Linking Credit Cards With UPI
GS Paper – 2,3 Government Policies & Interventions, Mobilization of Resources, Growth & Development.
Why in the news?
- The Reserve Bank of India (RBI) has proposed that credit cards be linked to the Unified Payments Interface (UPI) network.
- A credit card is a financial instrument issued by banks that has a predetermined credit limit and allows for cashless transactions. It allows cardholders to pay a merchant for products and services based on the amount of debt she has accumulated.
- This is meant to increase user convenience and broaden the scope of Digital Payments.
What exactly is the Unified Payment Interface?
- It is a more advanced form of Immediate Payment Service (IMPS), a 24-hour funds transfer service that makes cashless payments faster, easier, and smoother.
- UPI is a system that integrates several bank accounts into a single mobile app (of any participating bank), combining several banking features, smooth fund routing, and merchant payments under one umbrella.
- UPI is now the most popular of the National Payments Corporation of India (NPCI)-managed systems, which include the National Automated Clearing House (NACH), Immediate Payment Service (IMPS), Aadhaar enabled Payment System (AePS), Bharat Bill Payment System (BBPS), RuPay, and others.
Credit Card and UPI must be linked:
- With over 26 crore unique users and five crore businesses on the network, UPI has become a popular way of payment in India over time.
- In May 2022, the interface completed over 594 crore transactions totaling Rs 10.4 lakh crore.
- At the moment, the UPI supports transactions by connecting savings/current accounts via debit cards.
What is the Importance of the Change?
Additional Payment Options:
- The arrangement is expected to give clients with an extra payment option, increasing convenience.
Credit Card Use Will Rise:
- It will broaden credit card acceptance and usage.
- Given UPI’s widespread adoption, credit card usage is expected to skyrocket in India.
Credit Building Opportunities on UPI:
- It opens new opportunities to establish credit on UPI through credit cards in India, where a number of firms such as Slice, Uni, One, and others have developed in recent years.
Increase Transactions at More Merchant Websites:
- It is anticipated that it would increase transactions and acceptance at additional merchant sites.
- People who want to pay by credit card in order to benefit from a longer pay-back period or loans on credit-card outstanding, or who do not want to touch their savings at the time of purchase, can do so using UPI.
Increase overall spending:
- The change will significantly increase overall credit card spending – now, credit card spending is more than double that of debit card spending. More spending is a force multiplier for the economy in general.
Increase the average monetary value of financial transactions:
- This approach is likely to affect the average ticket size of financial transactions in addition to speeding up digital transactions.
- Currently, the average ticket size per transaction is Rs 1,600, whereas credit cards have a ticket limit of Rs 4,000.
- As a result of the new change, researchers predict that the UPI transaction ticket size will rise to between Rs 3,000 and Rs 4,000.
What are the Obstacles?
- It is unclear how the Merchant Discount Rate (MDR) will be applied to credit card UPI transactions.
- The MDR is a fee levied by a merchant’s issuing bank for taking credit and debit card payments from customers.
- According to a rule that has been in place since January 2020, UPI and RuPay are subject to zero-MDR, which means that no fees are levied on these transactions.
- The availability of zero-MDR on UPI may possibly be one of the reasons why other card networks, such as Visa and Mastercard, have not yet been onboarded to UPI for credit cards.