Understanding the impact of linking credit cards with UPI

The Reserve Bank of India (RBI) has announced that credit cards can now be linked to UPI. UPI (Unified Payments Interface) is the most popular payment system in India that allows customers to make real-time bank transfers by linking their savings or current accounts with debit cards.

According to RBI data, the UPI platform now has more than 260 million (26 crore) unique users and 5 crore businesses. UPI executed 594.63 crore transactions worth a total of Rs 10.40 lakh crore in May 2022 alone.

As per the circular, credit cards issued on the RuPay Network can presently be linked with UPI, which means that you will be able to link your credit card account with UPI in the near future and may be able to make payments at UPI-enabled merchant QR codes without having to physically carry your credit cards.

The major advantage of UPI is its widespread acceptability across the country, since retailers may take payments using a QR code or a registered mobile number, whereas credit cards require PoS (Point of Sale) terminals.

To make payments via UPI, you need to have any UPI-enabled mobile app to make payments. Link your bank account and one-time authentication for PIN setup with a debit card, then a one-time password is sent to your registered mobile number. 

Simply scan the QR code, choose your bank account, and approve with your PIN each time you make a payment, reducing the need to carry your debit or ATM card.

While it is not as simple as with credit cards, you must currently carry your credit card, swipe it on a PoS machine, enter your PIN on the device, and complete the transaction.

Accepting payments through credit card and debit card swipe requires the merchant to purchase a PoS machine, which comes at a cost. Accepting payments requires MDR and a T+2 or longer settlement period.

According to joint research by PhonePe and the Boston Consulting Group, UPI accounted for more than 60% of all non-cash transactions in FY22. PoS transactions, on the other hand, accounted for only 5% of all transactions. ​​So it's clearly understood that if implemented well, this initiative has the potential to increase credit card acceptance and adoption significantly.

Well, credit on UPI is not a new concept; a few FinTech businesses, like LazyPay, Jupiter Edge, and Freo Pay, allow their customers to pay with credit at any UPI approved merchant QR code.

They provide you with a small credit limit and a free repayment period of up to 30 days. Similarly, PostPe by BharatPe is another platform that allows clients to pay with their credit limit to any of their partnered businesses.

The ease of usage of UPI makes it popular. Users may now link their credit cards to UPI, enabling further adoption of fast and easy payments for even minor transactions without the necessity of a PoS.

Also, while paying with a credit card has advantages such as reward points on your spending and a credit-free period of up to 45 days, it may also draw up to 48 per cent annual interest on the outstanding amount if not managed properly.

While this is an interesting start, there are a few unanswered questions that must be addressed.

➤ Merchants like to accept UPI payments because there is no fee. However, it is unclear how credit card firms can recuperate their capital expenses and how the present infrastructure would allow this if credit cards are accepted via UPI Payments.

➤ More significantly, credit cards are a type of soft loan or short-term debt that must be handled carefully. There is the prospect of credit rotation and additional debt reinvestment in investing, trading, and so on.

➤ It can greatly increase UPI volumes and average order amounts, which are substantially higher in the case of credit cards than UPI, but the convenience of payments may result in consumer overspending and a debt trap for many people.

➤ All UPI transactions require a four or six-digit PIN, whereas credit cards require a PIN for offline POS and an OTP for online purchases. It is uncertain what payment authentication will look like, which might lead to an increase in fraud instances if suitable infrastructure and rules are not in place.

➤ Because the functionality is being pushed out to RuPay, India's domestic payment method, it would be fascinating to see if this gives RuPay an advantage over foreign competitors such as Visa and Mastercard and if this will increase RuPay's market share.