UPI has become an integral part of our daily lives now. We use it to buy groceries, we use it to send money to friends and family, we use it to purchase tickets, book shows, pay the cab driver, and a whole host of other things due to the ease and availability of such a platform at our fingertips. The best part is that it doesn't even require typing in the bank details; just a QR code or a phone number is enough to carry out the transactions. All through our mobile phones!

Recently, while talking to the Indian diaspora in Japan, Prime Minister Narendra Modi said that about 40% of all global digital transactions of the world take place in India. India is racing towards a cashless economy and UPI has come to play a major part in it. Towards this goal, the Reserve Bank of India (RBI) recently allowed the connection of credit cards with UPI. What does it mean for you individually and for India as a nation?

Previously, India, like other economies, used to operate mainly through cash, debit cards, credit cards and other traditional payment methods. But then, in 2008, the RBI along with the Indian Banks Association (IBA) established the National Payments Corporation of India (NPCI) with the aim to create a robust payment and settlement infrastructure in the country. With this goal in mind, the NPCI created and launched the Unified Payments Interface (UPI) in 2016 and the move revolutionised India for good. 

The UPI is basically a platform that enables real-time payments and transactions by facilitating inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions. It facilitates transactions by linking users’ bank accounts through debit cards. With the boost from the Indian bank note demonetisation and the launch of the BHIM app, the preference of Indians was slowly shifting towards UPI. The substantial fall in data prices induced by the launch of the Jio 4G network and the subsequent price war in the telecom industry further encouraged people to use the digital medium for their daily needs. With the introduction of UPI to other apps like PhonePe, Paytm, GPay, etc. and the increased ease of daily transactions, UPI usage rose tremendously in the past couple of years. UPI’s rise – from a modest ₹38 lakh worth of transactions in July 2016 to over ₹10 lakh crore worth of payments in May 2022 – has been phenomenal.

While commemorating the growth and success of UPI, RBI governor Shaktikanta Das announced, “It is now proposed to allow linking of credit cards on the UPI platform. To begin with, the RuPay credit cards will be linked to the UPI platform. This will provide additional convenience to the users and enhance the scope of digital payments.” After this announcement, while some business leaders expressed their support for the move, others were concerned with the payment structure for the usage of credit cards.

When you pay using a debit card, the money is deducted directly from your bank account. On the other hand, the thing about a credit card is that it enables the card-holder to pay with money they don’t have yet, i.e., the money is borrowed from the card-holder’s bank which he/she is liable to pay off later on a monthly basis. This gives people more time to pay back their obligations to the bank and buy stuff regardless of the current balance in their bank account. So, combining the credit card’s flexibility and UPI’s convenience would definitely increase customer convenience. But this comes with some caveats and operational issues.

Everyone started using UPI because there was no barrier to entry and very negligible setting-up cost for merchants. While one of the main features of UPI is that the transactions are free of any costs, contrary to that, when we make payment via credit card, there is a Merchant Discount Rate (MDR) which the merchant is charged by their bank for accepting credit card payments. Suppose you pay Rs 100 for an item and pay via credit card, approximately Rs 98 goes to the merchant and the rest of it goes to the facilitating banks and intermediaries like RuPay, Visa, Mastercard, etc. which is one of their biggest sources of income. So, the merchant loses money on the transaction by providing you with the facility of paying through credit. Needless to say, they prefer UPI via debit or cash payments which have 0% MDR.

Local vendors and kirana stores operate on razor-thin margins and won’t be able to afford the 2% MDR that the current credit card model requires. Also, a 0% MDR on credit card payments won’t be feasible for the banks and intermediaries. Apart from this, the merchants will also have to sign a separate UPI credit card scheme after the RBI comes up with the policies of process and payment systems with a more stringent KYC. Due to all this, most of these small businesses might just stay with the current model of UPI transactions via debit card. On the other hand, credit in UPI might be used mostly by merchants who already accept credit cards, who were planning to make credit payment option available for their customers and by those merchants who have a high margin on their products so that the MDR won’t have a significant impact on their profitability. For such merchants, credit card linkage to UPI will mean additional savings as they would no longer have to spend on the purchase and maintenance of point-of-sale (POS) terminals. It might even result in improved sales for such merchants due to the increased ease of making successful payments once this decision is implemented. Once RBI answers the question of uncertainty about the process and payment structure of credit card transactions in UPI, things should be much clearer for the retailers as well as for the consumers.

Looking at the bigger picture, linking credit cards to UPI plays a major role in paving the way for India toward a cashless economy. According to a report published by PhonePe and BCG, UPI accounted for more than 60% of all non-cash transactions in FY22. Also, UPI is estimated to grow and drive roughly 75% of total digital transaction volumes in the next five years. Credit card linkage to UPI empowers consumers to make more and more transactions digitally. It will be more convenient for the consumers to have all their cards managed and organized digitally in one app. Also, not needing to carry a wallet will be an added advantage. This move also promotes the usage of credit cards and will act as an enabling infrastructure for the people who will be getting new credit cards in the future. It might even result in a significant increase in credit card adoption and usage in India if implemented well. Not only that, but it also provides a great opportunity for card payment networks like RuPay, Visa, Mastercard, etc. to utilise the extensive UPI infrastructure to boost their businesses and provide innovative offerings for the rising credit card user base in India. Though there is still a long way to go, allowing the linking of credit cards to UPI does act as a stepping stone to India’s way to a cashless economy.

Aadim Aryavartta Meher graduated with a BBA (Hons) specializing in Finance from Bennett University and is an incoming student for the PGDM program 2022-24 at IMI Delhi. He is currently working as a Wealth Management Intern at Wise FinServ.