In the monetary policy announcement on June 8, 2022, the Reserve Bank hiked the repo rate by 0.5%. Bad news for borrowers. The interest on floating rate home loans would soon go up. Either the EMI or the loan tenure will go unless you part prepay your loan. Apart from the rate hike, the Reserve Bank made another interesting announcement: That you will now be able to make UPI payments using your credit cards. To begin, Rupay cards will be linked to UPI. Subsequently, other network processors (Visa/Mastercard etc.) will also be brought under the fold.
There has been an exponential growth in UPI transactions. In May 2022 alone, there were 594 crore UPI transactions amounting to Rs 10.4 lakh crores. Yes, these are not just merchant transactions but include P2P transfers too. Contrast this with usage of credit cards. 22 crore transactions worth ~Rs 1.05 lac crores in April 2022. So, UPI is almost 10 times bigger. Clearly, both customers and merchants love it.
How Will UPI Work with Credit Cards?
Right now, when you pay using UPI, your savings (or current) bank account gets debited. No credit involved. You must have sufficient money in your bank account to complete a UPI transaction. If your credit card account gets linked to UPI, you can even use your credit card to make UPI payments. In simple words, you combine the convenience of credit card and UPI. Both customers and merchants would love it.
But There Is a Problem
Nobody makes money in UPI. Your account is debited, and the merchant’s account gets credited. You pay Rs 1000, and the merchant gets Rs 1000. And that is one reason merchants love UPI. No one is allowed to make money off such transactions. Yes, PayTM, PhonePe or GPay do not make any money from UPI transactions. Yes, these apps would have a wealth of data about payment patterns/preferences of its customers and can use such information to cross-sell other products and services. But no money from UPI transactions per se.
With credit cards, you get interest free credit for up to 45-52 days. This is only possible because the banks (your and merchants’) and Visa/Mastercard/Rupay take a cut from the payment. This commission makes up for the interest-free credit in credit cards.
The merchant bears the cost (called merchant discount rate or MDR). You pay Rs 1,000 and the merchant gets Rs 980. Sometimes, while illegal, the merchant asks you to bear the cost (pay 2% extra if you want to pay through a credit card).
Now, if the banks are not allowed to make any money on credit card payments, how will they extend the interest-free credit period to the borrowers? The entire credit card business will become unviable. It is dangerous to rely on late payers only to build a sustainable business.
Hence, there must be a way to compensate the channel (banks/network). A few ways I can think of:
- The customer pays a convenience fee. Say, pay Rs 1020 instead of Rs 1000 if the UPI payment happens from a credit card account. The customers won’t like it. OR
- The merchant bears the cost. The merchants won’t like it. They don’t like credit cards for the same reason. OR
- The UPI payment through a credit card is considered a cash withdrawal. Note that cash withdrawals from credit cards don’t enjoy interest-free credit period. You must pay interest from Day 1 and there is a cash withdrawal fee too. Cash withdrawal using a credit card is usually a bad idea. Besides, you earn reward points for spending on your credit card. If the UPI payment through credit card is treated as cash withdrawal, it is unlikely that you will earn reward points for credit card UPI payments.
There is no clarity yet on how this will work. RBI will issue further instructions to NPCI. This is an interesting development, nonetheless. If you can think of other ways in which UPI payments through credit card can work, do let us know in the comments section.