Why The UPI-Linked RuPay Credit Card Hasn't Found Its Groove Yet

India's ambitious project of linking the Rupay credit card to the Unified Payments Interface has turned a little over a year old. Yet, the direct competitor of Visa and Mastercard has failed to match the stellar success of the UPI despite this linkage.

Today, about 25% of all physical credit cards are identifiable to Rupay, and about Rs 100 crore worth of transactions per day have been taking place, according to a person with direct knowledge of the matter who spoke on the condition of anonymity.

A paucity of official data on UPI-linked RuPay credit card transactions, even after a year, is a telling sign of several loopholes in the payment mechanism.

Market participants that BQ Prime spoke to highlighted the sticking points—not one, but many.

At this point, Rupay is the only credit card network linked to the UPI.

The lacklustre growth in this payment system is all about a tripartite nexus between merchants, banks and credit card holders, with the long-debated merchant discount rate taking centre stage.

The merchant discount rate, or MDR, is a fee that a merchant is charged by the card-issuing bank for accepting payments from customers via credit cards.

On Oct. 4, the NPCI announced that interchange fees would be applicable on Rupay-UPI transactions, but small merchants would be exempt from it. This meant that the interchange fee would be levied on transactions worth over Rs 2,000.

Even though 13 Indian banks and 15 payment service providers, including Google Pay, Paytm, Slice, and Mobikwik, are live with the feature, the problem continues.

"Usage of a credit card and UPI are for different purposes. Credit cards are used for high-ticket transactions. It is inconvenient to do small-ticket transactions because acceptance infrastructure is not available with small merchants," said Vijay Jasuja, former managing director and chief executive officer at SBI Card.

Large Banks At Last

One of the reasons for the slow pace is that the larger banks, who are usually the drivers of the government's initiatives, such as the State Bank of India, ICICI Bank and Axis Bank joined the party quite late, the first person quoted above said, who spoke on the condition of anonymity.

This is because the payment system is expensive, Vivek Iyer, partner-financial services advisory at Grant Thornton Bharat, said. "Once they are pushed to adopt the Rupay credit card, they have to start asking the customers to adopt it too," he added.

The Expensive MDR

The expensive nature is owing to the combined charges of MDR levied on merchants, payment service provider charges, other fee components for banks along with the NPCI commission. While a major portion of the MDR goes to the card-issuing bank in the form of interchange fees, acquiring banks and payment service providers gain only a small share.

Even though linking UPI to the Rupay credit cards and subsequently levying MDR would translate into a hit on the margins for banks, they have no other option than to give in to the competition of acquiring the largest market share in the credit card segment, Jasuja said.

Unlike other fees and charges, MDR is determined by the "association of payment networks and banks," which makes it an onerous task to arrive at a fair value.

All this against the backdrop of low credit card penetration in India compared to the global market. Only 3% of Indians hold credit cards, compared with the global benchmark of 30%.

Indians in the lower-income bracket use UPI as a mode of payment on a vast scale, but they do not have high credit scores to be eligible for Rupay credit cards, according to Jasuja.

This makes the entire mode of payment futile, he added.

Iyer echoed the view. "You can't give a credit card to someone who is below the poverty line. Anyway, the household low savings and small-ticket loans bubble will burst soon," he said.

The profitability factor also comes into play.

Owing to economies of scale, large merchants have an edge over the smaller ones. But they are also not willing to get on board with the RuPay credit card option with UPI because it would hit their profitability. "The commission and MDR on the RuPay credit card through UPI are additional cost. So, either one can reduce their margins or keep them the same and load that charge on yourself," Iyer said.

Beyond this, another concern is that the merchants can not identify whether the payment has been made from a Rupay credit card linked with UPI or direct UPI, according to Mohit Bedi, chief business officer and co-founder of Kiwi, a fintech company that enabled credit on UPI.

"NPCI is working to resolve this though. They are aware of the issues. This is a new ecosystem, there are teething problems..." Bedi said.

The solution boils down to the main problem: rationalisation of MDR, according to market participants.

To bolster the usage of UPI-linked Rupay credit cards, the need is to rationalise MDR charges to have a level playing field for all the participants, according to Jasuja.

Further, it is also important to define the minimum and maximum ticket size of transactions allowed via this method, as it would also reduce the associated risks that come with small-ticket size transactions, Iyer said.

While there is no definitive way to reduce MDR at this point, discussions around the pain point have started.

"Businesses have to be viable, so MDR costs are such that people need to figure out how to reduce them," Iyer said, while adding that regulatory guidelines are not enough.

"It is the market participants who need to come to a consensus with card-issuing and settlement agencies on how they can rationalise numbers. It's an oligopoly, after all," he added.