Over the past four to five months, Rupay credit card transactions on UPI (Unified Payments Interface) have found favour with customers, as it brings credit card offers and rewards to the fast, convenient, and ubiquitous UPI, along with interest-free credit for 45-50 days. Currently, only Rupay credit cards can be linked with UPI.
From around Rs 50-60 crore every day in the month of May, the transaction value of Rupay on UPI has gone up to Rs 100 crore daily in October, often touching Rs 150-200 crore per day on weekends, according to sources aware of the developments.
From less than 10 percent a few months ago, Rupay’s share of new credit card issuances has grown to 25 percent, which is roughly four lakhs every month, says the National Payments Corporation of India (NPCI), which runs Rupay and UPI.
This has stirred the hornet’s nest, with around 15-20 percent of merchants, both small and big, requesting their banks to disable payments using Rupay credit card on UPI, according to multiple merchant-acquiring banks and UPI apps. There are an estimated 70 million merchants using the UPI platform.
This is owing to the higher commission, or merchant discount rate (MDR), which merchants have to pay their banks for UPI payments made using Rupay credit cards.
On a typical credit card, a merchant typically pays around 2 percent MDR, or Rs 20 on a Rs 1,000 transaction. Of this, 1.5 percent, or Rs 15, which is called the interchange, goes to the card-issuing bank, and 0.5 percent goes to the merchant acquiring-bank and card networks.
According to a couple of banks and UPI apps, sports goods retailer Decathlon, train ticket booking platform IRCTC, food retailer Pizza Hut, ecommerce app Jiomart, logistics firm Delhivery, and dairy behemoth Mother Dairy, are among those who do not accept Rupay credit card payments through UPI.
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This, despite the fact that the NPCI had issued guidelines saying that any merchant accepting credit card payments through a point of sale (POS) terminal should also accept payments via Rupay on UPI, through the scan and pay method. The guideline is issued considering that such POS merchants are willing to pay or already paying MDR on card transactions.
Rupay credit cards on UPI is an important project for the regulator, policy makers, and NPCI, to take market share from international networks such as Visa, Mastercard, and American Express, which dominate card payments in the country. While Rupay dominates the debit card market, it has only around 10 percent share of the overall credit card market, which has higher MDR, and hence it is more important for NPCI to crack it.
Emails sent to NPCI, HDFC Bank, ICICI Bank, Axis Bank, Pizza Hut, Jiomart, IRCTC and Mother Dairy have not elicited any response. Delhivery and Decathlon could not be reached for comments.
Fear factor
“The direction has been issued because having a POS terminal means that they have no qualms in accepting cards and paying MDR. However, MDR on Rupay credit cards on UPI is higher than regular credit cards. While the official rate could be high, most big merchants negotiate a better rate owing to the higher account balances and their deeper partnerships with banks,” says Mohit Bedi, co-founder and chief business officer (CBO) of Kiwi, an app that issues customers a virtual Rupay credit card for UPI transactions.
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Usually, credit cards have 1.8-2 percent MDR, but most large merchants negotiate rates that are much lower, at around 1 percent, due to high volumes. This is the same for all card networks, whether it is Visa, Mastercard, or Rupay, as long as the sale happens through a POS terminal or online.
Banks acquire merchants and offer a lower MDR, as they benefit not just by facilitating payments, but also by acquiring the merchant’s current account and overdraft facility, fixed deposits, salary accounts of the merchant’s employees, etc.
In the case of Rupay credit card payments on UPI, the merchant is often acquired by UPI companies such as PhonePe, Paytm, and Google Pay, the three largest players in the ecosystem with more than 90 percent market share.
“According to banks, incase of QR, these UPI apps acquire merchants, they get the benefits such as branding, payment volumes or x-sell benefits. In that case, ideally they should pass on the lower MDR to these merchants considering overall relationship value. The UPI players are however not ready to do it and maybe, can't afford to do either,” says Bedi of Kiwi, which has around 1.5-2 percent market share in Rupay credit card on UPI transactions.
For Rupay credit cards, the MDR is higher on UPI because there are other fee components for banks, such as UPI interchange, NPCI commission, and PSP charges, on top of the regular credit card MDR charges. PSP (payment service provider) charges are what a PSP like Paytm, PhonePe, etc., levy for processing the payment.
“We’re expecting merchants to support Rupay on UPI as it deepens the wallet of consumers, who can then avail of credit for purchases made via UPI,” says Colin D'souza, head of banking business at neobanking firm Jupiter, which recently allowed Rupay credit cards to be linked to UPI on their platform.
Due to a government mandate, there is no MDR on regular UPI payments, and this has helped the digital payments platform find huge acceptance among merchants. But this has hurt the banks that facilitate billions of these transactions.
“There is a fear among banks that in order to avoid confusion and promote the usage of credit cards on UPI, the government could ask banks to lower the MDR on Rupay credit cards while making payments through UPI. This could upend the whole credit card business model,” says the head of digital payments at a private sector bank.
Counter-intuitive move by banks
Customer demand for credit card payments through UPI has forced banks to offer the same via virtual Rupay credit cards issued to the bank’s existing credit card holders, which makes issuance much quicker.
The bigger reason behind this move is that the fear of lower or zero MDR has spooked some banks, and there has been a mad scramble among the large credit card-issuing banks to distribute more Rupay credit cards, which can be enabled for UPI transactions.
How does this help them? 60-70 percent of the MDR is cornered by the card issuing bank as interchange fees, as they take the credit risk while providing interest-free capital for 45-50 days.
If the merchants refuse to pay any MDR, the card issuing bank or app will still get interchange, which the merchant-acquiring bank will be forced to pay. Yes Bank and Axis Bank are the largest merchant-acquiring banks in the UPI ecosystem, and this could create problems for these banks.
“So every bank wants to be the largest issuer of Rupay credit cards, which will safeguard their interchange fees. It is quite an alarming situation and if not addressed soon will create an imbalance in the credit card ecosystem,” says the head of credit card business at a private sector bank.
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According to the digital head quoted earlier, the issue has to be addressed soon by an NPCI circular, or there will be skirmishes between the large issuing banks and large merchant-acquiring UPI apps and banks. “If there is a lower or zero MDR on Rupay credit card payments through UPI, then there should be no interchange either,” the person adds.
“If there is no interchange for credit card payments, there will not be a credit card business. Our hope is it will not come to this,” says the head of credit card business at a private sector bank.
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