All roads lead to UPI

The Story

There are 3 ways in which you can make UPI payments today.

Method 1: You link your bank account to a UPI app and scan a QR code. Enter your pin and the money gets debited from your account immediately. Everything about this is free. You don’t have to pay anything for the convenience. Neither does the shopkeeper. And being ‘free’ really gave a fillip to UPI payments.

Method 2: You load up a prepaid wallet such as Paytm or Amazon. And use that to scan a QR code when you wish to make a payment. Straightforward. But, the new rules say that if you make a payment of more than ₹2,000 in a store, there’s going to be a 1.1% charge attached to this transaction. It’s something that the storeowner will probably have to bear. So it’s not a really appealing choice to them.

Method 3: If you have a Rupay Credit card from certain banks, you can simply link that to your UPI and pay on credit. You can leave the card safely back at home in a drawer. Now typically, when you swipe a card at a store, the merchant has to pay a fee to the bank. But since Rupay is a ‘Made in India’ product that competes against Visa and Mastercard, it got some leeway. So if the transaction value is less than ₹2,000, there wouldn’t be any fees either.

Put all this together and you get the UPI phenomenon of 36 crore transactions each day. It’s getting bigger and bigger every time NPCI puts out the numbers. In February 2021, UPI had just an 11% share in all kinds of retail payments. But by February 2023, it commanded 22%. And just last month, it hit a record high ₹14 lakh crores in value terms.

So you can see why the RBI is constantly thinking of ways to revolutionize it even further. Capitalise on its features and goodwill.

And on Thursday, they made a massive announcement. They want to introduce

Method 4 — a direct credit line on UPI. We’re not talking about a credit card linked to UPI, but a direct loan from a bank that can be used for payments on these apps.

What this means is that if you don’t have a credit card and still want a short-term loan to make UPI transactions, it could be very much possible. Banks don’t need to worry about the costs and hassles of issuing physical credit cards. Instead, they can simply create a pre-sanctioned loan limit for you. It could be based on your relationship with them. Or maybe some other form of data analytics to check if you’re creditworthy or not. And then they’ll allow you to draw down from a small loan when you want to buy something on credit. Merchants don’t need expensive swipe machines either to accept credit-based transactions. Just the regular QR code will do.

And suddenly, it could give a booster dose to financial inclusion. Just think about it. How many of these 26 crore users of UPI will have a credit card?

Probably not the big majority. But now, banks can easily tap into this network and open up small credit lines. It could be something as small as ₹10,000 to ₹20,000. It could spur consumption. Help people recover from financial setbacks. Come in handy for an emergency. And basically, improve their quality of life.

But there is a dark side to this kind of credit too.

Because UPI is so ubiquitous these days, people can quickly fall into the trap of borrowing. They could get lured by easy access to credit. And when the limit runs out, they could soon end up going to money lenders who don’t care about their financial well-being. It can end up being a vicious trap. And that’s a scary thought.

Anyway, here’s something we bet you didn’t know.

This actually isn’t the first time ‘credit’ is being linked to UPI.

No, no, we’re not talking about that announcement last year about linking Rupay Credit Cards to UPI. We’re talking about 2018.

Back then, the RBI said that a customer could get an overdraft account from their bank — which is typically a short, quick loan that your bank gives you usually based on your relationship with them. And then simply link that OD account to the UPI.

Voila — it was a credit on UPI.

But the plan failed. There were charges involved and merchants weren’t happy with that. So banks finally switched off this feature.

So it makes you wonder if it’s something that’s doomed to happen again. After all, the folks in the UPI value chain lose money hand over fist because they can’t impose any fees. And at some point, they’d want to monetize it. But if there’s an added fee involved, who’s to say that shopkeepers won’t scurry away from it again?

Well, UPI wasn’t quite as popular then as it is now. Transactions were still few and far between. But since everyone’s using UPI now, maybe shopkeepers will be a bit more amenable to charges this time around. We’ll see.

So the only question is — will this mean that credit cards also see a slow death?

After all, UPI has already hurt the debit card business of banks. Between March 2022 and January 2023, debit card transactions have fallen by 21% in terms of value.

Well, we don’t know yet.

But there are a couple of things for you to chew on.

For starters, the average ticket size for a credit card transaction is over ₹4,500. People typically have a high credit limit and can afford to swipe the card for high-value purchases. Now unless the credit limits being offered under UPI are quite high, people might still have to turn to credit cards for these high-value purchases.

Also, high spenders love the rewards and features that come with a credit card. These are points that they can redeem at stores, hotels, or airlines. And they use credit cards for these extras and not for a ‘loan’. Credit card companies can afford to give these points for ‘free’ because they make money from merchants when someone swipes a card.

Sure, UPI-linked credit could be chargeable as well. Just like how there’s a fee on transactions above ₹2,000 on Rupay credit card transactions linked to UPI. But if not, it’s quite hard to imagine that banks will be able to afford fancy reward points in this segment.

Anyway, we’ll just have to wait for a detailed circular from the RBI and see how all this shapes up. Will the partnership between UPI and credit be revolutionary? What do you think?

Until then…