Linking credit cards with UPI — what it means to your finances

In the RBI Monetary Policy announced on 08^th June, the central bank made a significant announcement as part of additional developmental policies. RBI permitted the linking of credit cards with UPI (unified payment interface). As you must be aware, UPI has emerged as the most popular form of digital payments in India with 60% share. UPI does away with the need to remember bank account numbers and IFSC Codes. All you need to remember is a simple (@) separated code like (aaabbb@icicbank). That is sufficient to receive and pay funds in any bank account linked to a unique UPI address.

What is so special about credit card linking?

Till date, UPI ids could only be linked to an existing bank account or a debit card. It could not be linked to a credit card. Now, post this announcement by the RBI, even credit cards can be linked to a UPI id. That means, you can effectively pay with your credit card account, without having to swipe the credit card at a POS machine. But more of that later.

The bigger question is, how soon will this new system be in place? As of now, the RBI has only mandated the National Payment Corporation of India (NPCI) to create the framework for linking credit cards with UPI network. The granular details are being worked out. Also, the RBI will initially only permit linking of RuPay credit cards to UPI id. Other major global card franchises like Visa and Mastercard will be permitted to log in at a later date.

Why is this linking of credit cards with UPI significant?

The permission to link credit cards with UPI is significant for two reasons. Firstly, it makes the usage of credit cards safer and less prone to frauds. Currently, credit card holders are required to swipe their credit cards on a POS machine and then input the 4 digit PIN. In public places like malls, this opens your credit card to data theft and other types of frauds. Also, there are methods like spoofing and splicing that can be used to steal your credit card credentials. Linking to UPI means you don’t have to swipe the credit card at the POS at all. You can use your UPI code linked to the credit card and authenticate it either with a mobile OTP password or by scanning a unique quick response (QR) code. This method is relatively safer and more secure compared to the traditional swiping method.

The second big difference is that it will open up the credit cards to a much wider market and a much bigger retail opportunity. Consider these numbers. According to joint research by PhonePe and BCG (Boston Consulting Group), UPI accounted for over 60% of digital transactions in FY22. On the other hand, POS transactions were just 5% of all transactions. ​​It surely opens up the credit card companies to much bigger and wider market. Also, the volumes on credit cards are still quite low. Total volume of credit card transactions in May 2022 was Rs1 trillion while on UPI platform it was Rs10.50 trillion. UPI has 26 crore users and 5 crore registered merchants. That is a huge chunk of the addressable population that credit card companies will gain access to.

Will it really appeal to the merchants?

That is the million dollar question. The merchants are the key link and unless they are sold on to the idea, this linking of UPI with credit cards will not take off easily. For the merchants, there are various advantages. The entire UPI-enabled mobile app will be residing in the mobile phone of the customer. The merchant does not require any infrastructure other than making the QR code available. However, since merchants are used to the existing credit card swiping system, there may be some resistance to shift to a new system.

But there are some factors that the merchants will find enticing. Firstly, merchants do not have to invest in a POS machine. Of course, most merchants already have a POS machine so for some time the two systems would co-exist. Secondly, credit cards have an MDR charge while UPI is free of cost. However, it is not yet clear if the MDR charges would apply on credit cards linked to UPI. The third point is about the settlement. POS transactions are settled in T+2 or longer, while UPI linked transactions would be quicker. It may take time, but merchants are likely to be sold on to the idea of UPI linked credit cards.

Poof of the pudding: what it means for the customer

At the outset, there are some clear advantages that linking UPI with credit card offers for the customers. Here are a few of them.

• It is a lot simpler than swiping your credit card and inputting your PIN in the presence of peering onlookers. Also, many of these machines can be spiked and that risk can be avoided by opting for a UPI linked credit card.
• Since the UPI code is much more popular with over 5 crore merchants, it also extends the acceptability of credit cards to smaller outlets, which normally do not accept card payments. That is a boost to digital payments.
• The OTP is a dynamic code sent to your mobile number so the risk of someone misusing your code in future does not arise. This can make credit card transactions a lot safer and also reduce the large number of disputes that are currently open.

However, for the customer, there are also some open issues to contend with, when it comes to dealing with linking of UPI and credit cards.

• Most credit card issuers give an interest free credit period of 30-45 days, depending on the billing cycle. However, on any outstanding amount, the interest charges are as high as 40-45% annually. That is a steep cost, and will continue even if the credit card is linked to the UPI.
• Indian households are still fairly debt averse, which is evident from the limited credit cards in circulation compared to debit cards. Users must remember that even if you use credit cards via UPI, it is still debt and carries 45% interest, steep MDR charges and annual maintenance fees.
• Unless consumers maintain this discipline, it could lead to a debt trap just because credit cards will now be more widely acceptable due to its UPI interface. Not to forget, unless you have a RuPay you cannot avail this facility to begin with.