The recent announcement by Yes Bank and IDFC First Bank to levy an additional 1 percent fee on utility payments made via their credit cards has left consumers pondering the rationale behind the move. This departure from the previous norm, where such payments often garnered reward points without extra charges, has raised eyebrows and prompted questions.
Delving into the reasons behind this decision reveals several key factors at play:
- Low Margin in Utility Category:
- Traditionally, utility payments yield lower margins for banks compared to other spending categories. Interchange fees earned by banks from transactions in the utility category are relatively lower.
- Payment gateway providers may offer discounts on Merchant Discount Rates (MDR) for certain categories like education, grocery, and utilities. This further reduces banks’ earnings from utility transactions.
- Personal Expenses Using Official Credit Cards:
- Many individuals, including business owners, tend to use personal credit cards to settle their business-related utility bills. While personal utility bills typically fall within a certain range, business utility bills can be substantially higher.
- Banks often provide more rewards on personal credit cards compared to business credit cards. This creates challenges in offering high rewards for business-related transactions.
- Incorrect MCC Tagging:
- Some payment service providers facilitate business payments using personal credit cards, contrary to the terms of use. These transactions, despite being business-related, are often tagged under the utility category MCC (Merchant Category Code).
- This misclassification complicates reward structures and fee assessments for banks, leading to adjustments in fee policies.
The response to these changes has been met with a spectrum of reactions, with some consumers expressing concern over the impact on their rewards and expenses. To address these concerns, banks have introduced measures such as offering free usage limits to customers, exempting transactions below a certain threshold from additional fees. For instance, Yes Bank provides a free usage limit of Rs 15,000, ensuring that smaller utility payments remain fee-free for customers.
While these adjustments may pose challenges for certain consumer segments, particularly business owners, there are alternative solutions available, such as opting for business credit cards tailored to offer more suitable rewards and benefits. As banks adapt their policies in line with market dynamics and consumer feedback, the future landscape of credit card rewards and fees remains subject to further evolution and refinement.
