UPI on Credit Card - A gamechanger or an eyewash!!!

Right from my college days, I have had this bad habit of picking holes/searching for ulterior motives in even the most well intentioned actions of other people, specially the ones in position of power. To the extent that one of the testimonials in my MBA yearbook from one of my close friends was about how many times we have ended up discussing the “real reason” about why something has been done.

That trait of mine came to the fore again this week when RBI announced linkage of Credit cards to UPI. While most people in the payments ecosystem are hailing it as a game changer, I am still only cautiously optimistic about the intent and actual impact of this considering the below reasons

1. Technically, this isn’t UPI on Credit Card. This is UPI on Rupay Credit Card only. This is important because of 2 reasons, firstly Rupay and UPI are both within the captive ecosystem of NPCI. Any payment expert worth his salt will tell you that replicating a captive ecosystem solution in an external environment is 100X more difficult. Secondly, Rupay at best is still a fringe player in the credit cards segment which is largely dominated by Visa and Mastercard. Just a cursory look at the list of currently Live Credit cards on Rupay Credit Card website (https://www.rupay.co.in/our-cards/rupay-credit/explore-the-credit-card-range) tells you they have a long way to catch up. Putting these 2 factors together, I would say while this move is great for optics for RBI and NPCI, from a materiality perspective the needle is only going to move only when one of Visa and Mastercard start.
2. That brings me to my next point, competitive dynamics of the credit card industry. Its been almost an year since Mastercard and Amex were banned by RBI from issuing new cards. Most of the large banks where Mastercard had a monopoly/duopoly have moved on in life and have seamlessly shifted to Visa. It would take a mammoth effort from Mastercard to restore pre-2020 numbers, I would say minimum 3 years. In this context, Rupay credit cards bringing in the ability to pay by UPI gives them the edge they need to compete the 2 established networks. And that’s the reason I don’t see RBI giving Visa/Mastercard permission to process through UPI anytime soon, not till the time Rupay has captured some material market share of the Credit Card market. Some might say this is manipulation of market dynamics, but unfortunately regulations are like that, you win some, you lose some. Visa won the right to monopoly when Mastercard got banned, now they have to tackle this.
3. The MDR question is obviously there. So far, UPI is a zero MDR mode of payment, so is Rupay Debit. However, credit card is a different ball game as Interchanges are the highest which is how issuers are able to fund the offers, cashbacks etc on credit card transactions and still make money. If the acquirer earns zero MDR on UPI transaction, there is no money to be made on the transaction. On the other hand, if you put an MDR on UPI, would the small kirana merchant openly keep out the QR code which he has proudly today pasted in front of his shop knowing that he will only get 98 Rs for a billing of 100 Rs. My reading of this is either some small MDR will come on all UPI transactions or it won’t come at all as the merchant has no way to know whether the guy scanning the code is using a CC or normal UPI. In any case, the unit economics of CC UPI transactions is still questionable. The story could have been completely different if NUE licenses to build alternatives to NPCI and UPI by private tech players (with open market play possible for MDR) would have been granted, but that too has been silently shelved. Again, regulations, win some, lose some.
4. Last but not the least, is this really something new? Credit on UPI has actually been around as a framework for a couple of years, it just never took off because of its restrictions on type of account, need for UPI id from same bank etc. We would have to still wait for NPCI guidelines to come to see whether those guidelines persist. I mean if I cant link my PNB Rupay Credit Card to my PhonePe and have to necessarily use a PNB UPI App with a PNB UPI handle, then this thing is a non-starter. In any case. Google Pay allows tokenized Credit Card payments at Bharat QR code enabled merchants for almost 2 years now, I would rather use that (if merchant permits as that has got an MDR).

To conclude, I don’t see much will change from a customer perspective immediately as 95% customers won’t have the ability to even try this. All I see this doing is Rupay CC having the bragging rights in short to medium term to have the reach to 18 Cr merchants vis-a-vis Visa/Mastercard reach of 65 lakh POS machines which may help them get market share, largely in new card issuances. For the credit card industry, I believe that’s a good thing simply because it will increase the credit card penetration in the country which currently is less than 5%. What it will do to the overall consumer debt levels, portfolio quality etc only time can tell.

Let the games begin !!!!