The Rise of UPI: A New Challenger to Credit Cards?
Currently, there exist three distinct methods to perform UPI payments.
Option 1:
The first approach involves linking your bank account to a UPI application, scanning a QR code, and entering your PIN. The amount is immediately debited from your account, and this process incurs no charges. Both you and the shopkeeper can enjoy the convenience of this free method, which plays a significant role in boosting UPI payments.
Option 2:
The second option involves loading up a prepaid wallet such as Paytm or Amazon and using it to scan a QR code for making payments. However, if the payment amount exceeds ₹2,000 at a store, a 1.1% charge is applicable to the transaction, which the storeowner may have to bear. As a result, this method may not be the most appealing option for them.
Option 3:
The third approach entails linking a Rupay credit card from select banks to your UPI account and paying on credit without having to carry the card. Typically, merchants have to pay a fee to the bank when customers swipe their cards at stores. However, Rupay, being a 'Made in India' product that competes with Visa and Mastercard, is granted some leniency. Therefore, no fees apply to transactions below ₹2,000.
All three methods contribute to the UPI phenomenon of 36 crore transactions each day, which continues to grow. In February 2021, UPI represented just 11% of all types of retail payments, but by February 2023, this figure rose to 22%. Recently, in value terms, it reached a record high of ₹14 lakh crores. Given its features and goodwill, the RBI is constantly exploring ways to further revolutionize UPI.
Option 4:
The introduction of Method 4, a direct credit line on UPI, could boost financial inclusion and improve the quality of life for many people who don't have access to credit cards. By creating a pre-sanctioned loan limit for individuals, banks can tap into the UPI network and open up small credit lines, which could spur consumption and help people recover from financial setbacks. However, there is a dark side to this kind of credit, as people could get lured by easy access to credit and fall into the trap of borrowing, ending up going to money lenders who don't care about their financial well-being.
This isn't the first time credit has been linked to UPI, as customers could get an overdraft account from their bank and link it to the UPI in 2018, but the plan failed due to charges involved, and merchants weren't happy with it. It remains to be seen if UPI's popularity now will make shopkeepers more amenable to charges this time around.
It's unclear if the introduction of UPI-linked credit will mean the slow death of credit cards. The average ticket size for a credit card transaction is over ₹4,500, and people typically have a high credit limit and can afford to swipe the card for high-value purchases. Also, high spenders love the rewards and features that come with a credit card, which credit card companies can afford to give for 'free' because they make money from merchants when someone swipes a card. If UPI-linked credit is chargeable, it's hard to imagine banks affording fancy reward points in this segment. We'll have to wait for a detailed circular from the RBI to see how this shapes up and whether the partnership between UPI and credit will be revolutionary.