UPI payments have been a major hit in India ever since their launch in 2016. When even the tiniest of transactions are being carried out through UPI, it isn’t surprising that in just January 2023, Indians transacted Rs. 1299058.78 crores through it.
In June 2022, 26 crore unique users were reported to be using UPI. In contrast, in FY21, there were only 6.2 crore credit card users in the country. There’s a stark gap in the user base of both these payment facilities, so offering credit cards on UPI indeed seems like a bridge to developing a digital payment ecosystem in India. In June last year, RBI first proposed the linking of credit cards with UPI. Thereafter, NPCI released an operating circular in December explaining the rules to operationalize credit card transactions through UPI.
Can we call this move a game-changer? Let’s have a glance at the impact of this integration.
Impact of Credit Card Integration into UPI
Greater Penetration of Credit Ecosystem
Truth be told, credit cards have a lower penetration in smaller cities, i.e., outside the country’s metros and tier 1 cities. Most merchants also don’t offer credit card payment facilities, as POS terminals are a big investment. In such scenarios, a 5-rupee printout of a QR code that accepts credit card payment sounds great for merchants who are already enjoying the Zero MDR regime.
For consumers, getting all the cashback, discounts, vouchers, and reward points on credit card transactions while making UPI payments also sounds like a sweet deal. So, this integration is definitely going to be great for cultivating the credit ecosystem in India.
Digital Card Management
The NPCI circular mentions that it is also planning to allow customers to check billed and unbilled amounts, check due amounts and dates, check reward updates, and convert the credit repayment to EMI, all in real-time on the app. These features on UPI apps (similar to checking bank balances on a UPI app instead of visiting the bank app) can be groundbreaking for card management through one payment app only.
For banks still working on offering diverse features on their app, this integration will be beneficial as the UPI apps will take care of digital card management, decreasing the strain on banking systems.
Elimination of the Risk of Skimming
Using your physical credit card at POS terminals often carries a probability of skimming, and there is always an impending risk of misplacing the card. Having a digital avenue to make payments right from your smartphone eliminates the necessity of carrying cards everywhere. As per the circular by NPCI, all payments will be authenticated by a second-factor authentication through the UPI pin, meaning security concerns can be excellently addressed.
A Customer Acquisition Model in Making
This integration can also prove to be a brilliant, cost-saving customer acquisition method. Today, credit card companies struggle with high customer acquisition costs, so UPI apps seem a great platform to expand their customer base. UPI apps provide digital servicing, thus reducing costs and enabling banks to offer more credit cards at lower credit limits. This will drive credit card penetration in more households across the country.
Incentives to UPI Apps
NPCI has also announced a revenue share of 4bps (0.04%) each to the PSP bank and the UPI apps. This commercial incentive is more than what they currently offer on UPI transactions through savings accounts. This is yet another reason why we believe UPI apps will push for more credit card transactions in comparison to the current system of debit payments.
The impact of credit card integration with UPI seems to be highly beneficial for all parties – consumers, banks, and UPI apps — nudging the masses towards a cashless, credit economy. But there are certain roadblocks and unanswered questions despite NPCI’s detailed circular.
Potential Roadblocks
- There is no clarity on how merchant discount rate (MDR) fees will work. Currently, UPI payments operate on a “zero charge framework” as per the mandate by the Government of India. But credit cards always come with maintenance charges and several other fees, so what about MDR? This remains to be seen.
- Whether this offering will appeal to Indian households is a question, as the risk-averse population sees credit as synonymous with debt. Pool in the interest charges on the outstanding balance, maintenance charges, etc., and we see a reason why credit cards have lower penetration in the Indian market.
- The third challenge that will concern most existing users is keeping track of their payments. Owing to the convenience of UPI, every 5 to 10 rupee transaction also gets recorded in our bank statement. But when it comes to credit cards, it can be hard to track the small and big expenses, leading to huge bills at the end of the credit cycle. This calls for personal monitoring and smart expense practices so that you can always pay your bills back on time.
How Will This Integration Help Users?
Yes, certain challenges exist in this integration for all stakeholders. But this decision favors the users in multiple ways, like:
- Customer experience on UPI apps will significantly improve as users will be able to explore credit card functionalities – all in one app.
- All the payments will be 100% secure through second-factor authentication.
- Users can opt for an autopay feature to avoid any unwanted interest or charges levied on them.
- Due to multiple-party involvement, there will be complete transparency in all transactions, history, notifications of approaching due dates, etc., throughout the credit card lifecycle.
- Customers will also enjoy multiple rewards and benefits from both their credit card provider and the UPI app.
To Sum Up
With continuous discussions on the pros and cons of credit card integration with UPI, it is exciting to see how the financial landscape will evolve across India. We believe that credit cards on UPI can be a game-changer as it will make more users acquainted with the value-added services. Besides, the rewards and benefits are added perks everyone’s looking out for.
Interested in learning more about the digital advancements in the credit card industry? Let us guide you. We’ve successfully transformed multiple financial institutions to be digital-age-ready. Explore our credit card offerings here.
Ashish Sherlekar
Ashish is a Principal Consultant at Verinite. He is Certified Scrum Master and SAFe Agilist with a demonstrated history of providing service in Retail and Commercial banking domain at various geographical locations. He is passionate about Music and loves singing. He believes in “You must be the change you wish to see in the world.
