Why in News?

• The Reserve Bank of India (RBI) has proposed to allow linking of credit cards with the Unified Payments Interface (UPI) platform.
• RBI Governor Shaktikanta Das stated that RuPay credit cards issued by the RBI promoted National Payments Corporation of India (NPCI) will be enabled first, and will become available after system developments.

About Unified Payment Interface?

• UPI is an instant real-time payment system developed by NPCI. The interface facilitates inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions.
• The UPI, managed by the NPCI, was first introduced in 2016.
• It is an advanced version of Immediate Payment Service (IMPS).
• UPI is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood.

Need to Link Credit Card with UPI

• UPI is currently the biggest among the NPCI operated systems including National Automated Clearing House (NACH), IMPS, Aadhaar enabled Payment System (AePS), Bharat Bill Payment System (BBPS), RuPay etc.
• The UPI has, over time, become a popular mode of payment in India with more than 26 crore unique users and five crore merchants on the platform.
• In May 2022, about 594 crore transactions amounting to ₹10.4 lakh crore were processed through the interface.
• At present, the UPI facilitates transactions by linking savings/current accounts through users’ debit cards.

Significance of the move

• The arrangement is expected to provide an additional avenue for payment to customers and hence enhance convenience.
• The linking of credit cards to UPI has been proposed to further deepen the reach and usage of credit cards.
• It is expected to bolster transactions and acceptance at more merchant sites.
• People who generally prefer to pay by credit card for different financial privileges, can now pay using credit cards via UPI.
• Currently, many merchants do not have credit card point of sale (PoS) terminals especially in semi urban and rural areas but a significant number do have the QR code based UPI acceptance facility. Now, they too will be able to accept credit payments via UPI without needing a PoS device.
• Linking of credit cards with UPI is likely to increase the use of such cards in small ticket size payments, as it would provide users with more options t o p ay fr om.
• Currently the average ticket size per transaction is ₹1,600 while it is ₹4,000 in credit cards. So, with the new development the UPI transaction ticket size is likely to go up to somewhere around ₹3,000 to ₹4,000.

Challenges

• It is not clear how the Merchant Discount Rate (MDR) will be applied to UPI transactions done through credit cards.
• Foreign card issuers such as Visa and MasterCard have a lion’s share of the credit card network business, part of the fees goes to them.
• The Indian government has shown its intent to promote the indigenous RuPay card system. It remains to be seen if it indeed does turn out more economical for merchants to accept payments from users with credit cards from foreign issuers.