Linking Credit Card to UPI: Impact on the Credit Card Industry
Published by Sharekhan Education | June 17, 2022
Linking Credit Card to UPI: Impact on the Credit Card Industry
Amit Pathak|Sharekhan Education
The Reserve Bank of India has proposed to allow the linking of credit cards to UPI, starting with Rupay cards. Visa and Mastercard (90% of credit cards in India) are also expected to be integrated in the future. This will improve the reach of digital payments in India. It will increase the payment options for the consumer. It will allow them to enjoy 30 days of interest-free credit versus an immediate debit from their bank account balance when paying via their existing UPI setup. This will reduce the need to carry physical credit cards.
Benefits of Linking:
The Unified Payments Interface (UPI) platform now has more than 26 crores of unique users and 5 crores of companies. The advantage of UPI is its widespread acceptability across the country, as retailers can accept payments using only a registered QR code or mobile number. It is difficult to install PoS infrastructure in cities from level III to level IV, but you will find QR codes everywhere. This integration will greatly improve credit card acceptance networks (both virtual and physical) given UPI-QR code penetration (50%) versus PoS device penetration (<5%) among merchants.
Growth Prospects:
UPI accounted for more than 60% of all non-cash transactions in FY22. It boosted India’s transition to non-cash payments and became the most inclusive payment method in India. For every 5% of the incremental volume of credit card transactions due to the UPI integration, annual credit card volumes are projected to increase by $ 38 billion. It is expected that credit card transaction volumes in India would grow by 22% CAGR over fiscal year 22-26E. The integration can greatly increase the average ticket size of the UPI transaction. Currently, the average ticket size of a UPI transaction is ₹ 1,600 per transaction, while that of a credit card is around ₹ 4,000. So now with this development, the UPI ticket size is likely to jump to around ₹ 3,000 – ₹ 4,000. The best part of UPI is that it can be extended to different forms of credit. For example, a low-value UPI credit line, a B2B credit, a working capital credit, etc.
One of the main reasons for the accelerated UPI adoption has been the zeroing of Merchant Discount Rates (MDR) for merchants.
Merchants like to accept UPI payments because there are no fees. Credit card issuers earn a 2-3% MDR on PoS transactions. There is a high probability that the MDR on credit cards through UPI will be capped at a lower rate to encourage adoption, especially for smaller ticket-size transactions.
SBI Cards:
We expect SBI cards to benefit from this credit card integration with UPI. Cross-selling credit cards to SBI bank customers would provide a long-term opportunity for SBI cards. SBI Cards is the second-largest credit card issuer in India, with a 19% share in credit card spending. It can leverage SBI’s YONO app, which can make a significant difference in its ability to penetrate SBI’s customer base.
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