How UPI-enabled Credit Payments Have the Potential To Catalyse Domestic Consumption

India, in recent years, has witnessed few of the most transformative years in the digital payments industry. Today, 40 per cent of payments in the country are digital, due to rapid expansion in digital infrastructure, UPI-led migration to digital, pandemic-led acceleration of shift in customer preferences, and a growing merchant acceptance network.

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Fintechs have also been imperative to agile, frugal inventions that have aided penetration to tier III-VI cities. Since its inception in 2016, UPI transactions through wallets and debit cards have been exponential. The massive compound growth rate is delineated by the fact that simply in the first quarter of 2022, 9.36 billion transactions amounting to 10.25 trillion rupees were processed through various payment modes, with almost 20 per cent of the population (26 crore) using it. With the advent of 5G and better internet connection, India is well poised to grow from a $3 trillion to a $10 trillion digital economy.

Its success can be attributed to its homegrown, one-of-a-kind interoperable mechanism that has made P2P and P2M transactions extremely easy and ubiquitous among the Indian population, which was previously averse to cashless payments. Digital payment platforms have dominated the market, as NPCI has extended the deadline for the adherence to the 30 per cent cap on market share. However, large-ticket credit still remained elusive of the UPI juggernaut, not having penetrated down the pyramid. The credit to GDP ratio is in the 50s whereas countries such as the US have a ratio of 216 per cent. China is at 182 per cent. Even as credit card spends are at an all-time high of INR 1.16 trillion in July 2022, it is still restricted to the urban sphere.

The RBI recently announcing the linkage of RuPay credit cards to UPI is a step towards increasing the ambit of payment choices and introducing credit to the underbanked sections of society. At present, large merchants accepting credit cards such as Visa and MasterCard are agnostic about cash burial as large payments above INR 5,000 still used credit cards which are done through POS terminals. Today, POS terminals are embedded with supply chain accounts, inventory management and customer relationship management, allowing them to manage their activities and payments on a single platform. However, even as POS terminals allow users to set a tapping limit, disruption is possible only by allowing the financially underserved regions to make small ticket payments on credit through bank issued credit cards. Digital credit will allow smaller merchants, who cannot afford POS terminals, but have QR codes onto the digital sphere and widen the credit scope of the economy.

Currently, the pilot is going live with few banks. UPI’s phenomenal success is due to its convenience and the fact that there is no MDR on debit and wallet transactions. However, considering the risk associated with credit, zero MDR for credit cards currently seems unlikely. This poses a huge challenge to credit acceptance, especially from a merchant’s point of view. If a charge is levied, a merchant may not be aware of the kind of card used by the consumer – if it is a credit or debit card, and may later be charged without their knowledge. This may lead to merchants not offering the credit option for UPI due to the monetary loss.

Payment bodies are debating how to manoeuvre this challenge. In my opinion, the original UPI strategy should be applied here as well to incentivise merchants and its implementation. In its initial phase, MDR should be free and subsided by the government until the acceptance is widespread, and later monetised through a possible lump sum or the cost can be shared by the consumers. Additionally, MDR can be waived off for small-ticket transactions, for instance under INR 5,000. Banks, alternatively, are suggesting a nominal interchange fee, rather than MDR. If this initiative is successful, considering the fact that other credit card companies such as Visa and MasterCard charge a higher fee per transaction—typically about 2-3 per cent—it is likely that customers merchants will opt for RuPay for credit card-linked UPI transactions and catalyse domestic growth within the country. Furthermore, RuPay’s success is likely to compel international credit companies to offer the same service eventually to maintain their presence. This will boost the array of options, along with UPI’s credit penetration within the country.

The RuPay-UPI credit link holds a lot of potential and if it is successful, the payments ecosystem can benefit tremendously. Furthermore, this will enable merchants to build credit histories and reduce customer acquisition costs by gaining access to users over a single platform. Making credit more accessible and convenient at the grassroots is pivotal for fuelling economic growth as it will also increase purchasing parity and drive consumption further.