The Unified Payment Interface (UPI) is all set to make the plastic in the payments process obsolete. Thanks to the seamless integration of UPI with digital payments and transfers, the use of debit cards has gone down and will only slide towards extinction in terms of utility.
Now, with the Reserve Bank of India (RBI) allowing for the linking of credit cards, starting with RuPay, with the UPI IDs, the scope for innovation within this payment ecosystem, not immediately, but in the next five to 10 years, has increased manifold, further pushing the government’s pursuit of financial inclusion.
Firstly, the linking of credit cards with UPI will have a direct bearing on the number and volume of transactions. UPI, on debit payments alone and contrary to the hopes and expectations of many, breached the Rs 10 trillion mark in May 2022, with the number of transactions inching towards 6 billion. However, even with a debit facility alone, there are reasons to be bullish on the UPI volumes, and the numbers could go as high as 50 billion per month in another four-five years. The credit card integration is only going to accelerate this push.
Two, there is now an opportunity for banks and other financial institutions to go big on digital credit cards. Already, some applications and platforms offer a pay later facility. In the United States, Apple, through an in-house subsidiary, will soon begin experimenting with a digital credit card for the services within its ecosystem.
Thus, for banks, this is an opportunity to eliminate the plastic from the process and go completely digital. The utility of a UPI ID in several applications also opens up the market for non-banking financial companies (NBFCs) to offer digital credit products in the future.
Three, it opens up a new market for microfinance products, targeted specifically towards first-time borrowers looking for small loans, as few as a few thousand rupees. With UPI integration, the financial institutions offering these services will be able to curate credit health for borrowers who have recently been inculcated into the formal financing frameworks, like Jan Dhan account holders who may have moved to savings accounts as they grew familiar with digital payments.
Four, beyond the credit health problem that hindered access to loans for most borrowers, the linking of credit cards and innovation around financial products can allow the government to deliberate on 'e-RUPI' credit vouchers that can be integrated into the UPI account of any holder, across any application. The government can perhaps begin piloting digital credit vouchers, linked with UPI IDs, that double up as credit cards. Similar credit vouchers can be curated around other services like ration, education, vaccination, MSME and Mudra loans, etc.
The ideal endgame for India’s pursuit of financial inclusion is to ensure personalised access to formal financing products. The building blocks have already been put in place in the last eight years, starting with Aadhaar, Jan Dhan accounts, the digital payments on mobile connected to the first two components, and most importantly, the account aggregator framework. Thus, a steady increase in the adoption of the account aggregator framework is expected, given financial institutions will seek elaborate information on first-time borrowers.
With the open network for digital commerce coming into play soon, having users choose from a wider option of payments, easing their access to credit and allowing financial institutions to create customised financial products that may offer a loan of as little as Rs 1,000 for a week to Rs 5,000 for a month, the marketplace for e-commerce will also receive a big boost, especially for the vendors. For many, credit challenges have always been a hindrance to business expansion, and with the new arrangement, a large part of the problem can be solved.
However, a few questions do remain. How will the merchant discount rate or MDR, a fee constituting less than 3 per cent of a credit card transaction, work? For the likes of Visa and Mastercard, the MDRs continue to be critical from a revenue perspective.
However, what if the ecosystem moves away from credit cards toward pay later schemes or small-ticketing loans where the amount can be credited to the borrowers? Credit cards are not going away, but what this arrangement enables is much bigger than the mere question of MDR. Nevertheless, the banks and other payment stakeholders must work through this.
There is also the worry of predatory lending to desperate first-time borrowers at high interest rates, as was the case during the 2008 financial crisis when everyone could access NINJA (no income, no jobs) loans. For the loan providers, this is an opportunity to garner data which they later sell to third parties or to enable harassment for the borrower. Awareness must always be the key to customer-friendly regulations for financial institutions willing to sign up to make credit offerings in the future.
The UPI framework is merely getting started, even at 6 billion transactions per month, even with only RuPay credit cards linked to the UPI IDs, but the potential for the entire ecosystem, with each block powering a specific purpose, is huge. It only gets bigger, better, and bolder from here.
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