Looking Ahead: Impacts of Availability of UPI on Rupay Network

On June 8, the Reserve Bank of India (RBI) allowed the UPI network (Unified Payments Interface) to be linked to credit cards. This is another major milestone in India’s journey in the payment technology revolution. UPI technology has put India far ahead in the global competition in “real-time payment” technology.?

Below is some context about UPI:

1. National Payments Corporation of India (NPCI) launched UPI in 2016
2. In FY22, UPI payment contributed close to 60% of retail payments in India and is used by 300+ Mn monthly active users
3. The current (May 2022) annual run rate of value of transaction via UPI is USD 1.6 Tn (112% higher than May 2021) (source: NPCI)

As of now, RBI has allowed UPI linkage via Rupay credit cards only. Rupay is a domestic card network (similar to Visa and Mastercard). The network was launched by NPCI in 2012.

Why is this new development worth discussing?

Incumbents such as Visa and Mastercard face major threats from domestic card networks. E.g. of domestic card networks are Rupay in India, China UnionPay (CUP) in China, Carte Bancaire in France. As these domestic networks become widely adopted, they eat into the business of international card networks. They then expand outside the domestic market to cater to the local population. CUP is a perfect example of a domestic card network going global. 65 institutions in 17 overseas countries have issued 46Mn+ UnionPay cards locally. These cards are accepted in 26 Mn stores worldwide and 150 countries (source).

Success of domestic cards is possible because of the support from central banks and government policies. The success of these domestic networks, especially in large markets such as India and China, is a threat to incumbents’ business models.

More often the problem or development itself is not the main issue nor something that can be discussed repeatedly to benefit us to foresee changes in businesses or new business opportunities. I find it interesting to think about 2nd and 3rd order impacts to help us identify white spaces and investment opportunities.

The big picture questions?

There are many questions among industry participants regarding the finer prints. At the same time, I am curious to understand where we are headed and what kind of structural shifts the new development will bring. Below are few questions that can help us to guide and look at the bigger picture while we wait for more clarity.

1) Is this a real threat to international networks? There are various scenarios possible –

• Will domestic networks dominate like in China? This can happen if Visa/Mastercard pulls back due to difficult business conditions such as regulatory pressure to lower MDR, special benefits to domestic networks, etc. OR
• Will the card market be dominated by co-branded cards as in France (Carte Bancaire) or Germany (Girocard)? In France, Visa and Carte Bancaire co-branded card dominate with 56% share and only Carte Bancaire branded card has a 3% share. OR
• Will the domestic network have a decent share in the low double digits, as in Japan? JCB has an 18% share

2) Will demand from customers be strong enough to push banks to go for a lower MDR business in hope of getting higher transaction volumes because the UPI terminal scale is 12x higher than the offline PoS scale?

3) Can Rupay provide and match all the fancy perks and lifestyle benefits to cater to different buckets of customers?

4) Will there be new categories of lending products built for UPI-based transactions?

5) Will these categories push retail credit too much and how will regulations evolve?

6) If lending becomes prominent, how will the underwriting by the lenders be adjusted to cater to an audience which differs significantly from the premium credit card customers?

7) How will the regulations around MDR change? In 2019, MDR on RuPay debit cards and?UPI was waived off by the government to incentivize merchants to accept digital payments but banks became reluctant to issue Rupay cards and moved to other networks.

Some predictions in the context of the new development:

1) More banks/financial institutions will try to partner and launch new products using the Rupay network. The growth in card adoption has been slow overall and credit card growth has been slower, as shown in the below chart. There are a total of 67.7 Mn credit cards outstanding as of?2021.

2) Increase in credit card penetration in India:

• India has among the lowest credit card penetration in the world at just 4.5% as of Sep 2020 (source: RBI) compared to 60%+ in developed markets. There are 2 reasons for low adoption: (1) Culturally, debt has a negative connotation in India, and (2) higher MDR on the credit card (2% - 3%). Rupay credit cards have a much lower MDR at around 1.5%. Thus, UPI with Rupay cards solves the 2nd problem. The merchant acceptance rate will be higher than before.
• All UPI terminals just turned into credit card acceptance points. Compared to UPI which helps in mobilizing 60% of retail payments, PoS terminals have only 5%.

3) Increase in Rupay’s share in the credit card market. Currently Rupay has only 20% market share in the credit card market which is dominated by Visa followed by Mastercard (source). Because the MDR for Rupay credit is lower than that of competitors, we can expect Rupay’s market share to accelerate.

4. Threat to BNPL businesses

Competing with UPI, which operates at that massive scale and makes micro payments easy at PoS, will be difficult for BNPL businesses and other lending businesses that acquire customers at PoS.

Finally, the development is in the positive direction overall: making credit accessible to a wider population, making credit payments easier, and increasing the competition in the local card network market which will ultimately help the consumers.

Happy to receive feedback and suggestions.