Why banks flag business expenses paid on personal credit cards

Credit cards come in two broad categories – personal and business. The fine print of personal credit cards clearly says that they cannot be used for business spending, and hence separate cards are issued for business expenses. However, the majority of self-employed or business owners bill some of their business expenses to their personal cards. This begs the question: How do banks allow this?

Banks monitor spending activities, regularly auditing suspicious transactions and on finding any misuse, they repeal the accumulated rewards, or worse, suspend the card.

How banks monitor

As per the most important terms and conditions (MITC) of banks, non-commercial credit cards can be used for personal expenses only. Non-personal usage includes buying goods or making payments to run a business, making commercial payments to merchants, and any other expense that is not for personal consumption, which includes buying things for others to maximise spending.

However, certain expenses are difficult to classify as personal or non-personal. For instance, flight or hotel bookings made by an employee for a business trip that the company reimburses later. Or say a freelancer works out of a home office and pays the house’s power bill with a credit card.

For some merchants that accept both retail and business payments such as utilities, flights, hotels, and vendor payment platforms like BharatNXT, there are no separate Merchant Category Codes (MCCs) for retail and business. So, there is no straight method for banks to know whether a business or personal expense is being billed.

Queries sent by Mint to HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank about how they differentiate between retail and business spends did not receive any response.

With such grey zones on what may constitute business expenses, high-value transactions that are done solely to maximise rewards are generally flagged and audited by banks. Ajay Awtaney, founder and editor of LiveFromALounge.com, said banks generally go after card owners when they notice a pattern.

“Banks do not track cardholders individually. When the bank approves a card, they put the cardholder in a certain portfolio based on their income, spending capacity and types of spends they are likely to make. Based on these factors, the bank develops a model and when a cardholder starts making high-value payments that don’t fit this model, they get suspicious,” he explained.

An example is when business owners started paying power bills, running into several lakhs of rupees, of their factories or manufacturing units with their personal credit cards.

“A family’s power bills are unlikely to cross ₹20,000 in a month, so anything beyond that is an immediate red flag for banks,” said Sumanta Mandal, founder of Technofino.

Most banks have taken action against such transactions.

“As a result of this misuse, most banks have either completely exempted utilities from earning rewards on credit cards or where allowed, they have imposed a fee on payments made beyond a certain threshold, which is typically ₹50,000 per month,” Mandal added.

The consequences

So, is there a right way to bill business expenses on personal credit cards? Mandal said there isn’t.

“When you pay a business expense with your personal credit card, you have violated the bank's MITC,” he said.

That said, there haven’t been instances of banks scrutinising expenses in the range of ₹5,000 to ₹10,000. Experts point out that small spends are generally overlooked by banks. However, that doesn’t mean the bank won’t ever enquire about them.

On the other hand, high spending on utilities, fuel, offline points of sale, and travelare almost always scrutinised by banks, especially when they suspect that expenses are being maximised to claim benefits and rewards. Even when smaller business spends are done across different merchants and they total up to exceed the cardholder’s income month after month, banks can investigate.

“One-off smaller amounts don’t matter but when the spends start running into crores or several lakhs, it becomes a problem as the bank is essentially underwriting unsecured loans and hence taking credit exposure. Also, there is the cost of rewards in such big-ticket transactions,” said Awtaney.

Banks take action by demanding proof of the payments suspected to be business transactions. If the cardholder fails to establish that the payments under scrutiny were personal, banks repeal the rewards earned on the business transactions and in some cases, cancel the full rewards accumulated in the account.

In March this year, Axis Bank blocked reward redemption of several users on the suspicion of personal cards being used for business spends. In the email sent to cardholders, the bank said, “...a pattern of nonpersonal usage of your credit cards has been observed for the transactions undertaken by you with the following merchants… We request you to reply with invoices/evidence, if you wish to establish that the transactions undertaken by you with the above-mentioned merchant were only for your personal expenses and purposes.”

In extreme cases, banks can also close the card. Mandal said American Express is the most stringent in its financial reviews.

“Amex asks for income proof, tax returns and on finding satisfactory proof that the cardholder was manufacturing spends for rewards, it closes the account and bars the cardholder from applying for an Amex card for a couple of years,” he said.

To avoid this, it is better to get a business credit card for commercial transactions.

Business cards on offer

Business cards are different from corporate cards. Corporate cards are given by multinational companies to employees for expenses specific to the job. For instance, to book flights for business trips or pay for meals with clients using a corporate card in place of your personal card. The liability in this case is with the company.

Business cards, on the other hand, are personal credit cards for business expenses. These are issued on the individual's name and permanent account number (PAN) and not on the company's PAN. These are typically given to owners of sole proprietors or directors/founders of companies.

All banks offer business credit cards, but most are low rewarding. Awtaney said currently, cards from HDFC Bank stand out from the rest.

The most rewarding one is Biz Black, which comes with a joining fee of ₹10,000 (excluding 18% GST) that is waived on spending ₹1.5 lakh within the first 90 days. For every ₹150 spent, the card earns 5 rewards points that are valued up to Re 1 per point, giving up to 3.33% reward rate. The card rewards generously with 5X reward points on income tax, GST payments and bill payments on PayZapp, the bank’s online payment app (see grfx).

Other business credit cards by HDFC Bank are also rewarding, giving 1-3% cashbacks and 1-2% reward rate. Business cards by ICICI Bank and Axis Bank offer cashback of 1% or less and a reward rate of 1% or less.

The main draw of business credit cards for most is not the rewards but the 40–55-day interest-free credit period that the business owner gets.