RBI Monetary Policy | Credit cards can now be linked to your UPI, starting with RuPay

"UPI facilitates transactions by linking savings or current accounts through users' debit cards. It is now proposed to allow linking of credit cards on the UPI platform to begin with the RuPay credit cards will be linked to UPI," he said.

"This will provide additional convenience to the users and enhance the scope of digital payments," the governor said.

It is still not clear how the Merchant Discount Rate (MDR) will be applied for UPI transactions done using credit cards. For each transaction, the merchant pays a certain percentage of the transaction amount which is then divided among the banks and payment service providers.

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 these transactions. 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 between two and three percent. Clarity will be needed on whether MDR will have to be let go for transactions done using credit cards linked to UPI.

Further, credit cards also attract higher security measures including two-factor authentication, which may be difficult to implement for UPI transactions.

On the MDR and other fee structures of linking credit cards with UPI, RBI Deputy Governor T Rabi Sankar clarified in an address to the press post the policy announcement, "Thinking of the pricing structure will be jumping the gun."

"The basic objective of linking credit cards to UPI is to provide a customer a wider choice of payments. How the pricing of that will work out we will have to see because that is something that the banks and other entities will have to do. At this point we will just introduce the arrangement," he added.

RuPay, the card network by the National Payments Corporation of India (NPCI), managed to capture a 60 percent share of India’s card market in 2020, as per data released by the RBI. However this is led by debit cards, while in the credit card space Visa and Mastercard continue to lead.

According to a recent report by UPI leader PhonePe and the BGC, digital merchant payments will see 7x growth in the next five years from $0.3-0.4 trillion currently to $2.5- 2.7 trillion by 2026.

UPI made up 60 percent of overall retail digital payments in India in FY22, a year in which the payments system breached the $1-trillion mark in transaction values, a watershed moment.

The move to allow customers to link their credit cards to UPI accounts, comes at a time when UPI adoption has increased drastically over the last two years. In his statement, Das said that UPI currently has 26 crore unique users and 5 crore merchants on its platform.

In May 2022, 594.63 crore transactions amounting to Rs 10.40 lakh crore were processed through UPI, up from 558 crore in April, Moneycontrol had reported. Transaction values crossed the Rs 10 lakh crore mark for the first time in the month.

NPCI, the umbrella entity that handles UPI, RuPay, Bharat Bill Pay, among others, is aiming for UPI transactions worth $1 billion a day over the next two or three years.

NPCI has two key tasks—enabling UPI on feature phones and in offline mode for smartphones. UPI 123Pay for feature phones is being tested, while NPCI has issued a circular on how UPI Lite will work in offline mode.

NPCI was also known to be working on a product that would allow customers to use credit lines through UPI, however the product was never launched.

UPI transactions are dominated by three key players enjoying a majority share of the market—PhonePe, Google Pay and Paytm Payments Bank.

PhonePe has a market share of 47 percent in monthly transactions, while Google Pay and Paytm Payments Bank have a share of around 35 and 15 percent, respectively.

(With inputs from Nikhil Patwardhan)