UPI is now India’s de facto method for online payments. The exponential increase in transaction value, from ₹3.8 million in July 2016 to ₹10.63 trillion in July 2022, reflects this. Indians love UPI — no bank details needed; just a mobile phone number is enough! It is simple, quick, and safe to use.

I love UPI, just like most Indians, but my second-favorite choice is … credit cards, which most Indians don’t prefer. I think credit cards are fun. You swipe the card, but your account balance remains rock-solid. Moreover, they come with lots of perks: cash back, discounts, free tickets, one-on-one deals, vouchers and gift cards, rewards points, etc. And who doesn’t love free goodies and a little longer time to pay while already enjoying their purchases?

Now, imagine the efficacy of UPI and the thrill of buying on credit bundled in the same package. This can be a reality soon. The Reserve Bank of India announced that credit cards can soon be linked to UPI, too! This means that UPI apps could become the norm soon, even for credit card purchases. This initiative is intended to benefit the Indian consumer and increase the credit penetration rate in India. At the same time, it raises some fundamental questions in the minds of the users, merchants, banks, and everyone else involved in credit card transactions.

Will It Be As Popular With Customers And Businesses As UPI Is?

There are two key reasons why this product will be well received by customers. First, it will make card transactions more secure and less vulnerable to spoofing and other types of fraud. It is not necessary for the cardholder to swipe the card at a POS terminal. This approach is safer and more secure than the conventional swipe method. Second, UPI is live in 330 banks now. This will open up credit card access to a broader range of customers and provide greater retail potential. This will also provide the necessary boost to the 21% of high-value P2M transactions in the ecosystem, as of June 2022.

For merchants, it is even better. They do not have to invest in POS machines, and for those who have both, the systems can coexist. And most importantly, the settlement process would be expedited. It appears to be a win-win situation for all involved. Sounds exciting!

Hold Your Horses! This Is Only A Part Of The Narrative.

There are a few essential elements at play here that have the potential to give everyone involved a reason for concern.

First and foremost, will it appeal to the risk-averse Indian household? The answer is probably not; they may resist adopting this payment approach. Why? Because credit cards retain their conventional traits, even when used with UPI. It is still debt. There will be interest on the outstanding amount, charges, and annual maintenance fees. In addition, it demands self-discipline and behavioral adjustments from the customers.

Secondly, will retailers actively promote it? Perhaps or perhaps not. The “free” aspect of UPI is a significant element in retailers’ decisions to embrace it, while credit cards come with a variety of prices. Online stores, shopping malls, large supermarket chains, and the like are more likely to implement it, since customers may request paying with this option. Local merchants and shopkeepers, on the other hand, are less inclined to embrace the notion of UPI-linked credit cards due to high merchant discount rate (MDR) fees.

A number of things will play a role in the initiative’s success. It is yet to be seen how the Reserve Bank of India and the National Payments Corporation of India (NPCI) will come up with a method on how MDR will be charged on credit cards through UPI. How are banks going to get credit cards out to the general population? Will banks develop new credit card models to entice customers to make the switch? Will this also enable new, UPI-leveraging models?

In the following months, there will be greater clarity as authorities and banks move forward with the initiatives. Read my other blogs on UPI to keep track of what’s happening in the industry.

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