The credit card is said to be the “most innovative invention and the most dangerous wealth destroyer” by the public and banking officials. There are only three credit card holders in India for every 100 people. This suggests that there may be a better penetration possibility in India. With the increasing popularity of credit cards, banks specializing in city and semi-city markets have an excellent way to increase their percentage within the marketplace. In contrast, UPI has become the standard and popular payment mode in India, with over 26 crore users and five crore merchants.
What if we can use Credit Cards with UPI?
On June 8, 2022, RBI allowed users to link their credit cards to UPI, which will enable more people to access this platform. Mr.Das said that the central bank is making a new arrangement, and is expected to provide more avenues and much more convenience for customers using the UPI platform.
Actually, this is such a big move that it could reshape the entire Indian credit market, and also, on the other hand, this is a shock wave to companies like VISA and Mastercard.
But how is this initiative going to shape the entire Indian economy and also such a massive thing for every middle-class family and small-scale business in India?
As we know how a credit card works, credit card banks and networks like VISA and Mastercard combine to charge fees of 1-3% for every transaction on a credit card. This fee is called MDR “ (Merchant Discount Rate = Switching Fee + Interchange Fee).” In addition to this, a charge of 0.5% is charged by the payment gateways that combine credit card banks and Networks, for example, Razor pay and PayU.
So, let's understand the Switching and Interchange fees and how they make up MDR. If you have a credit card and when you are using the credit card, the company, i.e., issuing bank, is taking a risk by paying the amount you said to pay to the vendor you are paying. So banks charge you for risking on your behalf, which is called de-risking, and this is called an “Interchange Fee.”
On the other hand, card networks charge fees for providing the infrastructure and service and for their effort to maintain this massive network so that the transactions are hassle-free, and this fee is called a Switching fee. So, MDR is the most essential payment made for a critical value-adding process that is carried out by the customers' bank and the card network, and the merchant’s bank charges this entire amount and so this is called the “Merchant Discount Rate (MDR) ”
The Indian Finance ministry has focused on this issue. Finance Minister Mrs. Nirmala Sitharaman made a statement last month stating that “MDR will not be applicable for UPI and Rupay-related transactions,” and this was the long-standing demand of the payment council of India. As a part of this, to compensate for the losses incurred by the banks, the GOI put in 1300 Cr. For one year
There are some important reasons why zero MDR is such a big thing to make:
· Banks will not be awarded credit risk
· With Zero MDR for Rupay cards and 2.5% MDR for Master card and VISA. As there will be Zero MDR, the Master cards and VISA market will collapse, which is nationalizing the card network market.
So, whatsoever killing Master Card and VISA networks in India is. The government's card network will become a monopoly.
So the incredible advantages of linking Credit Card with UPI are 6Mn card-accepting sale machines in India, whereas 50Mn merchants accept UPI. So, using a credit card will explode by 45Mn merchants. In addition, if the government introduces a microfinance credit line based on UPI to poor class sections, that will take the financial standard of poor class people to a whole new level.
Thirdly, cash printing and minting accounted for 2% of GDP, i.e., 2.7 Lakh Crore. So, if there is going to be a digital boom and less cash, a little chunk of the money spent on printing can be an incredible opportunity for GOI.
Vishwas Patel, chairman of PCI, said that “We at PCI are reaching out to RBI officials and also talking to National Payments Corporation of India (NPCI) to assess the linking up of credit cards with UPI and how it can be successfully rolled out, at the same time making it commercially viable for all players involved, ”
“The RBI has not specified the pricing part yet. But, my sense is they have to devise a mechanism wherein they can ask the ecosystem to identify the credit card transactions that will take place through UPI and then charge MDR accordingly. While keeping customers' convenience in mind, it is important they have to work out with the card networks and banks a proper MDR structure for the transactions that will happen on UPI through credit cards, ” said Dewang Neralla, CEO of NTT DATA Payment Services India.
When asked about the pricing structure, T Rabi Sankar, deputy governor, RBI, said: “How the pricing structure will work out we will have to see because it's something that the banks and system entities have to do. At this point, we will introduce the arrangement and see how the pricing goes.”
PhonePe and Google Pay currently own part of the UPI in the country, and more than 80% of all UPI activities are processed in these two applications. The new credit card connection policy will become an incentive for these applications as credit card users will likely be able to perform more credit card operations using these applications.
This means a market with a value of ₹ 1.07 lakh crore, which is growing rapidly with the opening of these applications. The average credit card user spends more than R14,500 per month on each card, 21 times more than ₹ 692 per month on debit card users
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