Mint Explainer: What RBI's commercial credit card diktat is all about

While banks and credit card firms do not disclose the number of commercial cards issued or the volume of spend, a senior banker said that about 25% of all credit card spends are on commercial cards, while the remaining happens on retail credit cards. (Image: Pixabay)
While banks and credit card firms do not disclose the number of commercial cards issued or the volume of spend, a senior banker said that about 25% of all credit card spends are on commercial cards, while the remaining happens on retail credit cards. (Image: Pixabay)

Summary

  • Companies will look at alternative credit lines and ways to settle payments between businesses. Banks could continue issuing more normal business cards, where intermediaries are not involved, to make up for lost spending

Mumbai: The Reserve Bank of India has recently asked a card network to pause payments under a system that allowed corporates to make card payments to certain other businesses.

While the regulator did not disclose any name, card network Visa said it had received a communication from RBI on 8 February regarding this. "That communication included direction that we hold all BPSP (business payment solution providers) transactions in abeyance," a spokesperson for Visa said.

Mint takes a look at what this means and who are affected by this directive.

What are commercial credit cards and why do companies use these?

Commercial cards are used by businesses for various expenses, including paying their vendors. The primary advantage of using such cards instead of transferring money to vendors through Real Time Gross Settlement (RTGS) or National Electronic Fund Transfer (NEFT) is the availability of a certain interest-free credit. Unlike retail cards where the interest-free period is usually up to 50 days, in commercial cards this is bilaterally negotiated between the card issuer and the company, which helps manage working capital.

Corporates make the payment to, say, a fintech, using these cards, and the fintech then settles payment with vendors or merchants. A merchant discount rate (MDR) is charged on these merchants for accepting these payments, which is collected by the intermediaries (the fintech) and split three ways, between them, the card network and banks. These cards also do not accrue reward points.

What are RBI's concerns?

Businesses typically pay their vendors by bank transfers or commercial credit cards, sometimes mediated by fintechs. The latter are called BPSP transactions, now suspended by RBI. According to RBI, fintechs are pooling large amounts of funds collected from corporates into accounts, which are not designated under the Payment System Settlement (PSS) Act. Typically, these funds should go through nodal or escrow accounts. and not current accounts. These funds are then transferred to vendors, who are not registered as merchants. This bypassing of the regulations seems to have irked the regulator.

What is the extent of these transactions?

While banks and credit card firms do not disclose the number of commercial cards issued or the volume of spend, a senior banker said that about 25% of all credit card spends are on commercial cards, while the remaining happens on retail credit cards. About half of these commercial card spends are for vendor payments, a segment that has been stopped after the RBI circular. 

Will businesses be impacted?

Given that total credit card spending was at 1.65 trillion in December, card payments worth over 20,000 crore on a gross basis could be hit every month. Macquarie Research says these cards were issued to drive volumes and never contributed much to profitability as margins were low. So, in the near term, while overall spending will come down for all players, the profitability impact will be low. It expects volume impact and lower card spending beginning in March 2024 to be reported by banks. Industry officials say BPSP was a special arrangement brought in by Visa. RBI assured normal business cards used for travel booking etc will not be affected.

What is the industry doing about this?

Companies will look at alternative credit lines and ways to settle payments between businesses. Banks could continue issuing more normal business cards, where intermediaries are not involved, to make up for lost spending.

Currently, card networks such as Mastercard, Visa etc and banks such as ICICI Bank, Axis Bank, HDFC Bank and Kotak Mahindra Bank are in dialogue with the central bank on this matter, Mint reported on 19 February. Fintechs are awaiting RBI’s clarifications to continue with this business.

 

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