On the 4th of October, 2022, the RBI published a seemingly innocuous circular. The subject read: “Operating circular for RuPay Credit Cards linked to UPI.” What the document discussed was quite interesting – it laid down briefly how linking RuPay Credit Cards to UPI may be operationalised. The authors of the circular thought the move would provide a “seamless, digitally enabled credit card lifecycle for the customers.” Unassuming as this statement might be, the author of this article considers the circular nothing short of revolutionary.
Now, it bears mentioning that we have already seen a roll-out of this concept: the ability to pair RuPay credit cards to UPI went live last year in July. However, only four banks support this feature even now – HDFC Bank, Indian Bank, Punjab National Bank and Union Bank. And besides, RuPay credit cards scarcely account for 4% of all credit cards in use in India.
By introducing a credit flow to the cash in the UPI system, the National Payments Commission of India would be simplifying access to credit like never before – imagine using your UPI app to scan a QR and the app automatically displaying an option to use your credit card as well as your debit card.
You would not need to pull out a physical card from your wallet, swipe it at the POS device at the counter, enter the pin for the cash to be disbursed and receive a receipt. No, you could do all that on your phone and still enjoy all the services and benefits that the physical card offers you.
Implemented at scale across India, we’re talking virtual redundancy of the POS systems at multiple merchants.
The primary motivation of this article is to discuss a recent development that has the potential to alter credit disbursal across India en masse. RuPay is merely the tip of the iceberg – we might be in for a much more significant change. In an inspiring column published on the 10th of January, 2023, Ashwin Manikandan of The Morning Context proclaims that according to three “industry executives aware of the matter,” the RBI is mulling over the possibility of allowing credit cards issued by MasterCard and Visa to be linked to the UPI.
However, before discussing why the move is so pivotal, we must put it into context.
We may, at once, not grasp the significance of this event. After all, credit card penetration in India is pitifully low – less than 6% of Indians own a credit card. However, as an emerging economy, India is pulling more people into the middle class than ever; a recent report by PRICE asserts that the share of the middle class in the Indian population grew from 14% in 2004-05 to 31% in 2021-22.
This inevitably means growth in discretionary spending and, by extension, credit. As a result, over the last three years, credit card spending (in Rs.) has grown by approximately 30%, while the volume of transactions has grown by about 15%. The number of outstanding credit cards increased by 21.9% to around 7.8 crores at the end of August 2022.
These are impressive figures by themselves, but remember: this is organic growth achieved without the benefits, convenience and interoperability offered by the UPI. Linked to the UPI, credit cards have the potential to reach a far more sizeable portion of the population.
To apprise the reader once again regarding the sheer scale and penetration of the Unified Payment Interface, consider that in July of 2022, the interface crossed 6 billion transactions! The amount of money exchanged over the platform in Rupee terms went from 41.04 lakh crores in FY21 to 84.16 lakh crores in FY22. To put that number into context, the nominal GDP estimate for India for the year 2022-23 is 273.08 lakh crores. Therefore, the total value of money exchanged over the platform is roughly 31% of GDP! Therefore, the possibility for growth on this platform is immense.
MDR, Interchange and the Works
A salient feature of the debit-based UPI transaction system is that there is no Merchant Discount Rate (MDR) or Interchange rate charged to the merchant or the customer when the transaction is done. Because of this, UPI apps and banks make virtually nothing on each transaction. Rather, they incur a cost.
Manikandan’s article in August 2022 notes that “for a peer-to-merchant transaction worth Rs. 800, the industry incurs Rs. 2” (as a cost). This translates roughly to a cost of 0.25% per transaction. The RBI discussion paper he cites breaks the costs down further to explain how must cost is borne by the issuing bank (0.1%), customer’s UPI app (0.06%), acquiring bank (0.07%) and the NPCI (0.02%).
Therefore, one of the primary criticisms from the banks’ side always has been that they aren’t making any money by asking their customers to use UPI. However, with the advent of credit-based UPI, new conversations regarding the implementation of such charges have gained momentum. In fact, even back in July last year, when the RuPay credit card tie-up to UPI was first testing the waters, NPCI re-negotiated and increased the MDR on its credit card to 2% for the UPI platform – signalling that charges on using credit-based UPI are applicable and welcomed.
Perhaps the most pathbreaking change that accompanies this move is that the merchants now open to take credit card payments goes from the 4 million who had POS systems to the 50 million who have registered QR codes connecting them (or, more specifically, the Virtual Private Address (VPA) of their account) to UPI.
News Flash: The total addressable market for credit cards just skyrocketed!
And, as we’ve discussed already before, the number of people using credit cards also stands to increase considerably after this. The combined effect of these two factors will surely increase the number of credit transactions occurring on the platform.
For payment processors Visa and Mastercard, this represents a chance to tap into a far more sizeable market. However, their decision will depend on how the regulation regarding MDR and interchange is framed. For merchants, this represents a way to invite more transactions while incurring a small charge. It also means an opportunity to move away from expensive POS systems to easily operable QR code infrastructure. For consumers, this means more convenience while carrying out payments, and for debit users, a new opportunity to experience credit-based modes of payment without registering on BNPL apps – now you can do it using the UPI apps you use for everyday expenses.
The economy also stands to gain: not only will there be more money exchanging hands, but the addition of Visa and Mastercard will also immediately bring in about 80% of credit card users to UPI’s fold almost immediately. How the government will capitalise on this opportunity remains to be seen. But if we venture a guess, and assume even a nominal charge on the service, it could be a sustainably growing income source. Even if the government lets the facility function as a public good, the positive externalities emerging from the move are considerable, though costly.
The changes accompanying Visa and Mastercard joining the interface to facilitate UPI credit payments promise to be game-changing. We hope that through this pamphlet, we hope we’ve provided a bit of context about why the move to credit-based UPI is so pivotal and how bringing in Visa and Mastercard will bash open the floodgates for further credit-based transactions to flourish in the UPI ecosystem and, by extension, the economy. This is a huge step forward toward India’s goal to go digital.
We have yet to discuss in detail the negative ramifications of this move. More credit-based transactions inevitably mean merchants lose a small sum as consumers switch from debit-based transactions. While the volume of transactions may improve, it remains unclear whether all merchants will benefit. Convenience to disburse money through credit-based methods may also result in overspending on the part of individuals. These are issues that are beyond the scope of this article but require serious discussion.
Because UPI has become such an integral part of our lives, it’s easy to forget that the technology is but six years old! And now, with credit being linked to the interface, we stand at the cusp of yet another revolution.
More power to the innovators.
• Manikandan, A. (2023, January 10). RBI wants to add Visa, Mastercard credit cards to UPI soon. The Morning Context. https://themorningcontext.com/internet/rbi-wants-to-add-visa-mastercard-credit-cards-to-upi-soon
• Adhikari, A. (2022, September 20). Credit card-linked UPI payment via QR code finally begins with domestic RuPay credit cards. Business Today. https://www.businesstoday.in/latest/economy/story/credit-card-linked-upi-payment-via-qr-code-finally-begins-with-domestic-rupay-credit-cards-347754-2022-09-20
• 5paisa Research Team. (2022, December 10). Will RBIs decision to allow linking Rupay credit cards with UPI kill Visa and Mastercard? 5paisa.com. Retrieved January 11, 2023, from https://www.5paisa.com/blog/will-rbis-decision-to-allow-linking-rupay-credit-cards-with-upi-kill-visa-and-mastercard
• Haris, M. (2022, September 29). UPI-Credit Card Linking Has Potential To Disrupt Visa, MasterCard Markets, Say Experts; Details. News18. https://www.news18.com/news/business/upi-credit-card-linking-has-potential-to-disrupt-visa-mastercard-market-say-experts-details-6062815.html
• Vashisht, N. (2022, July 27). Explained: How 2% MDR on RuPay-UPI may affect credit card industry. http://www.business-standard.com. https://www.business-standard.com/article/markets/explained-how-2-mdr-on-rupay-upi-may-affect-credit-card-industry-122072700513_1.html
• Moneycontrol News. (2022, August 22). MC Explains| What is MDR and why the Centre clarified its stance on UPI. Moneycontrol. https://www.moneycontrol.com/news/business/banks/mc-explains-what-is-mdr-and-why-the-centre-clarified-its-stance-on-upi-9069081.html
• BFSI-ET. (2022, July 28). Upcoming RuPay-UPI credit cards to charge 2% MDR: Report. ETBFSI.com. https://bfsi.economictimes.indiatimes.com/news/financial-services/upcoming-rupay-upi-credit-cards-to-charge-2-mdr-report/93164559
• Kalawatia, K. (2022). Operating circular for RuPay Credit Cards linked to UPI. In npci.org.in. National Payments Commission of India. Retrieved January 11, 2023, from https://www.npci.org.in/PDF/npci/rupay/2022/Operating-circular-for-RuPay-Credit-Cards-linked-to-UPI.pdf
• Team, W. B. S. (2022, November 2). One out of every three Indians middle class; to double by 2047: Report. http://www.business-standard.com. https://www.business-standard.com/article/current-affairs/every-one-in-three-indians-middle-class-to-double-by-2047-report-122110200522_1.html