Credit card-UPI linkage: Driving the next wave of growth in digital payments

In a significant boost to credit penetration into the digital payments platform, government-backed RuPay credit cards can now be linked to Unified Payments Interface (UPI). This announcement by the Reserve Bank of India (RBI) is expected to bring the next wave of disruption in the digital payments ecosystem. According to a recent Boston Consulting Group (BCG) report, India’s digital payments market is expected to reach $10 trillion from the current $3 trillion by 2026.

Currently, users are allowed to make real-time bank transfers by linking their savings or current accounts with UPI. But with this game-changing initiative, paying via RuPay credit cards by scanning the Quick Response (QR) code is now possible. This move is expected to bring about a surge in the number of RuPay credit cards in the system and also play a role in enhancing the scope of digital payments.

From small-scale retailers to roadside vendors, almost 30 million plus merchants across India are using QR codes, reveals a BCG report. Clearly, it continues to steadily replace methods of payment in physical stores, as well as cash-dominated transactions.

In May 2022 alone, UPI logged 594.63 crore transactions with a 4-fold increase as the next goal. In the process, it is eating away the market share from other payment forms. But what makes India’s homegrown digital payment system so wildly popular?

The major reason behind it is that retailers can take payments using a QR code or a registered mobile number, whereas credit cards require point-of-sale (PoS) devices. The QR code works in the favour of merchants, whereas the PoS device tends to eat into their share of profits. Consider this: The UPI-QR code penetration at present is at 60 percent, as compared to PoS device penetration which is less than 5 percent, according to a PhonePe and BCG report.

Only 6 million point-of-sale (PoS) machines for swiping credit and debit cards are being used as of now. Moreover, these machines rarely exist in semi-urban and rural areas. But with the RuPay credit card-UPI linkage, a large chunk of the population will have access to pay by credit cards.

For RuPay, this path-breaking measure is a tipping point for credit and we just saw the steep rise in the use of digital payments due to UPI and the adoption by the industry. This utility on UPI will have a similar effect and potentially increase the demand for RuPay Credit cards due to ease of use.

With over 30 million QRs available for UPI transactions, the same will be leveraged for credit cards. This will also increase acceptance in Tier 2 and Tier 3 cities. This move has the power to simplify and standardize the user experience for the end consumer.

If merchant adoption proceeds well, credit card payments through UPI can potentially reshape the credit card issuance and usage landscape in India. However, the new directive is not without its challenges. If implemented correctly, the following measures can go a long way in easing the RuPay credit card-UPI linkage process:

Increase RuPay credit card adoption: In 2016, demonetisation had paved the way for increased adoption of digital payments and card usage. The trend further accelerated after the COVID-19 pandemic made these options a necessity in the daily life of people to transact in the financial ecosystem. It also led to the financial inclusion goal for the government in an accelerated way in tier-2 and 3 cities.

Overall, during this period, the drive for cashless payments had strengthened the growth of companies like RuPay, Visa and Mastercard in the card network market in India. As per a RBI report, RuPay cards have grown to capture a 60 percent share of India’s card market in 2020.

However, expanding reach and distribution of RuPay credit cards will be critical during the first phase of the new move to link credit cards with UPI network. With banks also geared towards ensuring a higher issuance of RuPay credit cards, the volume of transactions and acceptance of credit cards are expected to rise and potentially disrupt the credit card network space.

Snap out of debt traps: Usage of credit is fundamental to the management of the lifestyle of any consumer. However, many fear that consumers may overspend and end up in a debt trap. Currently, banks and processors are giving cardholders the ability to easily view their transactions and spends across various categories. There are control features that help the consumer assign and block certain categories of spending.

The banking system is adept at managing these risks and these control measures will automatically kick in if there are major fluctuations in the transaction patterns. For this, RBI has a keen eye on debt and NPAs have tasked banks with formulating strategies to keep them as low as possible.

Implement fraud prevention techniques: Issuing banks will need to be even more vigilant since it increases the potential of fraudsters trying to game the system. While mature banks may have their policies automated, upcoming RuPay issuers will need to be proactive. For example, you cannot do wallet loads using credit cards. But wallets can be loaded using UPI which has traditionally been a debit transaction. Now banks that have issued RuPay Credit cards will start to see a spike in volumes and they will need to ensure such transactions do not take place.

Undoubtedly, the linkage will solidify the digital payments footprint in India and will strengthen merchant partnerships of card networks in the days to come. Eventually, it will enhance the payments experience on the RuPay network.

With innovative products and newer use cases creating a stir in the credit card space, companies will be able to cater to untapped customer segments and propagate financial inclusion through various channels. Massive disruption has already taken place in the payments space with UPI. The enablement of RuPay credit card on UPI will further change the concept of payments in India.