Key factors likely to be considered for linking credit cards with UPI. Read here

The Reserve Bank of India (RBI) has proposed to link credit cards with the Unified Payments Interface (UPI). However, only RuPay credit cards will be allowed to link as of now. NPCI will be soon releasing separate instructions on the linking. This move has opened up a big digital payment universe. However, the possible monetisation opportunity will depend upon its execution. Despite credit cards linking with UPI emerging as a landmark, however, its direct financial implications will depend upon a host of factors.

On June 8, RBI while hiking the repo rate by 50 basis points in the bi-monthly monetary policy, also announced to enhance the UPI system. RBI decided to allow credit cards for transactions.

At present, UPI facilitates transactions by linking Savings / Current Accounts through Debit Cards of users. The interoperability of PPIs has also facilitated access of PPIs to the UPI payment system for undertaking transactions.

Earlier this week, RBI said, " to further deepen the reach and usage, it is proposed to allow linking of credit cards to UPI. To start with Rupay credit cards will be enabled with this facility. This arrangement is expected to provide more avenues and convenience to the customers in making payments through UPI platform."

This facility will be available after the required system development is complete, RBI had notified, adding, "necessary instructions will be issued to NPCI separately."

There are more than 26 crore unique users and 5 crore merchants onboarded on the UPI platform. Last month alone, 594.63 crore transactions amounting to ₹10.40 lakh crore were processed through UPI.

Talking about the credit cards linking to UPI, Ansuman Deb and Ravin Kurwa Research Analysts at ICICI Securities in their research note said, "the regulator (RBI) has proposed to allow linking of credit cards (CC) to UPI. This facility will start only with RuPay CC limiting the scope as of now. However, this is a landmark feat considering it can open up a big payment universe."

Data given by ICICI Securities showed that UPI had a monthly payment of ₹9.6 lakh crore and ₹9.8 lakh crore in March and April this year. This is in comparison to credit card payment of ₹1 lakh crore in March/April 2022.

"The possible monetisation opportunity will depend on the fine print of the execution. There is also the question of potentially different target universe for UPI and CC payments. Additionally, there are important changes within the CC universe with one of the key new age CC players scaling down instalment payment features," the duo added.

Highlighting about RuPay cards linking to UPI, the analysts said that to start with, RuPay credit cards will be enabled with this facility. This arrangement is expected to provide more avenues and convenience to customers in making payments through the UPI platform. This facility would be available after the required system development is complete.

Notably, RBI also increased the limits applicable on e-mandates on cards for recurring payments to ₹15,000 per transaction from ₹5,000 per transaction.

ICICI Securities analysts pointed out that the nature of CC and UPI payments are fundamentally different. The average monthly ticket size of CC was in the range of ₹4,000-4,800 while UPI payments were in the range of ₹700-900 for P2M (person to merchant).

Data by the stock broker further revealed that industry credit card receivables edged up 4% month-on-month to ₹1.54 lakh crore which resulted in an increase of 2% in terms of receivable per card to Rs20,445 in April 2022 from Rs20,060 in March this year.

In April 2022, SBI Card spends market share dived to 18.6% from 19.1% in March 2022, while the cards in force market share remained stable at 18.6%. Overall, industry credit card spends ticket size dropped marginally 1% month-on-month to ₹4,731 while SBI Card spends slipped 1.7% month-on-month to ₹4,681. The overall industry spends per card plunged by 3.8% MoM in April 2022 while that of SBI Card contracted 5.5% MoM.

According to the analysts, linking of credit cards to UPI is a landmark development but direct financial implications will depend upon the details. Key questions involve (1) what will be the charges involved for UPI in CC considering UPI has zero charges currently, (2) whether it will also be gradually allowed for Visa/Mastercard, and (3) on successful adaptation, can the entire point of sale (PoS) infrastructure face a threat.

Which stock is a hot pick for investors amidst credit cards linking to UPI? 

SBI Card is seen to be attractive amidst the development. 

On SBI Card, the analysts have given a buy rating with a target price of ₹1,060 (unchanged) based on 40x FY24E (FY23/24 earlier) earnings.

The analysts said, "SBI Cards reported a positive surprise in Q4FY22 driven by lower credit costs. However, there has also been lower growth in the receivables mix. As a business combination, a lower revolver with lower credit cost is good but less than optimal. As such, improvement in loan book and revolver mix will be the next earnings levers post the normalisation of credit cost (8.4% in FY22)."

On BSE, SBI Card shares closed at ₹769.60 apiece marginally down. At the closing price, the SBI Card market cap stands at ₹72,592.02 apiece.

Taking into consideration SBI Card's Friday's closing price and ICICI Securities buy target, the shares have the potential to rise by nearly 38% ahead.