Banks are enthused by the central bank’s move to allow credit cards to be linked with the Unified Payments Interface (UPI) but are waiting for clarity on the merchant discount rate (MDR).
MDR is the fee merchants pay in exchange for payment services provided by banks.
On June 8, RBI said credit cards will be allowed to be linked to UPI, which so far had entailed a customer’s bank account being directly debited for any transaction.
The implementation will begin with the linkage of RuPay cards followed by other card networks such as Visa and Mastercard.
“Fundamentally, we as a credit-card issuer would like to participate in the UPI ecosystem, which is extremely beneficial to the customer, merchant as well as the financial entities facilitating the financing,” Shailendra Singh, managing director and chief executive office at BoB Financial Solutions, told Moneycontrol on June 10.
BoB Financial is a subsidiary of Bank of Baroda with over 1 million outstanding credit cards and monthly spending of over Rs 1,000 crore in April.
“This further opens avenues for many innovative and user-friendly products including bundling of a BNPL-based UPI payment system riding on the credit-card infrastructure,” Singh said.
BNPL stands for ‘Buy Now, Pay Later.’
How it works
Customers holding RuPay credit cards will be allowed to link their cards directly to UPI, Singh said. The facility is not yet live.
“We have a substantial footprint on Rupay credit cards and expect a significant percentage of those customers to use their BoB Rupay credit cards to make payments using the UPI ecosystem,” he said.
When Visa and Mastercard credit cards are also allowed to be linked to UPI, once the commercial arrangements are in place, Singh expects their users to start availing of the facility.
UPI in numbers
UPI-based payment more than doubled to Rs 84.16 lakh crore in FY22 from Rs 41.04 lakh crore in FY21, according to domestic rating agency ICRA.
Permitting credit-card payments through UPI could lead to some of the upfront spendings from savings and current accounts shifting to credit cards, said Aashay Choksey, assistant vice president of financial sector ratings at ICRA.
That, in turn, can drive higher card utilization and increase in spending per card for banks that operate a higher share of RuPay cards, he said.
RuPay credit cards are still gaining market share so the overall credit outstanding against cards, which was Rs.1.5 lakh crore as of April 22, 2022, a year-on-year increase of 20%, is unlikely to grow materially in the near term unless other payment companies are allowed to link to UPI as well, he said.
Growing credit-card market
According to an August report by PricewaterhouseCoopers (PwC), credit card issuance has grown at a compound annual growth rate (CAGR) of 20 percent in the last four years.
The number of credit cardholders increased from 29 million in March 2017 to 62 million in March 2021.
Banks, followed by non-banking financial companies that are their subsidiaries, like SBI Cards and BoB Financial Solutions, are the largest issuers of credit cards in India.
On May 6, Moneycontrol reported that Canara Bank was in initial talks to set up a separate credit card subsidiary and that an announcement is likely in the two quarters.
Another major private-sector lender, Axis Bank, on March 30 announced the acquisition of Citibank’s India consumer business for $1.6 billion in an all-cash deal.
DBS Bank, a global lender which took over Lakshmi Vilas Bank in 2020, recently launched its first credit card in partnership with Bajaj Finance on June 7, Moneycontrol reported from an interview with bank MD Prashant Joshi on April 7.
And not just banks, but with the Reserve Bank of India allowing non-bank lenders to issue credit cards, the cards market is expected to heat up even more, experts said.
Moneycontrol on May 4 reported that Mahindra Finance was exploring the possibility of launching a credit card for its customers and employees. Even the Shriram Group is looking at issuing its own credit card.
Even so, bankers are awaiting more clarity on the MDR that will apply when a customer uses a credit card to make a UPI-linked transaction.
According to a norm that came into effect on January 1, 2020, UPI and RuPay debit cards attract zero-MDR, meaning no charges are applied to transactions using them.
This is one of the key reasons for the widespread adoption of UPI by merchants across the country.
Credit cards on the other hand attract the highest MDR of between 2 and 3 percent
“Since there is no MDR charged to merchants for UPI payments currently, there is an open question of how credit- card issuers cover their cost of capital,” said Deepti Sanghi, co-founder and chief executive officer of Kodo, a fintech startup focused on offering corporate credit cards, among other products and services.“If the underlying infrastructure enables charging MDR to merchants for UPI payments done via credit cards, then the volume and value of credit card transactions will increase significantly. However, if the card issuers have to charge the users for these payments to cover their cost of capital, then the volume increase may be lower,” Sanghi said.