Last week, the Reserve Bank of India (RBI) decided to link credit cards with unified payment interface (UPI) platform, beginning with RuPay cards, to provide additional convenience to users and enhance the scope of digital payments. While the move looks good on paper, there are several issues like: how credit card issuers will cover their cost of capital; who will bear the cost of merchant discount rate (MDR); and how the underlying infrastructure will support it. Another important issue for UPI platform would be to adopt to the strict know-your-customer (KYC) practised by the credit card ecosystem.
UPI facilitates transactions by linking savings or current accounts through users' debit cards or Aadhaar numbers. Credit cards, however, are issued after detailed scrutiny of the customer, followed by a strict KYC process. This is because a credit card is a soft loan and the issuers must adhere to stringent lending norms, while UPI is just a platform.
Third-party apps like PhonePe and GooglePay on the UPI platform might have to upgrade their merchant KYC modules, given norms are currently more elaborate for accepting credit cards against QR (quick response)-based UPI payments.
RBI also pointed out that, currently, it will only introduce the arrangement and the system entities will decide their pricing structure. "This facility would be available after the required system development is complete. Necessary instructions will be issued to National Payments Corporation of India (NPCI) separately," RBI governor Shaktikanta Das had said.
Currently, over 260mn (million) unique users and 50mn merchants are on-boarded on the UPI platform. In May 2022 alone, 5,940.63mn transactions amounting to Rs10.40 lakh crore were processed through UPI. In March-April 2022, UPI had a monthly payment of Rs9.6trn to Rs9.8trn (trillion) compared to about Rs1trn of credit cards in the same period.
The nature of credit cards and UPI payments are fundamentally different. While the average monthly ticket size of credit card (CC) is around Rs4,000-Rs4,800, on the UPI platform, for person-to-merchant (P2M), the ticket size is just Rs700-Rs900. With such a lucrative monthly ticket size, no wonder everyone wants to on-board credit card customers on their platform.
While the difference between volume and value makes credit cards a good case to move to the UPI platform, there are a few more issues. The critical point is the charges involved for UPI in CC, considering UPI currently has zero charges.
On the UPI platform, there is no MDR charged to merchants. However, MDR is charged to a merchant for the payment processing of debit and credit card transactions. The MDR is capped at 0.9% for debit cards, while there is no limit on MDR for credit cards. Cards offered by Visa and MasterCard, typically, have an MDR of 200 basis points (bps) for credit cards and 50bps for debit cards. Credit cards from RuPay charge a lower MDR, while there is no MDR for its debit cards.
The main question for credit card issuers, thus, is how to cover their cost of capital and how the existing infrastructure will support the move to allow linking with the UPI platform.
One more stark difference between the credit card ecosystem and UPI platform is how they redress consumer grievances. Credit cards have a time-tested system for consumer grievances redressal as the money trail can be tracked till the end-user, whose authentic KYC has been done. UPI lacks this feature.
In January this year,
The Ken wrote a long piece about how “The UPI frauds undermining India’s payments fairytale”. While the ease of payments offered by UPI (Unified Payments Interface) has been celebrated as a ‘fintech’ success at a global level, the article talks about the high level of fraud because confidence tricksters find it exceedingly easy to defraud people using UPI. More shocking is the revelation that “payments companies have no institutional mechanism to help them go after fraudsters. Only banks are mandated to report frauds, not payments apps. There’s no infrastructure through which they can share data on phone numbers tied to scams either. Nor is there a central pool of information. While companies inform NPCI about new scams, they don’t share data about scamsters with each other…”
Even today, such a feature to dispute a fraudulent transaction is either not provided by UPI payment apps or buried under difficult-to-find and vague menu options (raise complaint), possibly generating offline workflows that are handled with a lag.
According to Nandkumar Saravade, an officer from the Indian Police Service (IPS), who was also the founding chief executive officer (CEO) of Reserve Bank Information Technology Pvt Ltd (ReBIT), the absence of putting in place such an interface artefact when the UPI platform was architected is like forgetting to put up a police station in a new township.
He says, "Once such a fraud-reporting feature is introduced, the payment apps themselves need to run creative awareness campaigns on how to detect and notify frauds quickly. This should be accompanied by a general information campaign by NPCI at the national level. A victim should be able to report the fraud to the UPI platform itself (rather than going through her bank) as soon as she becomes aware of it. If required, RBI should suitably amend in its fraud reporting circulars." (
Read: Tackling UPI Frauds: Security by Design Is the Answer)
While RBI had allowed the on-boarding of RuPay credit cards on UPI platform; the question is whether it will also be gradually allowed for Visa and Mastercard. Further, after successfully adapting credit cards in UPI, can the entire point of sale (PoS) infrastructure face a threat?
Earlier this year, the Payments Council of India (PCI), the industry body of digital payments aggregators, requested the ministry of finance to roll back the zero MDR regime for payments made through UPI and RuPay debit cards. Most merchants have set up the payments service facility or PoS and are paying a fee between 1% and 3%.
PCI expected a loss of Rs5,500 crore from UPI and RuPay debit card payments as the MDR on payment from these two options is capped at zero. Last year, to boost digital payments, the Union government approved a compensation package worth Rs1,300 crore for the zero MDR.
On its part, RBI, the banking regulator, has initiated a move while leaving banks, card issuers and payment services-providers to work out on pricing and system infrastructure. According to industry experts, while the discussion is going on, it would take at least six months before RuPay credit cards can be onboarded on the UPI platform.
"Ultimately, the power of acceptance will materialise at scale with the right economic models. Therefore the question of who bears the cost of 'acquiring' will need to be resolved between issuers, merchants and card networks. Additionally, given the nature of the interaction between card networks Visa and MasterCard and third-party UPI apps, the monetisation models and ownership of customer data also remains to be resolved," says Prateek Roongta, managing director and partner of Boston Consulting Group (BCG).
