Fintechs see Rupay UPI credit card as the next growth engine

Rupay credit card on UPI

A couple of years back, a new opportunity emerged for fintech startups: Rupay credit cards that can be linked to the unified payments interface (UPI), which has become a popular payment method.

Last year, multiple fintechs such as Rio, super.money, Kredit.Pe, and Jupiter launched apps that enable Rupay credit cards to be linked to UPI. Kiwi was the first fintech that focussed on building a platform where virtual Rupay credit cards can be linked to UPI for merchant payments.

Rupay credit cards are issued by banks and these fintechs act as their enablers as well as their  marketing, rewards, and loyalty management platforms. The apps also partner with key large merchants to offer cashbacks to consumers.

“While the product is two years old, several fintechs have realised only now that this could be a profitable model to build a UPI payments business. Now companies are finding a good product-market fit with curated merchants and offers for customers,” said Mohit Bedi, Co-Founder, Kiwi, which has raised close to $20 million in funding. The platform facilitates transactions worth around Rs 300 crore monthly.

The product blends the best of credit cards and UPI, offering customers a credit-free period of 40-50 days and reward points, along with the ease of use of and acceptance of UPI among a large segment of merchants. While there are only 9o lakh businesses that accept cards, there are an estimated 32 crore UPI merchants.

This has helped Rupay increase its credit card market share to 14 percent compared to just 5-6 percent a year ago. The National Payments Corporation of India (NPCI) operates both the Rupay card network and UPI.

Debit to credit

Most of these are virtual cards which customers prefer as they can be used to simply scan and pay at small merchants, where the ticket size is much smaller. Customers still tend to use a regular credit card at point-of-sale (POS) terminals.

“Small ticket merchant payments are mostly debit payments currently. We are looking to convert such payments into credit transactions. Since this is a secured credit card,  customers do not require a credit history, making it accessible to everyone,” said Prashant Kumar, Founder, Kredit.Pe.

A secured credit card is one where the issuing bank takes a fixed deposit from the customer and issues a card with a limit around the FD value. So, even in case of a default, the bank does not lose the principal.

The Flipkart group’s credit platform and UPI payments app super.money is also following the secured credit model, as this allows the company to go after a large segment without worrying about the credit score or credit worthiness. These cards start with a low credit limit of around Rs 10,000, which goes up as the customers pay on time.

This has even caused large lenders such as HDFC Bank to launch their own virtual Pixel brand Rupay credit cards that can be linked to UPI.

Since UPI rather than cards are used for daily, small-ticket  merchant payments, the engagement also tends to be higher among UPI users. For a regular credit card, around 60 percent of all transactions happen online; with UPI cards, 70-80 percent of the transactions happen offline.

The companies make 8-10 basis points (bps) on a transaction, apart from affiliate income on brand partnerships and revenue share from card-issuing banks on card distribution.

Rapid growth of merchant payments through UPI

While P2P (person-to-person) payments drove UPI growth during the first five years, in the last three years growth has been driven by merchant payments. Similarly, while convenience drove the first wave of UPI growth, the next wave is likely to be driven by credit, say the founders betting on the space.

Merchant payments constitute around 63 percent of the overall UPI payments now, while it was only 40 percent in January 2022, indicating the shift in usage from P2P to merchants.

UPI merchant transactions have grown almost five-fold in less than three years, indicating the importance of the real-time, mobile-based system in the country's commercial payments space, according to data available on the NPCI website.

Rise of Rupay

While RuPay is the most successful debit card platform with more than 80 percent market share in terms of cards issued, it trails Visa and Mastercard in credit cards, where the spending is much higher. However, with the linking of RuPay credit cards with UPI, the platform has now cornered 25 percent market share in new credit cards issued in the country. There are around 10.8 crore active credit cards in India, per RBI (Reserve Bank of India) data.

The cumulative monthly transaction value of RuPay is around Rs 14,000 crore through UPI, while the overall spending on the credit card network in a month is around Rs 1.8 lakh crore, which translates into 7.5 percent market share in terms of value.

Rupay's overall spending, including at PoS terminals (swipe as well as tap-and-pay), is estimated to be around Rs 26,000 crore, which is close to 14 percent market share.

More than half of all RuPay credit card transactions happen through UPI. A year ago, RuPay was doing around Rs 10,000 crore  worth of transactions in a month, 50 percent of which was through UPI.

RuPay credit card spends are growing 5 percent monthly, reaching an average of Rs 40,000 per user, according to data available with Kiwi. However, the average transaction value is Rs 1,100, much lower than Visa and Mastercard, where the average transaction value is around Rs 4,000. This is largely because the cards are still mostly used for small-value daily payments, which the customers earlier used to pay with UPI.

UPI credit card as an entry point

Over the past couple of years, cashbacks have dwindled dramatically on the top three UPI platforms such as PhonePe, Google Pay, and Paytm, and this provides an entry point for smaller companies trying to acquire customers through cashbacks.

For all the companies acquiring customers through UPI, the idea is to sell other products such as  personal loan,  gold, investments, insurance, etc., to a smaller segment of the population, but with a larger propensity to spend or a higher disposable income, unlike the vast majority of the UPI users of PhonePe and Google Pay.

super.money CEO Prakash Sikaria said the company is only targeting around 20 million users and UPI will help it re-imagine the financial services products and services portfolio.

“Customers are paying for insurance, mutual funds, IPOs, loans, and credit cards through UPI. Every banking or payment product has been reimagined with UPI at the centre. India will have what I call UPI banks. We imagine ourselves to be one,” he told Moneycontrol recently.

So does Rio.

“UPI is only a strong starting point. The daily engagement provides us with a better opportunity than banks to start selling financial products. The idea is to be present where we have visibility of the customer's spending,” says Riya Bhattacharya, Founder of Rio.