In today’s Finshots we see why ICICI Bank’s decision to impose an extra charge on “rent payments using credit cards” could be a sign of things to come
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Have you ever used apps like Cred, PayTm or NoBroker to pay your rent?
If you have, then you probably used your credit card to make the transaction.
But here’s the thing – If you were using an ICICI Bank credit card, you might soon have to rethink your strategy. Because come 20th October they will ask you to pay a 1% fee on all rental payments.
But why is this happening now? Doesn’t ICICI Bank already make money when you pay rent?
They do. But there are some caveats involved.
So let’s take it from the top, using Cred as an example.
Now if you used Cred to pay rent, they’d charge you somewhere around 1–1.5% to facilitate this transaction. And I know what you’re thinking – Why would anyone shell out extra just to pay rent – Why not just pay them directly and get it over with?
It’s quick, clean, and something we’ve been doing for ages.
But… Cred’s fee may not really be such a bad thing. For starters, banks offer cashback and rewards when you use their credit cards. It’s a way for them to incentivize you to take that short-term loan or credit. Sometimes, the cashback could be as high as 3%. Alongside this, you could tack on rewards too – like Cred coins. You could then use these coins to buy discounted products – snacks, earphones, pillows, or sneakers.
There’s also the fact that credit is “credit”. Depending on your billing cycle, you may be entitled to borrow money, interest-free for 18–45 days.
So if you’re short on cash, this feature can come in extremely handy.
Also, credit cards usually waive their annual fee if you spend a certain sum each year. And since, rent payments are recurring, high-value transactions, people can easily waltz past those spending targets. Put everything together and you could argue that the 1-1.5% fee may be worth it.
In any case, Cred charges you this fee, but the company doesn’t actually get to pocket all that money. Sure, it may show up as “revenue” on their financial statements. But they have to pass it along to many intermediaries in the payments ecosystem. Your bank gets its share. Payment gateways get a small slice too. And Cred pockets the difference, if there’s anything left.
So yes, ICICI Bank already has a gateway to make money.
But as we already noted there are caveats. See, a credit card was originally designed to incentivize consumers to spend more. And it was primarily designed for consumers to transact with merchants. So if I were selling electronic goods on my storefront, I could potentially sweet talk you into buying an iPhone by reminding you that you have a credit card. By telling you that you can spend a little extra cash, even if you’re short on money right now.
But when you’re paying rent using a credit card, you’re not transacting with a merchant anymore, you’re sending money over to your landlord. It’s as good as using your credit card to avail a cash advance.
And banks aren’t very comfortable with cash advances. If you’re using your credit card in an ATM and withdrawing hard cash, you know that it carries a 3% charge. And there’s no grace period or reward points. Interest is charged the moment you withdraw the money. Now banks add these restrictions because they think you’re desperate. It’s almost like a personal loan and they’re wary of letting you use your credit card this way.
However, when you’re paying rent on Cred using a credit card, you’re still doing the same thing, in a roundabout manner, without having to deal with all the restrictions.
Let me explain. Imagine you want to exploit this loophole. You simply pretend that you have a landlord, or get a friend to pose as one. You then make a payment to this friend, label it as “rent”, and send money into their account using your credit card. They could then use their debit card at the ATM, withdraw the cash and hand it straight back to you.
See – you used a credit card for an immediate, interest-free cash withdrawal!
It’s a cash advance without all the pesky restrictions.
And most platforms don’t even ask you for a rental agreement. So it’s really easy to get away with this.
But it seems banks have finally woken up to the real risks involved with these kinds of payments. Maybe ICICI Bank is just the first among many. And if this becomes the norm, it’s possible that paying “rent using credit cards” could become a thing of the past.
It’s possible the extra charge may not simply be worth it anymore.
Until then …
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Ditto Insights: The biggest mistake people make when buying a term insurance policy
When you’re buying a term insurance policy, you know exactly what you’re getting. A large lump sum in the event of your passing. Nothing more! Nothing less!
But recently, we had to deal with a rather testing interesting case. A customer came to us asking a very simple question – He was recently diagnosed with multiple myeloma – a rare form of cancer. And while he was upbeat about his chances di lui, he wanted to know if he could buy a policy that would supplement his income di lui, in the event he had to quit work.
He had a term insurance policy. But these policies don’t pay out the monies when you’re alive. He knew it. But he desperately needed some money, considering he wasn’t going to be earning for the foreseeable future.
Unfortunately, we had to break the news to him – No insurer was going to offer him protection at this point.
But for anybody who’s healthy and currently looking to buy a term insurance policy, know that there is an option. Insurance companies often let you buy a “critical illness” add-on. The object here is to pay you some money (say 10–15 lakhs) if you were even diagnosed with a critical illness. Now different insurance companies have different definitions of what constitutes a critical illness, but they usually cover cancer of specified severity.
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