MACROSCAN Penned by Anjaney Jan 12, 2023

Credit-Linked UPI:
An Evolving Saga
"The UPI juggernaut rolls on..."
Nandan Nilekani

Currenc-i
The Economics and International Business Club
Apoorva | Jeevan | Priyank | Rajdeep | Sakshi | Shelly | Varnika
Anjaney | Harshit | Krithik | Pranita | Ragavan | Srishti | Vishal
Introduction
On the 4th of October, 2022, the RBI published a seemingly innocuous
circular. The subject read: “Operating circular for RuPay Credit Cards
linked to UPI.” What the document discussed was quite interesting –
it laid down briefly how linking RuPay Credit Cards to UPI may be
operationalised.

The authors of the circular thought the move would provide a

“seamless, digitally enabled credit card lifecycle for the customers.”
Unassuming as this statement might be, the author of this article
considers the circular nothing short of revolutionary.

Now, it bears mentioning that we have already seen a roll-out of this

concept: the ability to pair RuPay credit cards to UPI went live last
year in July. However, only four banks support this feature even now
– HDFC Bank, Indian Bank, Punjab National Bank and Union Bank. And
besides, RuPay credit cards scarcely account for 4% of all credit
cards in use in India.

By introducing a credit flow to the cash in the UPI system, the

National Payments Commission of India would be simplifying access
to credit like never before – imagine using your UPI app to scan a QR
and the app automatically displaying an option to use your credit
card as well as your debit card.

You would not need to pull out a physical card from your wallet,
swipe it at the POS device at the counter, enter the pin for the cash to
be disbursed and receive a receipt. No, you could do all that on your
phone and still enjoy all the services and benefits that the physical
card offers you. Implemented at scale across India, we’re talking
virtual redundancy of the POS systems at multiple merchants.

The primary motivation of this article is to discuss a recent

development that has the potential to alter credit disbursal across
India en masse. RuPay is merely the tip of the iceberg – we might be
in for a much more significant change.
In an inspiring column published on the 10th of January, 2023, Ashwin
Manikandan of The Morning Context proclaims that according to three
“industry executives aware of the matter,” the RBI is mulling over the
possibility of allowing credit cards issued by MasterCard and Visa to be
linked to the UPI.

However, before discussing why the move is so pivotal, we must put it into
context.

Putting the Move into Context

We may, at once, not grasp the significance of this event. After all, credit
card penetration in India is pitifully low - less than 6% of Indians own a
credit card. However, as an emerging economy, India is pulling more
people into the middle class than ever; a recent report by PRICE asserts
that the share of the middle class in the Indian population grew from 14%
in 2004-05 to 31% in 2021-22.

This inevitably means growth in discretionary spending and, by extension,

credit. As a result, over the last three years, credit card spending (in Rs.)
has grown by approximately 30%, while the volume of transactions has
grown by about 15%. The number of outstanding credit cards increased by
21.9% to around 7.8 crores at the end of August 2022.

These are impressive figures by themselves, but remember: this is organic

growth achieved without the benefits, convenience and interoperability
offered by the UPI. Linked to the UPI, credit cards have the potential to
reach a far more sizeable portion of the population.
UPI
To apprise the reader once again regarding the sheer scale and
penetration of the Unified Payment Interface, consider that in July of 2022,
the interface crossed 6 billion transactions!

The amount of money exchanged over the platform in Rupee terms went
from 41.04 lakh crores in FY21 to 84.16 lakh crores in FY22. To put that
number into context, the nominal GDP estimate for India for the year 2022-
23 is 273.08 lakh crores. Therefore, the total value of money exchanged
over the platform is roughly 31% of GDP! Therefore, the possibility for
growth on this platform is immense.

MDR, Interchange and the Works

A salient feature of the debit-based UPI transaction system is that there is

no Merchant Discount Rate (MDR) or Interchange rate charged to the
merchant or the customer when the transaction is done. Because of this,
UPI apps and banks make virtually nothing on each transaction. Rather,
they incur a cost.

Manikandan’s article in August 2022 notes that “for a peer-to-merchant

transaction worth Rs. 800, the industry incurs Rs. 2” (as a cost). This
translates roughly to a cost of 0.25% per transaction. The RBI discussion
paper he cites breaks the costs down further to explain how must cost is
borne by the issuing bank (0.1%), customer’s UPI app (0.06%), acquiring
bank (0.07%) and the NPCI (0.02%).

One of the primary criticisms from the banks’ side always has been that
they aren’t making any money by asking their customers to use UPI.
In fact, even back in July last year, when the RuPay credit card tie-up to
UPI was first testing the waters, NPCI re-negotiated and increased the MDR
on its credit card to 2% for the UPI platform – signalling that charges on
using credit-based UPI are applicable and welcomed.

The Potential
Perhaps the most pathbreaking change that accompanies this move is
that the merchants now open to take credit card payments goes from the
4 million who had POS systems to the 50 million who have registered QR
codes connecting them (or, more specifically, the Virtual Private Address
(VPA) of their account) to UPI.

News Flash: The total addressable market for credit cards just
skyrocketed!

And, as we’ve discussed already before, the number of people using credit
cards also stands to increase considerably after this. The combined effect
of these two factors will surely increase the number of credit transactions
occurring on the platform.

For payment processors Visa and Mastercard, this represents a chance

to tap into a far more sizeable market. However, their decision will depend
on how the regulation regarding MDR and interchange is framed.

For merchants, this represents a way to invite more transactions while

incurring a small charge. It also means an opportunity to move away from
expensive POS systems to easily operable QR code infrastructure.
For consumers, this means more convenience while carrying out
payments, and for debit users, a new opportunity to experience credit-
based modes of payment without registering on BNPL apps – now you can
do it using the UPI apps you use for everyday expenses.

The economy also stands to gain: not only will there be more money
exchanging hands, but the addition of Visa and Mastercard will also
immediately bring in about 80% of credit card users to UPI’s fold almost
immediately. How the government will capitalise on this opportunity
remains to be seen. But if we venture a guess, and assume even a
nominal charge on the service, it could be a sustainably growing income
source. Even if the government lets the facility function as a public good,
the positive externalities emerging from the move are considerable,
though costly.

Conclusion

The changes accompanying Visa and Mastercard joining the interface to

facilitate UPI credit payments promise to be game-changing. We hope
that through this pamphlet, we hope we’ve provided a bit of context about
why the move to credit-based UPI is so pivotal and how bringing in Visa
and Mastercard will bash open the floodgates for further credit-based
transactions to flourish in the UPI ecosystem and, by extension, the
economy. This is a huge step forward toward India’s goal to go digital.

We have yet to discuss in detail the negative ramifications of this move.

More credit-based transactions inevitably mean merchants lose a small
sum as consumers switch from debit-based transactions.
While the volume of transactions may improve, it remains unclear whether
all merchants will benefit. Convenience to disburse money through credit-
based methods may also result in overspending on the part of individuals.
These are issues that are beyond the scope of this article but require
serious discussion.

Because UPI has become such an integral part of our lives, it’s easy to
forget that the technology is but six years old! And now, with credit being
linked to the interface, we stand at the cusp of yet another revolution.

More power to the innovators.

References
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credit cards to UPI soon. The Morning Context.
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mastercard-credit-cards-to-upi-soon
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