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The reasons behind linking UPI with credit cards


  • The RBI has proposed linking credit cards to the Unified Payments Interface (UPI), beginning with the National Payments Corporation of India’s (NPCI’s) RuPay credit cards. Is this a precursor to bringing Buy Now Pay Later (BNPL) services under regulatory fold? Mint examines.

How will users benefit from this new move? 

This will enable users to link their credit cards and pay via UPI. Until now, customers could only link their savings accounts and debit cards to UPI. To start with, they will be able to link NPCI’s RuPay credit cards. Here’s how the new feature will work: Fintech company PhonePe’s users, for instance, were able to add only bank accounts earlier. Now, the customers will be able to add their credit cards as well. When customers go to a shop and scan a QR code, PhonePe will give them the option to pay for the goods they buy and the services they avail of either through their bank accounts or by using credit cards.

Is this ‘Credit on UPI’ with a twist? 

‘Credit on UPI’ has been a long ask from the NPCI as well as from the industry. “The logic behind this is that the whole Buy Now Pay Later ecosystem is outside the purview of regulation and there is a risk to the ecosystem. We would like to have credit on UPI," a senior NPCI official said. Credit on UPI could ideally have involved non-banking financial companies disbursing a line of credit. However, this is unlikely to happen now. The recent development will enable higher usage of credit in India and at the same time increase the adoption of RuPay credit cards, which is still small compared with Visa and Mastercard.

Who are the beneficiaries?

Banks will be the biggest beneficiary. “Banks are best positioned and the power might shift from fintech lenders to banks because they might just give a small credit line-backed RuPay card," Setu co-founder Nikhil Kumar said. NPCI, on the other hand, is also expected to earn more with interchanges (fees merchants pay for making online transactions) on both the RuPay credit card and UPI credit .

Will acceptance be a challenge?

Today, the use of UPI is free for merchants. They won’t be ready to pay interchange on UPI, and credit card issuers won’t be ready to waive that fee. The interchange on RuPay credit card is up to 2%. Also, it may be a challenge for merchants to identify the payment mechanism used by the customer at the point of sale—whether it is through a debit or a credit card. The other problem is that on UPI debit, dispute management and refunds are still a challenge. The addition of credit will bring its own set of challenges. 

When is this scheduled to happen? 

The overdraft (OD) facility on UPI was launched in 2018. This has not taken off. Payment firms block such transactions as interchange is applied. Also, most consumers don’t know whether a merchant will accept OD facility. The industry now feels linking credit cards and UPI will be a long-drawn process that will take 6-12 months for guidelines to be issued. First, the RBI will issue a formal circular to NPCI on bringing this into action. Next, tech specifications and the business model to activate the system will be decided.

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