Exploring the Linkage Between Credit Card and UPI Payments
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21 NOVEMBER, 2022

Understanding the Benefits of the UPI and Credit Card Integration

Be it paying using credit cards or credit card to credit card payments, soft loans have a way of making their way through the financial systems. And now that the digital payments landscape is evolving rapidly with Unified Payments Interface (UPI) at the helm, UPI credit cards are the latest shiny instrument at the customers' disposal.

The fee-free model of UPI has made a solid case for long-term credit card UPI payments, and the concept is here to stay. The Credit Card-UPI linkage is expected to open Pandora's box of possibilities that has the potential to reshape transactions as we know them. It is believed that more and more people will use credit cards for UPI.

On that note, let us understand how the integration of UPI with credit cards can benefit both customers and merchants.

How has UPI Trail Blazed the Digital Payments Game?

Unified Payments Interface, more colloquially known as UPI, has penetrated the Indian payments system in a disruptive fashion. With the Covid-19 pandemic further accelerating the digital payments landscape, UPI has been at the forefront of this seismic transformation.

In August alone, the payments platform clocked in 657 crore transactions (amounting to INR 10.73 trillion), a record high since its inception. Compared to last year, UPI transactions grew by 85% in volume and 68% in value.

To put this growth spurt into perspective, let's bear in mind that the UPI-based transactions stood at ₹10.63 lakh crore in value. It was for the first time since its inception in 2016 that UPI hit 6 billion transactions.

In the fiscal year 2022, the platform processed over ₹77.94 trillion transactions. The current fiscal year has witnessed over 30 billion transactions amounting to over ₹51.74 trillion. And it is only a matter of time before UPI hits a billion transactions per day marker.

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UPI-Credit Card Linkup: Benefits for Customers and Businesses

The recent surge in FinTech startups has led to innovative efforts regarding credit on UPI. These companies offer a low credit limit and allow the users to pay with credit at any UPI-approved merchant QR code.

UPI's ease of use is unmatched in minor day-to-day transactions. With the added capability of linking credit cards to UPI's eliminating the need for a PoS, adoption is expected to be even more seamless and quick.

Since credit cards and UPI come with a unique set of deliverables, their proposed linking by the Reserve Bank of India (RBI) is a step in the positive direction. While UPI payments are free of cost and require single-PIN authentication, credit cards come with reward points and interest-free credit lines (for a limited duration, though). Joining them both can result in customers being able to use UPI even for larger transactions.

The end-user can now use UPI to make credit card payments, with credit cards acting as a back-end tool. In the bigger picture, linking a credit card to UPI is a creatively wise move because it would support both UPI transactions and the overall goal of a digital India.

The current ticket size for a UPI transaction stands at Rs 1,600, with that of a credit card being around Rs 4,000. Handshaking could easily take the UPI ticket size to Rs. 3,000- 4,000. Moreover, the customer now has a bifurcated choice: whether to use the credit card-UPI option or go the conventional debit route.

The integration would mean customers will be saved from the hassle of carrying the card and quit relying on cash from credit cards (at an advance fee). With no need to swipe at the Point-of-Sale (POS) machine or fill in details online, the users can enjoy a much more convenient payment experience. Since merchants wouldn't have to invest in POS machines, it'll eventually raise the ceiling for digital transactions and merchant tie-ups across the country.

Transforming card transactions into a more secure and less exposed route would mean reduced fraud cases and illegal spoofing. Furthermore, since UPI is rampant across over 330 banks, this will open up a new avenue for customers' credit card access. The increased retail potential can, in turn, boost the 21% of high-value P2M transactions in the ecosystem (till June 2022).

Things to Keep in Mind

The contrast between the charge-free nature of UPI against the variety of prices accompanying a credit card would determine the sustained promotion of this method by retailers. It is likely that online retailers, malls, and huge grocery chains, would be more inclined to adopt this, with the customers demanding it.

At the same time, small-scale shopkeepers and local merchants can be less interested in UPI credit cards. The merchant discount rate (MDR) fees are major. However, the RBI and National Payments Corporation of India (NPCI) on MDR's final decision is awaited regarding the credit cards that'll operate through UPI.

Some key factor could be the distribution of these new-age credit cards to the masses by the banks. Will this require institutions to pivot their UPI models? It is also food for thought.

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From a merchant perspective, such a linkage should ideally cause a surge in large-scale acceptance. This is projected because many merchants in Tier 2 and Tier 3 cities do not have credit card PoS terminals at their disposal. But they have been observed to have UPI QR-code-based transaction abilities on the ready. From a customer perspective, it meshes the various reward and credit card benefits with the user-friendliness and security of UPI.

With UPI becoming a widely accepted channel to make purchases, linking credit cards to UPI is just another step in the right direction. Starting with Rupay credit cards, for now, this linkage can make QR codes indispensable for debit card, account, and credit card-based payments in the long run.

Before widespread implementation, credit card companies must figure out the financial dynamics. Since UPI payments incur no fees, it is not certain how they will recoup their capital expenses with the current financial system.

On the users' side, the ease of UPI payments coupled with credit cards' short-term debt can lead to overspending and debt traps. This is a palpable scenario considering the increased UPI volumes and average order amounts with credit card linkages.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.