Linking RuPay credit cards with UPI a game-changer, but pain points remain

Come September, and millions will be able to buy whatever they’ve set their hearts on and pay through RuPay credit cards linked to the Unified Payments Interface (UPI).

The merchant discount rate (MDR) has been set at 2 per cent of the transaction size, of which 1.5 per cent will go as interchange towards the card-issuing bank, with the rest (50 basis points) being shared as fees with RuPay and the acquiring entities — be it banks, or non-banks like Mswipe Technologies and Paytm.

It will lead to exponential growth in RuPay credit-card issuances, but a raft of issues may need to be seen afresh, given the inter-linkages.

Will smaller merchants agree to cough up the MDR? After all, the UPI is a toll-free highway. The huge spurt in UPI transactions masks the fact that a good percentage of them is declined, as the system can’t take the load. A related issue is what happens to buy-now-pay-later (BNPL) firms.

Then there’s the elephant in the room: should there be zero-MDR on RuPay debit-card  transactions with a ticket-size of up to Rs 2,000? And should UPI transactions continue to be free for all time to come?

In the situation room

The July 2022 issue of the Reserve Bank of India’s (RBI’s) monthly Bulletin says there were 76 million credit cards in circulation in May, compared with 923 million debit cards. These numbers are to be juxtaposed against the nearly 570-million customers with credit-bureau histories. A shade over half of the credit cards resides in the wallets of a sub-segment of cardholders. Clearly, even the most aggressive retail banks are carpet-bombing a small pool of customers.

A breakdown of the 76 million credit cards by payment network is not available in the public domain, but senior officials in the business say Visa’s share is nearly 70 per cent, with MasterCard accounting for the bulk of the rest. Rupay credit cards are estimated at around one million.

Top sources in the payments’ networks refer to a strategic aspect as well. After the Ukraine conflict began, Russia was unplugged from the global payments system: no Visa, MasterCard, or SWIFT (for wholesale payments). 

China has its UnionPay (which has overtaken both Visa and MasterCard in transactions, though only a small part of it is outside the Middle Kingdom), and is accepted globally. So, why can’t RuPay become another UnionPay? Outside India, RuPay has a partnership with Discover.

Says Ketan Patel, chief exe­cutive officer of Mswipe: “De­ployments of PoS (point-of-sale) machines have been growing 5-7 per cent annually and will co­n­tinue to do so at a similar pace, as there is consistent growth in credit-card issuances.” 

As for acceptance, there are over 6 million PoS terminals deployed currently; and a Boston Consulting Group (BCG)-PhonePe report notes that the share of digital traffic through PoS is only 5 per cent — 63 per cent is on UPI, with prepaid and internet banking at 9 per cent each.

But by FY26, transactions at PoS are seen at 8 per cent of digital volumes, even as UPI inches up to 73 per cent, with prepaid and internet banking falling to 8 per cent each. That said, a lot hinges on the way banks on the RuPay network tackle merchant on-boarding challenges.

Will merchants agree to an MDR of 2 per cent on RuPay-UPI credit cards?

“It could be that the smaller merchants may discourage the use of UPI credit cards because of the MDR. But the gain to be had is a huge fillip for credit cards,” says Saurabh Tripathi, senior partner at BCG.

The bet is that nearly 55 per cent of all credit-card transactions happen online and these platforms can afford to shell out the MDR. The bulk of the rest happens in-store, of which only about 5 per cent is through outlets with annual revenues of up to Rs 2 million.

Rethink on RuPay debit card MDR?

This leads to two issues that may not at first appear to be related, but in fact are. The first is the decision (announced in the Union Budget of July 2019) to go in for zero MDR on RuPay-UPI debit cards on transactions of up to Rs 2,000; and two, should UPI transactions continue to be free?

Zero MDR on RuPay debit cards was part of the government’s move to lower the cost of acceptance for merchants. “The question is: how do you increase the number of acceptance outlets? There are 40 million merchants and only 6 million PoS terminals. It would have been much higher had the MDR issue on UPI debit cards been seen differently,” says Loney Antony, vice-chairman, Hitachi Payment Services.

Without MDR income, the business of PoS providers and payment service providers (PSPs) came under pressure. While the government proposed that RBI and banks are to absorb the MDR cost — and there are several ways for banks to recover such costs — there is no other income for the PSPs to recover these costs. 

Neither the Nandan Nilekani Report (2019) nor the Watal Committee (2016) envisioned zero MDR, but said it should be determined by market forces. 

“It would be better to give an MDR exemption on RuPay debit cards to all merchants with turnover of up to Rs 2 million (out of the GST), rather than on ticket-sizes of up to Rs 2,000 at all outlets. This will give relief to smaller merchants, but at larger outlets, you have to pay the MDR even if it is up to Rs 2,000,” says Naveen Surya, chairman emeritus, Payments Council of India; and chairman, Fintech Convergence Council.

The essence of what Surya points out is that it’s one thing to say smaller merchants should not bear the burden of MDR on transactions of up to Rs 2,000, but this should not hold true for the same expense at a larger outlet. This distorts the “positive discrimination” sought be achieved in the first place, because the government picks up the tab for the larger merchants — who can afford to pay the MDR. 

Last December the Union Cabinet approved a Rs 1,300-crore package as compensation to banks for the zero-MDR regime and to give a fillip to digital payments. The zero-MDR cost is now being borne by taxpayers for the MDR foregone when you place orders of up to Rs 2,000 on Amazon, Flipkart, or a Swiggy (the latter two are funded by private equity capital). Surely, this was not the idea in the first place.

And, then you have the issue of free UPI. Banks pay a switching fee to the National Payments Corporation of India — a not-for-profit entity — running into hundreds of cro­res every year for UPI, but have to offer the service for free, be it for peer-to-peer or peer-to-merchant transactions. 

“I don’t think the industry will win the argument yet that MDR should be bought back on RuPay debit cards, as banks also gain by way of higher balances in accounts and massive digital adoption by customers and merchants. This is better than customers withdrawing money from ATMs,” explains Tripathi.

It could well be argued that had UPI been profitable for banks, they may have been able to settle for a lower MDR on RuPay  credit cards. And RuPay could have taken the fight to Visa and MasterCard in a bigger way!