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Credit Card Linkage: The Next Step In the Evolution of UPI
The Indian digital payments ecosystem has undergone a significant transformation in the last few years, with the rapid growth and adoption of Unified Payments Interface (UPI) transactions. The ease of use, along with its ubiquitous presence both online and offline, has made UPI one of the most preferred payment modes in India, even competing with credit card spends.
The Reserve Bank of India's recent decision to allow linkage of RuPay credit cards with UPI is expected to be a game changer for the Indian cards industry. RuPay clocked 25.6 crore transactions worth Rs 1.27 lakh crore in December 2022, which is just a fraction of UPI transactions and value for the same period. With the integration of credit cards with UPI, credit card issuers can offer a new source of funds to the 260 million (and growing) UPI users, weaning existing customers away from using their bank accounts for transactions, and increasing credit card spending. This is even more significant when you consider the number of outstanding credit cards climbed by 19 per cent from 65 million in September 2021 to 77.7 million in September 2022, while outstanding debit cards increased by 2 per cent from 920.3 million to 938.53 million during the same time, as per the data of Worldline India.
The linkage of credit cards with UPI offers several benefits for customers. Credit cards can now be used at any merchant accepting UPI payments, including small merchants who do not have the infrastructure to accept card payments. Customers can now make transactions without depleting their bank balance, and there is no need to carry the card, reducing the chances of fraud and loss.
For card issuers, the linkage of credit cards with UPI offers the potential for incremental spends, especially with smaller merchants who do not have the infrastructure to accept card payments. This move will also help activation and engagement as customers across demographic profiles will find several new opportunities to use their cards. However, spends on smaller merchants will not bring any interchange income, and there could be a risk of losing interchange from larger merchants if the classification is not proper and/or the interchange rates are not aligned correctly. There will also be a need for enhanced fraud risk management as integrating cards with UPI will open up a whole new set of use cases.
The linkage of credit cards with UPI will undoubtedly prove to be a game changer for the Indian cards industry. Issuers have started rolling out this facility, and other card networks are also waiting for RBI's go-ahead to link their cards with UPI. The universal adoption of digital payments is one indication of the blurring of the digital divide, and with UPI's rapid growth, it is only a matter of time before credit cards follow suit.
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