Will UPI on credit cards take off?

Every day, more than 26 crore digital payment transactions are processed by India’s payments systems, two-thirds of which are processed just by the Unified Payments Interface, or UPI.

With more than 26 crore unique users and five-crore merchants on board the UPI platform, payments through this method have become ubiquitous. 

In the first quarter of 2022, 9.36 billion transactions amounting to 10.25 trillion rupees were processed through payment modes like debit and credit cards, PPIs like mobile wallets and prepaid cards and UPI person to merchant or P2M.

UPI P2M transactions emerged as the most preferred payment mode among consumers with a market share of 64% in volume and 50% in terms of value, according to a Worldline report.

UPI transactions have been growing by leaps and bounds at the cost of other retail payments, especially card transactions. 

One of the key reasons for UPI’s popularity is the zero Merchant Discount Rate or MDR.

MDR is a fee calculated as a percentage of the transaction that is paid by merchants to banks for processing payments. RuPay debit cards too attract no MDR whereas the fee on other debit cards is 0.4% to 0.9%.

However, there is no cap on MDR for credit cards, which ranges from 2-3% of the transaction value. RuPay credit cards typically have lower MDR than Mastercard or Visa credit cards. 

Merchants prefer UPI so they can avoid high MDR on credit cards as well as monthly rentals for Point of Sale terminals. 

UPI currently facilitates transactions by linking savings or current accounts through debit cards of users. The RBI last month allowed the linking of credit cards to UPI, with the facility being initially made available for cards issued on the homegrown RuPay network. 

Business Standard on Monday reported that NPCI and banks have come to a consensus on the MDR for credit-card transactions on the RuPay-UPI, which has been a sticking point. 

They agreed to an MDR of 2%. Of this 1.5% will go to the issuing bank, with the rest being shared with RuPay and the acquiring entity.

At smaller outlets, with annual turnover of up to Rs 20 lakh, these transactions will be free with a ticket size of up to Rs 5,000 and no limits on the number of daily transactions. RuPay’s operator NPCI will reportedly seek RBI’s approval for the scheme. 

Will the MDR come in the way of merchant adoption for UPI transactions on Rupay credit cards?  

Bhaskar Chatterjee, VP, Product Management, Ezetap says MDR helps issuing banks cover credit risks. Merchants with PoS machine won’t mind new mechanism and adoption will happen once merchants see value in it. 

Sagar Agarvwal, Co-Founder and Managing Partner, Beams Fintech Fund says, credit card payments on UPI will lead to faster adoption by consumers. Merchants will be receptive with more customer demand. Adopting QR for credit card UPI simpler for non-PoS merchants, he said.

While five crore merchants have been onboarded on the UPI platform, India has just over 60 lakh PoS terminals in use. Merchants with PoS machines can be easily signed on to credit card UPI payments. Expanding adoption to smaller merchants will require protecting them from MDR. They will also wait to see how consumers are accepting the new mechanism and the reception at larger merchants. 

In the first phase, lower penetration of RuPay credit cards may also come in the way of adoption. Of the more than 7.3 crore credit cards in circulation, RuPay cards are estimated at just around one million. Even so, credit card payments through UPI has the potential to reshape the credit card issuance and usage landscape in India.