Cash back credit card: How good is it?

Sangeeta Singhvi used two ICICI Bank credit cards to purchase a plasma TV from Vijay Sales in Mumbai . Since her credit limit was Rs 1 lakh (Rs 100,000), she and her husband swiped their individual gold cards to purchase the fabulous Rs 2 lakh (Rs 200,000) set.

When their November credit card statements came, they were pleasantly surprised. The plasma TV cost them only Rs 1.9 lakh (Rs 190,000). In other words, they got a handsome discount of Rs 10,000.

This is because ICICI Bank is offering a 5 per cent cash discount to its credit and debit card holders on purchases of Rs 2,000 or more. Under this special festival scheme -- open till December 31 -- customers can get a maximum refund of Rs 5,000 per card.

Thrilled by the discount, Sangeeta is planning to use her ICICI Bank debit card, her Big Bazaar ICICI Bank co-branded card and her salary-account debit card to furnish her new flat!

ICICI Bank, which launched the scheme from October, is not alone in this, though. Citibank, too, offers a cash back card.

HSBC had a scheme which closed on November 30. It offered a cash discount of 10 per cent on the three highest transactions recorded during October and November.

To avail of the HSBC scheme, the cardholder needed to register with the bank first -- otherwise no purchase counted. What's more, not all purchases swiped against the credit card qualified for the cash back.

It was valid only purchase made at department stores, spends on apparel, consumer durables, jewellery, watches, electronic goods and leather items. This means all those expensive luncheons did not qualify, but grocery items amounting to at least Rs 2,000 fit the bill.

So why are banks doing this? The reason is not hard to find. While banks have been issuing millions of credit and debit cards, not all have been activated, and the cost involved in issuing a single plastic card run into hundreds of rupees.

"The idea behind the scheme is to encourage usage of cards, which otherwise costs banks a lot of money," says V Vaidyanathan, senior general manager and head, retail products, ICICI Bank.

But this is the first time that card issuing banks are rewarding their customers with cash. The standard rewards are based on a point system, which could be "encashed" for goods and services.

Citibank has an edge over others in that in its scheme there is no time limit or cap on amount. The scheme, introduced late in November, is applicable to all purchases. However, the catch is that one needs to actually apply for a cash-back card.

The card member gets one per cent cash back irrespective of the category of spend. Beyond that, the level of cash-back changes with the expenditure.

For instance, when Rahul Mehta swiped his Citibank cash-back card to buy medicine, he got back 5 per cent in his monthly card statement. When he paid his mobile and other utility bills, the degree of discount was less at 3 per cent.

The card also has overseas incentives: If one withdraws cash when abroad from an international ATM, one gets a 4 per cent cash -back. Any purchases made abroad leads to a 2 per cent cash-back.

So how are banks funding this?

"It's coming from the promotions budget," says Vaidyanathan of ICICI Bank. "The idea is once the customer is hooked into using the card, he's bound to continue with or without the scheme."

Check the fine print:

• Citibank's offer can be availed only by applying for the 'cash back card'.
• ICICI Bank's offer is restricted to 20,000 merchant establishments across the country; so not all shops are included.
• There's no minimum limit under Citibank's offer, ICICI Bank's qualifying limit is Rs 1,000 and the maximum one can avail on each card is a discount of Rs 5,000.
• ICICI Bank's scheme is valid till December 31, so this might encourage usage only till that date.

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