Lack of revenue model on UPI might push more fintechs towards Rupay credit card

Rupay credit cards offer an opportunity to monetise UPI payments

Fintechs in the unified payments interface (UPI) space are increasingly looking at Rupay credit cards to monetise the mobile payments platform.

On June 11, the finance ministry said in a clarification that there is no plan to charge a merchant discount rate (MDR) or payment commission charged to merchants on UPI transactions.

The ministry added that these rumours are false and misleading, while creating needless uncertainty.

The clarification dashed the hopes of payment fintechs in the UPI space that were hoping that the government would allow MDR for high-value payments or payments at large merchants.

The lack of a revenue model for UPI has been pushing several smaller fintechs to launch Rupay credit cards over the last year or so to monetise the payments revenue. All credit card payments have MDR, including Rupay.

Flurry of launches

Over the last month, travel fintech startup Scapia, money and banking app Jupiter and Flipkart’s UPI app super.money have launched Rupay credit cards. Another fintech, Slice, which has a small finance banking business, is planning to launch Rupay credit cards in the next couple of months.

Kiwi, Rio and Kredit.Pe also have their Rupay credit card platforms with partner banks.

“The finance ministry statement makes it even more important for fintechs to focus on promoting Rupay credit cards as it remains the only serious way of making money in the UPI ecosystem,” says a founder of one of the fintechs with a Rupay credit card.

Rupay credit cards can be linked to the customer's UPI account and can be used at merchant locations where UPI is accepted. While there are only a crore point of sale terminals in the country, there are more than 15 crore unique UPI merchants in the country. Other card networks, such as Visa and Mastercard, credit cards cannot be linked to customers’ UPI accounts.

Rupay credit cards have MDR, and this applies to UPI transactions that happen through the instruments. The MDR is divided among the card issuing banks, card networks and merchant acquiring banks.

The product blends the best of credit cards and UPI, offering customers a credit-free period of 40-50 days and reward points. Most of these fintechs offer around one to two percent cashback on all offline UPI purchases and around 5 percent cashback on online spends.

To be sure, other than Slice, these are co-branded credit cards issued and managed by the partner banks, where the fintechs help in marketing and sales, apart from consumer brand partnerships and managing rewards.

NPCI’s Rupay bet

The National Payments Corporation of India, which runs the domestic card network Rupay and UPI, has been marketing the network to increase its acceptability among potential credit card customers.

Through these fintechs, it is trying to gain market share among existing Visa and Mastercard users by selling a second or third credit card. It is also targeting young customers who mostly use debit purchases by using UPI to start using Rupay credit cards for those transactions.

"We have seen Rupay’s team take a far more active approach over the past year — their partnerships and marketing folks are regularly engaging with issuers, fintechs, and merchants. There is a sharper go-to-market effort now," said Mohit Bedi, co-founder of Kiwi.

Rupay has a fintech relationship team that actively courts them, along with a team that builds partnerships with banks as well. And this has taken Rupay’s market share to 16 percent of the overall credit card transactions in the country.

Over the last couple of years, Rupay has been a brand partner with the cricket tournament IPL to increase awareness among customers. It is believed to have spent around Rs 100 crore each year apart from other marketing expenses.

Global card networks such as Visa and Mastercard offer incentives to banks to be part of their network, while banks pay fees to be part of the network

Rupay also has a budget to offer discounts on merchant platforms such as ecommerce platforms, quick commerce sites and food delivery apps. These expenses are shared among NPCI, banks and the card fintechs.

Another attraction for fintechs and banks is the lower network cost that Rupay offers. A Visa or Mastercard network is thrice as expensive for banks to participate in. Even for the premium cards, Rupay is charging the ecosystem participants only half of what a typical Visa or Mastercard charges.

"In terms of network incentives, Rupay is fairly competitive today. While they may still lag in global acceptance, they are more than making up for it with local utility, lower cost, and strong ecosystem support,” Bedi of Kiwi added.

What really matters to banks is the net cost of transactions across networks, which means, network fee minus any incentives. On that front, Rupay is competitive and often the most cost-efficient choice for domestic use cases, according to Bedi.

UPI linkage is the key

With UPI bringing convenience and gaining popularity through its ubiquity, the ability to connect with UPI makes it successful.

“Being able to connect with UPI is the major reason for the Rupay credit cards' acceptance and growth. It still has a challenge when it comes to acceptance globally, like Visa or Mastercard, which will take several more years. So it can be a strong second credit card for most premium customers. For young people who use UPI more, getting rewards for such payments is an attractive proposition,” said a senior executive who has worked for Rupay.

Around 50 percent of all Rupay credit card transactions happen through UPI, according to sources working on Rupay network.

“For fintechs, these card payments happen through their apps, especially the scan and pay method, which brings the customers back to the app on a daily basis. This gives them an opportunity to cross-sell other financial services products. This is not the case when they issue a plastic card,” said a senior executive with a bank, which partners with some of these fintechs.

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 (person-to-person) to merchants.

UPI merchant transactions have grown almost fivefold 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.

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 11 crore active credit cards in India, per RBI (Reserve Bank of India) data.

Meanwhile, UPI is still mostly a debit platform. The share of Rupay credit card transactions through UPI constitutes only 0.4 percent of the overall UPI transactions.

Challenges remain

However, not everyone is ready to go all in on Rupay credit cards.

“The problem with going all in on Rupay is that it is susceptible to government interference. These things are always uncertain. You cannot build the fintech’s strategy around this,” said a founder of a fintech that works in UPI and card payments.

To be sure, there has not been any policy decisions on Rupay credit cards and is run as a commercial service without any government interference until now.

The international acceptance is still one of the major factors that pose a problem for Rupay to challenge the dominance of Visa and Mastercard.

Fintechs such as Niyo, Jupiter and Scapia offer zero markup cards to their customers, a clear indication that they target a young demographic that travels internationally. Hence, it becomes a challenge for them to go all in on Rupay.

For instance, Scapia’s Rupay card is a second card after Visa, targeting the same set of customers’ UPI spending. While Rupay has partnerships with Japan’s JCB and US firm Discover card networks for international payment terminals, it is still far away from being accepted around the world.

This is also one of the reasons Rupay is not considered the primary card by well-heeled customers. This shows in the credit card spending pattern as well. While the average transaction value of credit cards is around Rs 4,2oo in the country, it is only Rs 3,000 per transaction for Rupay.

But the NPCI’s marketing efforts and partnership with banks for premium cards are starting to yield results, with the brand slowly becoming acceptable to premium customers as well.

"Among younger, digital-first users, especially Gen Z, the old 'poor cousin' image of Rupay has faded. If a product is convenient and works seamlessly on UPI, brand baggage isn’t a big deal anymore,” says Bedi.

However, Rupay still needs to create awareness among customers about moving their debit UPI transactions to credit. They will also need to be aware that Rupay credit cards can be linked to their UPI accounts, say the fintechs working in the space..