Driving the next wave of digital payments growth


The use of credit is fundamental to the management of any consumer’s lifestyle. However, many fear that consumers are spending too much and ending up in a debt trap.

In a significant acceleration of credit penetration into the digital payment platform, government-backed RuPay credit cards can now be linked to the Unified Payments Interface (UPI). This announcement by the Reserve Bank of India (RBI) is expected to lead to the next wave of disruption in the digital payments ecosystem. According to a recent report by Boston Consulting Group (BCG), the Indian digital payments market is expected to grow to $10 trillion from the current $3 trillion by 2026.

Currently, users are allowed to make real-time bank transfers by linking their savings or checking accounts to UPI. But with this game-changing initiative, paying via RuPay credit cards by scanning the Quick Response (QR) code is now possible. This move is expected to lead to an increase in the number of RuPay credit cards in the system and also play a role in improving the reach of digital payments.

Made-In-India UPI will take the next big step

From small retailers to roadside vendors, nearly 30 million merchants across India are using QR codes, a BCG report reveals. Obviously, it continues to gradually replace payment methods in physical stores, as well as cash-dominated transactions.

In May 2022 alone, UPI recorded 594.63 crores in transactions with a 4x increase as the next target. In doing so, it eats into the market share of other payment methods. But what makes India’s digital payment system so popular?

The main reason behind this is that retailers can accept payments using a QR code or registered mobile number, while credit cards require point-of-sale (PoS) devices. The QR code works in favor of merchants, while the PoS device tends to eat away at their profit share. Consider this: UPI-QR code penetration is currently 60%, compared to PoS device penetration which is less than 5%, according to a PhonePe and BCG report.

Only 6 million point-of-sale (PoS) machines for swiping credit and debit cards are currently in use. Moreover, these machines rarely exist in semi-urban and rural areas. But with the RuPay-UPI credit card link, a large part of the population will have access to credit card payment.

Major boost for the credit card industry

For RuPay, this groundbreaking measure is a tipping point for credit and we have just seen the surge in the use of digital payments due to UPI and industry adoption. This utility on UPI will have a similar effect and potentially increase the demand for RuPay credit cards due to its ease of use.

With over 30 million QRs available for UPI transactions, so will credit cards. It will also increase acceptance in Tier 2 and Tier 3 cities. This development has the power to simplify and standardize the user experience for the end consumer.

Overcoming pain points will be crucial

If merchant adoption goes well, credit card payments through UPI have the potential to reshape the landscape of credit card issuance and usage in India. However, the new directive is not without its challenges. If properly implemented, the following measures can greatly facilitate the linking process between RuPay credit card and UPI:

Increase adoption of RuPay credit cards: In 2016, demonetization paved the way for increased adoption of digital payments and card usage. The trend accelerated further after the COVID-19 pandemic made these options a necessity in people’s daily lives to transact in the financial ecosystem. This also led to the financial inclusion target for the government on an accelerated basis in Tier 2 and 3 cities.

Overall, during this period, the trend towards cashless payments has enhanced the growth of companies such as RuPay, Visa and Mastercard in the card network market in India. According to a report by RBI, RuPay cards have grown to capture a 60% share of the Indian card market in 2020.

However, expanding the reach and distribution of RuPay credit cards will be key during the first phase of the new initiative to link credit cards to the UPI network. With banks also keen to ensure more RuPay credit card issuance, transaction volume and credit card acceptance are expected to increase and potentially disrupt the credit card network space.

Get out of debt traps: The use of credit is fundamental to the management of any consumer’s lifestyle. However, many fear that consumers are spending too much and ending up in a debt trap. Currently, banks and processors offer cardholders the ability to easily view their transactions and expenses in different categories. There are control functions that help the consumer to allocate and block certain categories of expenses.

The banking system is adept at managing these risks and these control measures will automatically come into effect if there are significant fluctuations in transaction patterns. For this, RBI has a watchful eye on the debt and the NPAs have instructed the banks to formulate strategies to keep them as low as possible.

Implement fraud prevention techniques: Issuing banks will need to be even more vigilant as this increases the potential for fraudsters trying to game the system. While mature banks may have their policies automated, future RuPay issuers will need to be proactive. For example, you cannot make wallet uploads using credit cards. But wallets can be loaded using UPI, which is traditionally a debit transaction. Now, banks that have issued RuPay credit cards will start to see an increase in volumes and they will need to ensure that such transactions do not take place.

Ushering in a new phase for digital payments

Undoubtedly, the link will solidify India’s digital payments footprint and strengthen card networks’ merchant partnerships in the days to come. Eventually, this will improve the payment experience on the RuPay network.

With innovative products and new use cases creating a stir in the credit card space, companies will be able to address untapped customer segments and spread financial inclusion through various channels. Massive disruption has already taken place in the payments space with UPI. The activation of RuPay credit card on UPI will further change the payment concept in India.

The author, Sachin Castelino, is Director of Strategy and Transformation at In-Solutions Global.

(Edited by : Anshul)

First post: STI


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