BENGALURU: Digital payments companies are upbeat on the recent announcement by the Reserve Bank of India (RBI) about linking credit cards with the Unified Payments Interface (UPI). As digital payments are increasing, and with the growing popularity of UPI, many companies are now leveraging the technology. Also, many new players are launching their UPI services to make transactions simple.
Till now, UPI facilitates transactions by linking users’ debit cards with savings or current accounts. This new move will see an upsurge in not only UPI transactions but also of credit cards. At present, there are over 26 crore users and 5 crore merchants on the UPI platform.
In May 2022 alone, about 594 crore transactions amounting to Rs 10.4 lakh crore were processed through UPI, according to the RBI. The central bank also said that, to begin with, the RuPay credit cards will be linked with the UPI platform.
“UPI has enabled small and medium merchant segments with lower cost, faster turn around and better collection mechanism. Credit was the much-needed missing element in making this complete. We expect this to add an additional 15-20% growth to UPI volumes. This will further disrupt the payment gateway and point of sale (PoS) led business models in the payments sector,” Jaikrishnan G, Partner & Head of Financial Services Consulting, Grant Thornton Bharat said.
Experts believe that credit card linking on UPI platform will accelerate the country’s transition into a cashless economy. A new report by digital payments major PhonePe and Boston Consulting Group (BCG) says that the value of digital payments will jump three-fold from the present $3 trillion to $10 trillion by 2026, and digital payments will constitute nearly 65% of all payments in another four years. Also, of every three payment transactions, two will be non-cash or digital by 2026, the report added.
While the move could have far-reaching effects on taking cashless transactions to a new level, users should however be aware of charges and other unanswered questions. They should also be wary of debt traps as convenience of use can lead to overspending.
Unanswered questions on MDR
Though there are many advantages, at the same time, many questions are also being raised on credit card charges and merchant discount rates (MDR). At a press briefing, when asked about pricing, RBI deputy governor T Rabi Sankar said, “How the pricing will work out, that we will have to see as we go forward.” Currently, merchants are not charged for using UPI, but in case of credit cards, MDR charges are applicable. This means, for every credit card transaction, merchants pay banks a certain amount.
“Since there is no MDR charged to merchants for UPI payments, there is an open question of how will the credit card issuers cover their cost of capital and how will the underlying infrastructure support this,” asked Deepti Sanghi, Co-Founder and CEO, Kodo, a fintech start-up. If this takes off, we would have 10x merchants accepting credit cards in India in a few years, said Shashank Kumar, CTO & Co-founder, Razorpay.
In a series of tweets, Shashank Kumar also said that merchants will need to consent to accept credit cards via UPI and bear the MDR, especially in the in-store offline world. “That’s not going to be simple given many merchants have got used to accepting UPI payments at zero cost.” Also, how quickly can banks operationalise this and keep the momentum going? With changes on recurring, tokenisation and now UPI, banks have been catching up with compliances and changes on various fronts and this will become one more thing to take care of, he added.
Apart from these, there are also a few questions on whether cards on UPI will work on top of the existing card rails or skip them and also how soon MasterCard and Visa will come on board, as the RBI said to begin with RuPay credit cards will be linked to the UPI platform. Pranjal Kamra, CEO, of Finology Ventures, says this credit card link will allow users to make UPI payments using the benefit of a 30-day interest-free credit, in case there isn’t enough balance in the bank account.
According to Kotak Institutional Equities, a fresh agreement with 181 million UPI QR codes through the network provider implies that there could be pushback if the flow moves more towards credit over traditional UPI. Analysts also say that there are already Bharat QR codes that accept all formats of payments but utilisation is low.
Some facts about UPI
Currently, there are over 26 crore UPI users.
MDR charges range between 2-2.5%
UPI adoption will surge from 35% in FY 21 to 75% in the next five years, according to PhonePe
UPI transactions are at about 9x of credit and debit card transactions today in volume terms in FY22.
Last month, about 594 crore transactions amounting to Rs 10.4 lakh crore were processed through UPI