The Reserve Bank of India (RBI) has suggested the possibility of linking credit cards to the Unified Payments Interface (UPI) platform. This proposition is intended to offer an increased level of convenience to users, and expand the reach of digital payments in the country. A credit card is a financial tool provided by banks with a pre-set credit limit, which allows for cashless transactions, enabling cardholders to pay for goods and services on credit.
About Unified Payment Interface
The UPI is an advanced version of Immediate Payment Service (IMPS), providing a round-the-clock fund transfer service to make cashless payments faster, easier and smoother. UPI combines multiple banking features into a single mobile application. It is the largest of the National Payments Corporation of India (NPCI) operated systems, including National Automated Clearing House (NACH), Immediate Payment Service (IMPS), Aadhaar enabled Payment System (AePS), Bharat Bill Payment System (BBPS), RuPay and the like.
Need for Linking Credit Card with UPI
UPI has gradually emerged as a preferred mode of payment in India, boasting over 260 million unique users and 50 million merchants on its platform. In May 2022 alone, around 5.94 billion transactions amounting to Rs 10.4 trillion were processed via the interface. As it currently stands, UPI facilitates transactions by linking savings or current accounts through users’ debit cards.
Significance of RBI’s Proposition
This move could potentially provide an additional payment avenue for customers and enhance convenience. Additionally, this measure is expected to increase the use of credit cards due to UPI’s extensive adoption. Moreover, it could potentially increase transactions and acceptance at more merchant sites for users who prefer to pay via credit card to avail a longer pay-back period. The move could also potentially boost overall spending through credit cards and affect the average size of financial transactions.
Emerging Challenges
However, challenges remain. It remains unclear how the Merchant Discount Rate (MDR) would be applied to UPI transactions made through credit cards. MDR is a fee charged by a merchant’s issuing bank for accepting payments from their customers via credit and debit cards. Since January 2020, a rule has been in place making UPI and RuPay transactions free of MDR, meaning that no charges are applied. This zero-MDR policy could be a reason why other card networks such as Visa and Mastercard have not yet been integrated into UPI for credit cards.
