Why Fintechs are Pausing Credit Card Rent Payments: A Deep Dive into Regulatory and Banking Issues

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In recent months, numerous fintech companies have halted credit card rent payments, spurred by regulatory concerns and increased bank charges. This move, while not unexpected, has caused significant ripples throughout the financial ecosystem, affecting both consumers and businesses.
Credit Card Rent Payments

The Reserve Bank of India (RBI) has not issued an official directive to halt these payments but has raised concerns about credit cards being used for unintended purposes. This scrutiny has led major fintech players like PhonePe, Paytm, Mobikwik, Freecharge, and Amazon Pay to stop accepting rent payments through credit cards since March. These actions were primarily driven by the exponential rise in rent payments using credit cards, which now account for nearly 10% of the overall monthly credit card spending in the country.

A senior banker closely working with the regulator explained, “People are using credit cards as a credit line product for rent payments, similar to an overdraft facility. This sometimes mimics cashouts at merchant outlets, akin to taking a personal loan, which raises regulatory concerns.”

Bank Charges

Adding to the regulatory pressure, banks have started imposing fees on rent payments made via credit cards. On June 26, HDFC Bank, the country’s largest private sector lender, announced a 1% fee on such transactions, capped at Rs 3,000 per transaction. Prior to this, most credit card issuers were merely stopping rewards for rent payments. With HDFC Bank setting a precedent, other banks are likely to follow suit.

ICICI Bank and SBI Cards, the next two biggest credit card issuers, had already stopped awarding reward points for rent payments in March and April. This turn of events has placed fintechs in a difficult position, facing both regulatory and financial pressures.

The Fintech Landscape

Several fintech companies, including Cred, RedGiraffe, OneCard, NoBroker, and Epayrent, have responded by requiring more details from consumers, leading to multiple customer complaints about failed transactions. These steps were taken after banks and the RBI expressed concerns over the surge in rent payments using credit cards.

Fintechs typically onboard landlords by providing card terminals and completing merchant KYC. This setup effectively treats landlords as vendors, allowing them to accept credit card payments. However, this arrangement exists in a regulatory grey zone. “Fintechs are acting as super merchants, aggregating thousands of vendors on their platform. While not illegal, this practice is making banks cautious due to recent RBI actions against similar practices with corporate credit cards,” noted a senior fintech executive.

Historical Context

The RBI’s concerns are not new. Earlier this year, the central bank directed Visa to cease its business payment solution provider (BPSP) operations in commercial and business payments via corporate credit cards. The BPSP allowed small businesses to accept card payments without needing a terminal, facilitating credit payments that were previously made through RTGS and NEFT account transfers.

The RBI’s unease with rent payments stems from the similarity in the intermediary model, where fintechs accept card payments from customers and remit the funds via IMPS/RTGS/NEFT to landlords. Although the transactions are generally below Rs 1,00,000 per month, the RBI is cautious about the potential for misuse.

Credit Card Rent Payments

Consumer Impact

One primary reason consumers prefer using credit cards for rent payments is the 45-50 days interest-free period they offer, unlike overdrafts, personal loans, or cashouts at ATMs. However, this creates a paradox for banks. Most customers who use credit cards for rent payments settle the entire amount at the end of the credit-free period, making them less profitable for banks. Banks earn more when customers revolve credit, paying high interest on the due amount.

In the United States, Wells Fargo Bank faced significant losses on its rewards program for rent payments, a cautionary tale that has influenced Indian banks to start imposing fees. This move aims to balance the equation, making such transactions less attractive to consumers who exploit the interest-free period without generating significant revenue for banks.

The Road Ahead

Fintech startup RedGiraffe, a pioneer in the credit-card rent payments business, submitted a white paper to the RBI in March. The document outlined a comprehensive model, showcasing global practices and detailing processes to ensure regular settlement of high-value transactions across all instruments, mitigating the risk of peer-to-peer (P2P) transactions.

Despite such initiatives, the RBI remains focused on the nature of the beneficiaries. The central bank emphasizes that individuals, unlike merchants, cannot accept credit card payments through intermediaries. For banks issuing credit cards, payments are deposited into a merchant account, complicating efforts to halt these transactions without explicit regulatory directives.

Summary

As regulatory and financial pressures mount, the future of rent payments via credit cards in India remains uncertain. Fintechs and banks are navigating a complex landscape, balancing consumer demands, regulatory compliance, and profitability. While the RBI has not issued an outright ban, the current environment suggests a cautious approach, with stakeholders waiting for clearer guidelines.

For now, consumers looking to pay rent via credit cards may face higher costs and reduced options, prompting a reevaluation of their payment methods. As the situation evolves, the fintech industry will need to adapt, finding innovative solutions to comply with regulations while meeting customer needs.

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