Why are banks charging 1% fee on utility payments using credit cards? (2024)

After rent payments, banks are imposing extra charges on utility payments made via credit cards. In a recent development, Yes Bank and IDFC First Bank announced that they will charge an additional 1percentfee on all utility payments made using their credit cards starting from May 1, 2024. Customers will have a free usage limit of Rs 15,000 for Yes Bank and Rs 20,000 for IDFC First Bank. This means that if a Yes Bank credit card holder pays a utility bill of less than Rs 15,000 in a statement cycle, they will not be charged any extra fees.

However, if a customer pays more than Rs 15,000 in utility bills in a statement, they will be charged an extra 1percentfee plus 18percentGST on it. The same rules apply to IDFC First Bank credit cards, but the free usage limit is Rs 20,000 instead of Rs 15,000.

However, things were not always like this. We used to receive good rewards on utility payments, and there were no extra fees for paying utility bills. So, why are banks now keen to implement such rules?

Low margin

The utility category is a low-margin category, which means banks earn comparatively less from MDR/interchange fees. MDR varies across all categories, depending on many factors. Payment gateway providers often offer discounts on MDR feesoncategories like education, grocery, and utility. As a result, banks earn less interchange fees when customers use their cards in these categories.

Also read |Yes Bank, IDFC First Bank to levy surcharge on utility payments with credit cards

Personal expenses using official credit cards

Many business people use theirpersonalcredit cards to pay their business-related utility bills. While the total utility bill of a normal household doesn't generally exceed Rs 10,000 to Rs 15,000, business utility bills can amount to lakhs. Banks typically offer more rewards on personal credit cards than business credit cards. Thus, banks may find it challenging to provide high rewards on business transactions.

There are a few apps and websites, such as BharatNXT, that offer business payment services using credit cards. People can use these platforms to pay their vendors, suppliers, employees, GST, and other business-related payments.

Also read |ICICI Bank app glitch exposes credit cards: What customers should do

Incorrect tagging

Although this is not allowed as per the MITC of personal credit cards across all card issuers in India, many individuals still use theirpersonalcredit cards for these transactions. The main issue arises because many business payment service providers, including BharatNXT, are assigned the utility category MCC.

Therefore, all payments made through such apps are tagged as utility payments. This problem occurs due to the incorrect tagging of MCC to businesses. Tagging MCC and verifying business categories are the responsibility of payment gateway providers/acquiring banks. Unfortunately, we see many instances of incorrect MCC assignments to businesses.

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These are the three main reasons why banks are not offering rewards on utility payments or are charging extra fees for them. In recent times, I've observed that when one bank starts charging extra fees on certain payments, other banks tend to follow suit immediately or after some time. So, don't be surprised if all other banks in India start charging an extra 1percenton utility payments.

However, regular consumers should not worry about these extra fees. All banks that have started charging extra on utility payments offer a free usage limit to their customers. I believe other banks will also offer a free usage limit if they start charging extra fees on utilities. These free usage limits can range from Rs 10,000 to Rs 20,000, which is a decent limit for a normal Indian household. For example, when Yes Bank first announced its decision to charge an extra 1percenton utility payments using their credit cards, there was no free usage limit of Rs 15,000. However, competition and public pressure mounted on the bank on social media platforms led to Yes Bank revising its decision. It, then, added a Rs 15,000 free-usage limit.

So, if you are not a business person who only pays for theirownutilities, you should not worry about the extra fees. However, if you are a business person, I would suggest applying for business credit cards. Currently, there are a few very rewarding business credit cards available in India.