Advantage UPI

The Reserve Bank of India (RBI) made a significant announcement on digital payments as part of its recent monetary policy statement. It has decided to allow UPI (Unified Payments Interface) to be backed by credit cards. This marks a big step forward in improving the inter-operability of UPI, which can now have either a digital wallet or a bank account or a credit card at its back end. With Covid giving a big nudge to adoption, UPI transactions in India have shot up nearly five-fold in value in just two years with monthly transactions topping ₹10-lakh crore in May 2022. So far, while UPI has replaced cash in low-ticket transactions such as purchases from kirana stores or paying cab bills, large transactions such as buying white goods remain credit-card driven. By allowing consumers to use UPI not just for cash transactions but for credit-enabled ones too, RBI seems to be nudging UPI adoption for mid- to high-value transactions. While consumers can use UPI for high-value transactions even now if they do have the requisite bank balance, there seems to be reluctance owing to fear of transaction failures and security lapses. Linking UPI payments to credit cards can be a good way to gauge the willingness to adopt QR code-based payments for larger purchases.    

With credit card-based transactions currently at just 15 per cent of UPI transactions, the linking of credit cards to UPI can significantly expand the user base for credit card issuers. But banks cannot be faulted if they don’t view this as a win-win. Credit cards allow them to charge high fees in the form of MDR or merchant discount rate charges at 2–3 per cent of transaction value, while UPI is a free interface. There’s the worry of who will bear the MDR incidence on UPI-driven card transactions. Unless if the RBI is willing to foot the bill through Payment Infrastructure Development Fund, just like it is doing for UPI dependent merchants, this could put a chunk of bank revenues at risk in the long run. For banks, credit card transaction revenues (mainly from MDR) account for 30 per cent of the total pie. That’s not all. Should the credit card user base jump manifold driven by low-ticket transactions, banks may become vulnerable to revolving credit risk. There’s the softer aspect too — the fear of credit cards losing their desirability as a status symbol for affluent folk. Players offering BNPL (buy now pay later) finance are worried that credit card-backed UPI payments would cannibalise their market, but it’s possible that on this score, the RBI’s intention is to discourage customers from falling prey to the opaque practices of some of these players.  

It must be noted though that currently both UPI and RuPay are products of NPCI and the RBI is piloting this project only with RuPay cards, which account for less than five per cent of the credit cards in force. If this experiment succeeds, RBI will need to think through aspects relating to MDR charges and the incidence of credit risks before it moves forward with a full-scale roll-out across other card providers.

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