E-commerce & Credit card kiting

I recently realized that consumers are at a significant advantage for their online transactions in the 2-3 week period from the generation of previous month statement to the payment due date. Not only benefits you with the long interest free credit but it also reduces your previous month amount payable if the transactions fails.

Weather it is the merchant, product quality or because of consumers, most platforms will promptly refund the money to the original source of payment. Seems benign, but most banks treat credit reversals as payments rather than reversal of the original charge. Therefore, if this reversal happen before the payment due date of the last statement, your will benefit from an additional interest free 30 day credit period equal to the transaction value.

There is also a small loophole in the credit card point’s accrual mechanism. Some card systems do not have a provision to show negative credit card points balance. So, if you happen to spend the points after the transaction is complete, but before it is reversed, then there is a high likelihood that your next month’s statement will show zero points balance (rather than negative) which effectively gives you free points. Yay! The banks have tried hard to delink the points with its value, so that you see 2X points of a particular store/scheme as attractive and not a measly 0.2-0.5% additional cash discount. Therefore, they do not charge your account for this technicality.

Banks have some technological challenges as their system was designed for swiping where the frequency & timing of reversals was much slower. Probably this is the reason this loophole does not come in the radar and people can benefit from them.

This apparently seem like a victim-less crime. The merchants, esp. in India prefer pre-paid orders as compared to Cash on delivery so they do not complain. In addition, payment gateway usually reverses all charges to them, making cancellation as a benign nuisance. The short time window and the 3-5 days it takes for a transaction to get reflected in the account limits it applicability. Also a customer who issues checks or gives payment instructions promptly rather than waiting for the last minute will not be able to benefit from the loophole.

PS: I have never had a need for credit kiting and nor have any intentions to break the law. I happened to discover this when Amazon India cancelled my pre-paid order of a cellphone and my Citibank did not debit my bank account for my previous month’s credit card statement. But as the recent example of Paytm has proven, consumers can alter their behavior for a benefit of few basis points.

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