In today's Finshots we explain what it means to link credit cards on UPI

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The Story

UPI has been quite the revolution already. You can make a payment to a shopkeeper, you can send money to the friendly autorickshaw driver, you can ask your friend to cough up for last night’s dinner. You don’t even need bank details for this. Just a phone number will do! And you don’t need to lug your debit card around. The magic happens on our mobile screens and payments happen in the blink of an eye. Indians loved it — and from a measly ₹38 lakhs worth of transactions back in July 2016 to over ₹10 lakh crores worth of payments in May 2022, UPI’s meteoric rise has been quite breathtaking!

At the other end of this payment spectrum, we have credit cards. These have been around since the time of the dinosaurs — by that, we mean that it’s an old soul when compared to the youthful UPI. And the big difference with credit cards is that instead of seeing your account debited as soon as you pay a bill (like the UPI), this buys you time. You swipe the card or you tap it and your bank balance remains rock solid. You just have to pay all your bills in one shot on a monthly basis. And people love this feeling of getting a little extra time when they spend their dough on larger ticket items. The average credit card holder spends around ₹14,500 a month compared to just ₹700 on their debit card.

Now, what if you could combine the two — the efficiency of UPI with the thrill of buying on credit? Wouldn’t that be something?

Well, the Reserve Bank of India definitely thinks so. On June 8, the central bank decided that it was going to make this fantasy a reality. It announced that credit cards can soon be linked to UPI too! That means, your credit card can rest in a safe drawer at home along with your debit card. And UPI apps such as PhonePe and Google Pay could soon become most people’s defacto payment choice — even for credit!

Sounds insane, right?

But hold your horses. You need to be part of an exclusive club to get this early access. So, take a good look at your card again. If it says RuPay, you’re in luck. You could be soon using credit on UPI. However, note that RuPay credit cards account for just 2% of the total credit card market. But still, if you’re one of the lucky few, you could be the one telling stories like “I was one of the first!”. Much like the 42,000 Diners Club members who were the first exclusive set of folks in the world to lay hands on a credit card way back in 1951.

But the expectation is that pretty soon, even Visa and Mastercard will join the fray and this UPI and credit card collaboration could be a gamechanger.

But will it?

Well, to understand that, we first need to look at why UPI became so ubiquitous. And the simple answer is that UPI is “free”! You can just walk into your kirana store, scan the QR code or type in their phone number and make a payment. There isn’t any fee involved.

But if you swipe your debit or credit card at a store, there’s a fee that the shopkeeper would have to shell out. This is why you often saw hand-written cardboard notes in small shops that either said that cards weren’t accepted or that an extra 1% charge would be levied on card transactions (not quite a legal thing though).

But what’s this fee we alluded to? Well, it’s called Merchant Discount Rate (MDR):

Let’s suppose you buy a box of chocolates for ₹100 and you swipe your card. This sets off an elaborate tango that involves multiple stakeholders. The store owner’s bank will receive the transaction information associated with your purchase. The bank will now have to verify with your bank if you’ve got enough money to pay for the purchase. They’ll also have to see if all your information checks out. And to do that, they have to rely on a payment network operated by Visa, Mastercard or RuPay. Once these guys enter the fray, they’ll relay the information to your bank and after everything checks out, the money will finally be credited to the store owner’s account. That is after everyone has taken their cut. Your bank will take a small piece of the pie. The merchant’s bank will take its cut and the likes of Visa and Mastercard will take their share. And the store owner will only receive what’s left. In essence, if the MDR stood at 1%, he will receive ₹99 from your purchase.

Basically, the shopkeeper loses money for offering you the convenience of shopping with your card. So naturally, they prefer payments either in cash or via UPI.

Now here’s the thing about using a credit card over the UPI. It’ll probably incur an MDR too. So, if shopkeepers were wary about dealing with MDR in the first place, why would they agree to accept credit card payments even via a UPI app? They might just say no.

But wait, didn’t the government introduce a no-MDR policy on RuPay cards?

Well, they did. Since RuPay was a made in India product, the government wanted to promote it and decided to scrap the fee back in January 2020. But it was only on debit cards! RuPay credit cards still carry an MDR of 0.4–0.9%. So whether the credit card is RuPay, Visa, or Mastercard, there will probably have to be an MDR on the UPI app. That’s a cost the shopkeeper will have to bear.

And you can’t just wish MDR away. That’s the bread and butter for these companies. So it does seem unlikely that shopkeepers will be gung-ho about this.

But there is another argument to be made here. Maybe, shopkeepers will be more amenable to accepting credit cards over UPI after all. And why’s that, you ask?

Well, to accept cards, shopkeepers need a swiping machine. Or a Point Of Sale (POS) machine as it’s technically known. And these things don’t come cheap. There’s an upfront cost of around ₹10,000 to get the device. Then there’s usually a yearly fee as well. These costs can put people off very quickly. And that’s why POS machines are a rarity in smaller towns and cities. In contrast, setting up the QR code for UPI payments is easy peasy. The shopkeeper just needs their bank account, a smartphone, and a data connection. That’s it. And it’s usually free or comes at a minimal cost. It’s no wonder that for every POS terminal, there are 10 QR codes in use — it’s a 5 million versus 50 million game here.

With this proliferation of QR codes across the length and breadth of the country, it could be the starting point to expand the scope of credit cards. Even banks and other financial institutions could issue certain types of cards carrying a lower limit to customers. Customers who may be comfortable with UPI but who haven’t used credit cards before. And maybe that will expand the growth of credit-based cards in the country too.

Between April 2021 and March 2022, merchants processed ₹16.8 lakh crore worth of UPI transactions. And another ₹9.70 lakhs worth of transactions on credit cards. But once this collab between UPI and credit cards kicks in, you might well see UPI value fly off the charts.

Until then…

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Additional pointers

On pricing: Even RBI Deputy Governor T Rabi Sankar clarified the pricing aspect, “Thinking of the pricing structure will be jumping the gun. The basic objective of linking credit cards to UPI is to provide a customer a wider choice of payments. How the pricing of that will work out we will have to see because that is something that the banks and other entities will have to do. At this point we will just introduce the arrangement.”