Credit card linkage to UPI: Uncertainty over pricing leaves players in the dark

While the Reserve Bank of India’s (RBI’S) decision to allow linking of Rupay credit cards to Unified Payments Interface (UPI) has been received positively by the industry as it is expected to open up a big payment universe, an uncertainty over the pricing structure has left players seeking clarity on how such a move will be implemented.

Whether it is a credit card, debit card, or UPI, the consumer doesn’t incur any charge, it is the merchant who bears the cost in terms of merchant discount rate (MDR). While there is no MDR on UPI, for debit cards, it is capped at 0.9 per cent. There is, however, no cap on MDR for credit cards. Typically, credit cards (nonrupay) have MDRS of 200 bps vs 50 bps MDR on debit cards. Rupay debit cards have no MDR whereas Rupay credit cards typically have lower MDRS vs those on Visa/mastercard. Also, usually, in MDR, the issuing bank takes 60 per cent, and the balance is shared between the network provider (Visa, Mastercard, etc.) and acquirer.

Vishwas Patel, chairman, Payments Council of India (PCI), hailed the RBI’S move and emphasised that the players need more clarity on the same because in giving credit, there is a cost of funds involved for issuing banks, while in UPI transactions, the MDR is zero. There are lots of questions and a whole lot of clarity required regarding the same, he said. “We at PCI are reaching out to RBI officials and also talking to National Payments Corporation of India (NPCI) to assess the linking up of credit cards with UPI and how it can be successfully rolled out, at the same time making it commercially viable for all players involved,” he added.

“The RBI has not specified the pricing part yet. But, my sense is they have to devise a mechanism wherein they can ask the ecosystem to identify the credit card transactions that will take place through UPI and then charge MDR accordingly. While keeping customer’s convenience in mind, it is important they have to work out with the card networks and banks a proper MDR structure for the transactions that will happen on UPI through credit cards,” said Dewang Neralla, CEO, NTT DATA Payment Services India.

When asked about the pricing structure, T Rabi Sankar, deputy governor, RBI, said: “How the pricing structure will work out we will have to see because it’s something that the banks and system entities have to do. At this point, we will introduce the arrangement and see how the pricing goes.”

“In the event UPI through credit card has any MDRS (vs no MDR on debit UPI), we remain uncertain about the uptake of this product, outside of the existing merchant base that uses POS devices (and pays MDR on card transactions). We estimate this cohort is about 3-4 million merchants, 30 million merchants who accept QR payments/upi,” said Goldman Sachs in a report.

“While UPI through credit cards will allow consumers an additional digital payment option, we see a low probability of the majority of small merchants paying MDRS, at least not as high as current credit card MDRS of 200 bps (given they currently pay no MDR on wallets or UPI acceptance),” the report added.

Also, there is no clarity on whether the facility will be extended to credit cards of other card networks, such as Visa, Mastercard, American Express, etc.

Despite the uncertainties, this move is certainly going to increase the number of points at which credit cards can be accepted. Currently, there are 6 million card accepting Point of Sales (POS) machines in India where credit cards can be swiped physically. On the contrary, UPI has over 260 million unique users and 50 million merchants onboarded on the platform. Essentially, if one wishes to use their credit card through UPI, there will be acceptance across 50 million merchant outlets.

“The idea behind this is, in tier-iii to tier-vi cities, it is difficult to install POS infrastructure, but you will find QR codes everywhere. So this will expand the credit card universe and spends will also rise. Further merchant acquisition will also be easier,” Neralla added.

“While merchant adoption will need to watched, this move (when extended beyond Rupay) can sharply improve acceptance network for credit cards (both virtual and physical) given UPI-QR code penetration (50 per cen) vs POS device penetration (<5 per cent),” said Citi Research in its note.

Having said that, the success of this move is also dependent on the banks because apart from public sector lenders, private banks have been reluctant in issuing Rupay cards so far due to its relatively lower international acceptance.

According to RBI data, there were only 0.97 million Rupay credit cards issued till November 30, 2020, and existing Rupay based credit cards are less than 2 per cent of overall credit cards issued in India. Therefore, unless banks ramp up issuance of Rupay based credit cards, there will hardly be any impact on credit card spends as is being envisaged by the industry, analysts said.