Linking Credit Cards With UPI

• 17 Jun 2022

For Prelims: UPI, Financial Instrument, Digital Payment, RBI

For Mains: Linking Credit Cards With UPI, its Significance and Challenges, Government Policies & Interventions

Why in News?

The Reserve Bank of India (RBI) has proposed to allow linking of credit cards with the Unified Payments Interface (UPI) platform.

• A credit card is a financial instrument issued by banks with a pre-set credit limit, help make cashless transactions. It enables cardholders to pay a merchant for goods and services based on her accrued debt.
• This is intended to provide additional convenience to users and enhance the scope of Digital Payments.

What is Unified Payment Interface?

• About:
  • It is an advanced version of Immediate Payment Service (IMPS)- round–the-clock funds transfer service to make cashless payments faster, easier and smoother.
  • UPI is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood.
  • UPI is currently the biggest among the National Payments Corporation of India (NPCI) operated systems including National Automated Clearing House (NACH), Immediate Payment Service (IMPS), Aadhaar enabled Payment System (AePS), Bharat Bill Payment System (BBPS), RuPay etc.
• Need to Link Credit Card with UPI:
  • The UPI has, over time, become a popular mode of payment in India with more than 26 crore unique users and five crore merchants on the platform.
  • In May 2022, about 594 crore transactions amounting to Rs 10.4 lakh crore were processed through the interface.
  • At present, the UPI facilitates transactions by linking savings/current accounts through users’ debit cards.

What is the Significance of the Move?

• Additional Avenue for Payment:
  • The arrangement is expected to provide an additional avenue for payment to customers and hence enhance convenience.
• Credit Card Usage will Increase:
  • It will deepen the reach and usage of credit cards.
  • It is anticipated that credit card usage will be zooming up in India given UPI’s widespread adoption.
• Avenues to build Credit on UPI:
  • It opens up avenues to build credit on UPI through credit cards in India, where in the last few years, a number of startups like Slice, Uni, One etc. have emerged.
• Bolster Transactions at more Merchant Sites:
  • It is expected to bolster transactions and acceptance at more merchant sites.
  • People who generally prefer to pay by credit card so as to avail of a longer pay-back period or loans on credit-card outstanding, or who do not wish to touch their savings at the moment of purchase, can pay using credit cards via UPI.
• Boost Overall Spending:
  • The move will provide a significant boost to overall spending via credit cards — currently, spending through the use of credit cards is more than double the average spend via debit cards. More spending is generally a force multiplier for the economy.
• Increase Average Ticket Size of Financial Transactions:
  • Besides accelerating digital transactions this measure is also expected to affect the average ticket size of financial transactions.
    • Currently the average ticket size per transaction is Rs 1,600 while it is Rs 4,000 in credit cards.
  • So, with the new development the UPI transaction ticket size is likely to go up to somewhere around Rs 3,000 to Rs 4,000, analysts claim.

What are the Challenges?

• It is not clear how the Merchant Discount Rate (MDR) will be applied to UPI transactions done through credit cards.
  • The MDR is a fee that a merchant is charged by their issuing bank for accepting payments from their customers via credit and debit cards.
• According to a norm that has been in effect since January 2020, UPI and RuPay attract zero-MDR, meaning that no charges are applied to these transactions.
• Applicability of zero-MDR on UPI could also be a reason why other card networks such as Visa and Mastercard may not have been onboarded to UPI for credit cards yet.

Source: TH