Mint Primer: Why commercial card spending has been paused

RBI
RBI

Summary

  • Commercial cards are used by corporates for making purchases on the company’s behalf. This gives them interest free loans for a period of 30-40 days, which helps manage working capital.

The Reserve Bank of India has asked a card network to pause payments under a system that allowed corporates to make card payments to certain other businesses. RBI did not name the network but Visa says it’s got a missive. Mint explains the reasons for the move.

Why do companies use credit cards?

Commercial cards are used by corporates for making purchases on the company’s behalf. This gives them interest free loans for a period of 30-40 days, which helps manage working capital. They can be used to pay for equipment rentals, office supplies etc. 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.

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 Business Payment Service Provider (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.

What is the extent of these transactions?

Banks and credit card firms do not disclose the number of commercial cards issued or volume of spend. According to estimates as of December-end, BPSP transactions were 12.5% of total credit spending, or 20,000 crore per month. According to RBI, credit card spending among Indians rose to 1.65 trillion in December 2023 from 1.61 trillion in November.

Will businesses be impacted?

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 all banks and SBI Card. 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.

How is the industry trying to fix the situation?

Experts say businesses 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. Fintechs are awaiting RBI’s clarifications in order to continue with this business.

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