Credit cards can now be linked to your Unified Payments Interface (UPI) according to Reserve Bank of India (RBI) new guidelines. Isn’t it a eureka moment for India’s Retail Digital Payment sector!
The central bank will start this facility with RUPAY credit cards. Earlier consumers used their savings accounts, debit cards, and current accounts to do transactions using UPI. Once the credit cards are linked with UPI, users can make payment by scanning the QR code and choosing the credit card as the payment mode.
UPI is India’s leader in digital payments and after crossing 5 billion transactions in a month for the first time in March, UPI has crossed the $1 trillion mark in transaction amounts for FY 2021-22. And it’s looking forward to the path to a trillion dollars now.
A new Move in the Indian Fintech Journey
Now credit cards have the same ubiquity as debit cards because customers can use their credit cards for UPI payments through POS terminals by simply scanning the QR code. It can decrease the cost of merchant terminalization which further can result in increasing the penetration of POS terminal infrastructure in India.
NPCI and RUPAY at advantage
The team of NPCI (National Payments Corporation Of India) and RUPAY is the first mover who is doing this hence it will give them an edge over their competitors. Both the RuPay network and UPI must be managed by the National Payment Corporation of India (NPCI)
BNPL provider VS UPI
Non-credit card populace uses credit-at-the-point-of-purchase or BNPL nowadays but this new step from RBI would make it difficult for serious BNPL providers to compete with UPI. This actually can give a boost to credit card issuers.
Limits for E- payments through credit cards
RBI has set the limits for the existing e- mandate on e-payments through credit cards from ₹5,000 – ₹15,000. It means a person can make recurring transactions of up to ₹15,000 through his credit card, without any additional factor authentication or OTP.
Impact on average transaction value
The average transaction value for UPI is around 1/10 of the average transaction value on credit cards. This change would lead to a lower average transaction value on cards & higher number of transactions, therefore monthly card bill reconciliation becomes more cumbersome because the number of transactions will increase exponentially with the reduction in the amount. This opens up opportunities for new players to come up. Any activity proportional to the number of transactions will spike and this will impact operational risk for financial services providers like chargeback volumes might increase.
Credit card promotions may see innovations
Discounts of small amounts may not be large enough to entice a new customer, and promotions like INR 100 in cashback for the first transaction at Croma might become more popular. As transaction limits are small & consumers need credit cards only for big purchases so this might not be a big change after all
The downside for Credit card issuers
The Zero MDR on UPI payments will affect the profits of credit card issuers as MDR is a fee that banks charge to a merchant when their customers make transactions via that bank’s credit or debit cards. It would make it difficult for them to manage expenses to fund their cost of revenue. Zero or negligible MDR may lower the average transaction value on cards & may unleash credit to cash conversion issuers so banks might start issuing low limit cards for markets on the frontier.
Merchants in this picture
Linking credit cards and UPI will make the payment more convenient and faster and it is beneficial for the small merchants as well as the largest UPI acquirers like PhonePay, BharatPay, Paytm, etc. The central bank has not introduced any charges for using Credit cards while paying through UPI but, It is still a question of whether merchants have to pay for credit card-funded transactions from banks or lenders, and if this is so will they be going to charge their customers who will pay via credit card?
Conclusion
This is a significant move for the Indian fintech sector as it would fuel the engine of both digital payments and credit card issuing and along with that, we can see an increase in market penetration of POS terminals in India. This is a move in making payments more convenient for customers and fuel the digital payments in the whole country.