage of credit cards for these transactions. Some banks have stopped giving reward points for rent transactions. Some banks have excluded rent transactions for calculating the expenses for annual fee waiver. To discourage the use of credit cards for rent transactions, most banks have started levying a processing fee for rent transactions. Some fintech platforms have also made changes to the services they offer to comply with RBI regulations.
As per some reports, the RBI has reached out to the fintech platforms that allow rent and other payments through credit cards. It has asked for information related to these transactions. It remains to be seen what steps the RBI takes in future on the usage of credit cards for these transactions. Banks are taking steps to discourage the usage of credit cards for rent payments and other P2P transactions.
But will the RBI completely ban the usage of credit cards for these transactions? We will have to wait and watch the RBI's next move. Some bad actors have been misusing credit cards for rent payments and other high-ticket transactions. Hopefully, their misdeeds won’t jeopardise the jeopardise the popular payment method used by other genuine customers and fintechs operating in this space.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.
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