Reasons behind RBI's move to link credit card to UPI

Apr 05, 2024

On the 8th of June 2022, the RBI announced that soon people will be able to link credit card to UPI platforms.

RBI Governor Shaktikanta Das announced this proposal and stated that the RBI-promoted NPCI‘s Rupay credit cards will be available after system developments.

This stirred up a lot of talk within the financial services industry as the decision can turn out to be a double-edged sword depending on how it is executed.

Rationale behind RBIs move to link credit card to UPI

To understand why this move by the RBI can be a good or bad thing, let us first understand how traditional payments through a debit or credit card work.

Traditional payments process

1. When you use a credit or debit card at a merchant’s POS machine.

2. The transaction amount and other details pass through secured payment gateways like Razorpay and reach the merchant’s bank.

3. These details are then processed forward by the merchant’s bank to the payment network such as Visa, MasterCard, RuPay, etc. 

4. The payment networks then forward the transaction amount and details to the card issuing company to verify them.

5. Once verified, the amount is debited to the merchant’s bank account from your bank account in case of using a debit card. In the case of a credit card, the amount is sent from the credit card issuing bank to the merchant’s bank account.

All of this happens in the backend and is a complex process considering there are millions of such transactions taking place every single day. But for us, it happens in a matter of seconds.

To maintain and keep this infrastructure up and running without any hiccups, payment networks like Visa and Mastercard charge merchants a small commission for every transaction processed through their network known as MDR.

The merchant discount rate is split between the payment issuer’s bank and the payment network in the form of an interchange fee and a switching fee.

While the MDR for debit cards can go up to 0.9% per transaction, the MDR for credit cards is usually anywhere from 1-3% per transaction and this is a very crucial source of revenue for payment networks and banks.

Considering demonetization and COVID-19

More and more people throughout India shifted to cashless and contactless payment methods. Among these methods, UPI took the limelight for its easy accessibility and ease of use for both paying and receiving money. 

The payment landscape has changed ever since the introduction of UPI in 2016. UPI or Unified Payments Interface allows you to transfer money directly from your bank account or debit card to another bank account without any MDR.

This made the payment method suitable for merchants to adapt quickly as they wouldn’t have to pay any extra fee and would receive the exact amount that was transferred.

Although a great move from the government to improve the digital payment landscape in India, the decisions took a toll on banks that had to suffer from a loss due to the lack of revenue they received from debit card MDR. 

This loss was still bearable for banks as the money being transferred was debited directly from the bank account of a person, meaning it was taken from money a person already had.

But if credit cards are to be used through UPI with no MDR, then it could be a huge risk for issuing banks and payment networks as there are chances of defaulters not paying back leading to much bigger losses. 

So far, the rules and guidelines haven’t completely been laid out with respect to using a credit card through UPI. So as of yet, it isn’t clear whether MDR will be applicable or not.

Statistics regarding adoption of UPI

• The adoption of UPI has been rapid even in Tier 2 and Tier 3 cities with almost 50% of transactions being online in these areas.

• Sectors such as EdTech, E-commerce, gaming, and healthcare have shown the highest adoption rate for the volume of online transactions using UPI.

• One thing that is very clear is that there are definitely more UPI users in India than credit card users. But at the same time, the average payment volume on credit cards is much higher than the average payment volume of a UPI user. 

• Depending on how the rules of linking credit card to UPI pans out, India could either see massive adoption of credit cards or its decline within the country.

Related read - RBI's new guidelines on data protection and card transactions

Linkage of RuPay enabled credit cards with UPI: Who is the ultimate beneficiary?

1. Payment through credit cards via QR codes eliminates the need for POS (Point of sale) machine

If all types of credit cards soon become eligible to be linked and used with UPI platforms, then merchants will no longer have to have a POS machine where a credit card needs to be inserted or swiped to make a payment.

2. Consumer can make payments through a credit card via a UPI account

Consumers being able to link credit card to UPI platform will make it convenient for them to utilize their credit card more easily in places they couldn’t before. They will also not have to carry around their physical credit card with them all the time and risk losing it.

3. Convenience for consumers

Ever since the boom of cheap internet and smartphones in India, the payment landscape through digital methods like UPI and digital wallets has also increased significantly.

Instead of carrying a hefty wallet with cash or cards that need to be kept safe, it is much easier for consumers to just use their phones and transfer money through UPI.

By linking credit card to UPI, the process will become even more convenient.

4. Inclusive mode of payment

The more payment tools that can be integrated with UPI the better it is for merchants.

They get the benefit of a customer using it and receiving payments they otherwise might not have received from a credit card holder due to the absence of a POS machine.

5. Enhanced security for transactions & user data

When using a physical credit card, there is always the chance of it being stolen and used for online transactions.

Then you have to go through the hassle of calling the card issuer’s customer support, deactivating the card, and sorting things out. 

On the other hand, using a digital mode like UPI is much safer thanks to robust IT security that is set in place to avoid fraudulent activity.

The fact that a person has to unlock your phone and then also bypass all security measures to make a payment makes it much safer than using a physical credit card.

6. It will impact the average ticket size of the transaction

The average transaction value of payments made using a credit card is generally much higher than that of a UPI transaction or one made through a debit card.

So using credit cards through UPI will directly increase the payment volume of transactions taking place through it. 

7. Person-to-merchant P2M

There is massive scope for growth for merchants to receive payments from people who might have avoided purchasing from them if they did not accept credit cards.

Now that you will be able to use RuPay cards to link credit card with UPI, it’ll be easier for people to make payments of higher value without having to transfer directly from their bank account.

Will credit cards & debit cards become just back-end instruments?

While credit cards and debit cards will not end, the shift in payment behavior is a clear indicator that people will choose convenience. So while these payment instruments will still exist, the transaction volumes directly through them might decrease.

For any challenge or downside that someone might claim digital payments to have FinTech solutions are constantly working to resolve them:

1. Establish & secure customer identity

Knowing who you are paying and who is paying you is key to legal identity verification for payments to take place. The digital infrastructure set up for online payment methods like UPI has to be followed by all players so that there is uniformity.

2. Penetrate unbanked with low-cost credit 

Credit is something that is generally accessible only to people in the middle class and above. With changes to financial laws, rules, and regulations such as the ability to link credit cards with UPI.

We will soon see the introduction of low-cost credit to rural areas of the countries.

3. Eliminate tedious paperwork

The less paperwork that is required to establish credit cards, bank accounts, or other payment tools, the better it is for all parties. Digital verification helps in keeping all things transparent and easy to access for you and the issuers.

4. Protect user data

FinTech solutions, governments, banks, and other financial institutions invest heavily into IT security to protect user data, including their identity and the money being transferred through these networks.

Related read - Guide to corporate credit cards in India

There is no doubt that before the existence of UPI, debit and credit cards were seeing growth in numbers in the country.

But the rate of adoption for UPI was much faster thanks to demonetization and uncontrollable circumstances like the pandemic in 2020.

The credit and lending space in India will also see a shift with the government introducing new policies.

Only time will tell whether credit cards will become obsolete or a pathway to better credit facilities.

Suggested read - Corporate credit card benefits for Indian businesses

Corporate cards specially made for Indian businesses