Credit card-linked UPI payment via QR code finally begins with domestic RuPay credit cards

In a first of its kind, the government-backed RuPay credit card has gone live with a unified payment interface (UPI), which means scanning QR codes at merchant outlets for goods and services instead of using a POS terminal.

In his opening remarks, Nandan Nilekani, the non-executive chairman of Infosys, said that the Reserve Bank of India (RBI) has become a world leader in combining regulations and innovations.

"I see the launch of UPI and RuPay credit cards as the first step of credit on UPI. It’s a very sensible first step to test the waters for credit. I am sure they ( RBI) will open up to more forms of credit like BNPL and others," said Nilekani.

In June, the RBI allowed the linking of RuPay credit cards to UPI.

Punjab National Bank, Union Bank of India, and Indian Bank are the first three banks that have gone live with UPI linkages, while many others are expected to join shortly.

RuPay credit cards, which are mostly issued by public sector banks, will be linked to a virtual payment address via UPI ID, allowing for instant scanning at merchant outlets that accept QR codes. Currently, RuPay credit cards have a market share of one-fifth in terms of spends in India.

"There will be no MDR on UPI-linked credit transactions, but a small interchange fee," said Atul Kumar Goel, MD&CEO of Punjab National Bank.

The credit card issuing bank will recover the interest component, especially the interest from the merchant for the interest-free credit enjoyed by the customer. However, Goel refuses to elaborate more on the fee component.

So far, the UPI is linked via the customer's debit card to their savings or current account. There is no MDR on UPI debit transactions.

On credit transactions, an MDR is levied by the POS terminal acquirer on a merchant. The card network (Visa/MasterCard) fixes the MDR distribution amongst all the intermediaries in the POS acquirer, card issuer, and card network.

This path-breaking measure will not only expand credit in smaller towns and cities but also impact the business model of global card networks.

First, there is likely to be an expansion of credit as UPI linking of credit cards will allow purchases at a large number of merchant outlets with QR code. In the past, the high-cost POS terminals have stood in the way of credit card growth. "You don’t find a POS machine in rural and semi-urban areas. Now with the RuPay credit card, credit will be available to a large population," said Biswamohan Mahapatra, Chairman at NPCI.

"There are also many merchants who today don't have a POS terminal but have a QR code, where a credit card is generally not used. So, that entire market will open up in a very big way," said Mandar Agashe, Founder and MD of Sarvatra Technologies.  

People are credit-starved in India. The credit to GDP ratio is in the 50s whereas counties like the US have a ratio of 216 per cent. China is at 182 percent.

Second, bigger networks like Visa and Mastercard will also be forced to join the UPI bandwagon. Non-RuPay credit cards typically charge an MDR of up to 2 -3 per cent of the transaction value. The lower interchange fee in RuPay-UPI will make it more popular for the masses.