Credit Card ? UPI linkup

Credit Card – UPI linkup

News: The Reserve Bank of India (RBI) has proposed to allow linking of credit cards with the Unified Payments Interface (UPI) platform.

About Credit Card and UPI:
• A credit card is a financial instrument issued by banks with a pre-set credit limit, help make cashless transactions. It enables cardholders to pay a merchant for goods and services based on her accrued debt.
• On the other hand, UPI is an advanced version of Immediate Payment Service (IMPS). UPI is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing and merchant’s payments into one hood.

Importance of the move:
• It will deepen the reach and usage of credit cards. It is anticipated that credit card usage will be zooming up in India given UPI’s widespread adoption.
• The arrangement is expected to provide an additional avenue for payment to customers and hence enhance convenience.
• It is expected to bolster transactions and acceptance at more merchant sites. People who generally prefer to pay by credit card so as to avail of a longer pay-back period or loans on credit-card outstanding, or who do not wish to touch their savings at the moment of purchase, can pay using credit cards via UPI.
• The move will provide a significant boost to overall spending via credit cards — currently, spending through the use of credit cards is more than double the average spend via debit cards. More spending is generally a force multiplier for the economy.
• Besides accelerating digital transactions this measure is also expected to affect the average ticket size of financial transactions. Currently the average ticket size per transaction is Rs 1,600 while it is Rs 4,000 in credit cards. So, with the new development the UPI transaction ticket size is likely to go up to somewhere around Rs 3,000 to Rs 4,000, analysts claim.

What are the possible challenges?
• It is not clear how the Merchant Discount Rate (MDR) will be applied to UPI transactions done through credit cards. The MDR is a fee that a merchant is charged by their issuing bank for accepting payments from their customers via credit and debit cards.
• According to a norm that has been in effect since January 2020, UPI and RuPay attract zero-MDR, meaning that no charges are applied to these transactions.
• Applicability of zero-MDR on UPI could also be a reason why other card networks such as Visa and Mastercard may not have been on boarded to UPI for credit cards yet.