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Why credit cards on UPI is a game changer

Integrating credit cards with UPI will increase the usage of cards at smaller outlets, helping one manage one’s cash flow without breaking the bank.

The growth of Unified Payments Interface (UPI) transactions in number and value can be explained by the ubiquitous presence, offline and online, of its acceptance infrastructure, and its ease of use, both for the sender and receiver of funds.

The spectacular growth of UPI has been seen to compete with credit card spends, as customers end up using UPI given its omnipresence and ease of use, even if they hold a credit card. Merchants too encourage the use of UPI, given the lower cost and simpler transactions.

Much to the cheer of the Indian credit card industry, the RBI allowed the linkage of RuPay credit cards with UPI in June 2022. This move is set to be a game changer for the industry, as RuPay clocked 25.6 crore transactions worth Rs 1.27 lakh crore in December 2022. These figures are just 3 percent and 10 percent of UPI transactions and value, respectively, for December 2022.

Credit card issuers have been busy at work since last June to offer RuPay Credit cards to the 260 million (and growing) UPI users, as a new source of funds for their transactions. They are hopeful of weaning existing customers away from using their bank accounts for such transactions, thereby increasing credit card spending, especially given that small merchants who do not accept such payments today will do so once cards are integrated with UPI.

Let us quickly look at the pros and cons of linking credit cards with UPI:

For Customers

Pros: credit cards can now be used at any merchant accepting UPI payments, including the vegetable seller, the milkman, the newspaper vendor, etc., without depleting one’s bank balance.

Moreover, there is no need to carry the card, thereby reducing the chances of fraud and loss.

Cons: as all spends can now be charged to the card, there could be a risk of over-spending, as one need not worry about having money in the bank.

For card issuers

Pros: incremental spends, especially with respect to smaller merchants who do not have the infrastructure to accept card payments. This will also help activation and engagement as customers across demographic profiles will find several new opportunities to use their cards.

Cons: spends on smaller merchants will not bring any interchange income, and there could be a risk of losing interchange from larger merchants as well if the classification is not proper and/or the interchange rates are not aligned properly. There will also be a need for enhanced fraud risk management as integrating cards with UPI will open up a whole new set of use cases.

As evident from the above, the pros outweigh the cons and the move to link credit cards with UPI will certainly prove to be a game changer for the Indian cards industry. Issuers have started rolling out this facility, and other card networks are also waiting in the wings for RBI’s go-ahead to link their cards with UPI.

The universal adoption of digital payments is one indication of the blurring of the digital divide.

There are several reasons for the rapid growth and adoption of digital payments across the country, including government initiatives around financial inclusion, no-frills accounts, direct benefit transfers, and demonetisation. Another unlikely catalyst was the pandemic, with consumers adopting no/low touch payments.

The QR code, now present at almost every merchant, is a manifestation of the digital revolution brought on by the UPI platform.

UPI has been growing rapidly since its launch in April 2016. As per the NPCI website, approximately 90,000 transactions (across 21 member banks) for Rs 38 lakhs in July 2016 has grown to a staggering 7.8 billion transactions (across 382 member banks) for Rs 12.8 lakh crore in December 2022.

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