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Explained: The pros and cons of linking RuPay Credit Card to UPI

The National Payments Corporation of India (NPCI) is looking for ways to encourage RuPay credit card payments linked to the Unified Payments Interface (UPI) by addressing challenges in its adoption

Photo: Bloomberg

Photo: Bloomberg

Vikas Tripathi New Delhi
The National Payments Corporation of India (NPCI)-operated digital transaction platforms, Unified Payments Interface (UPI) and RuPay, play integral roles in India's cashless economy push. In June 2022, RBI allowed individuals to link their credit cards to UPI, enabling payments by just scanning QR codes.

RuPay credit card payments linked to the Unified Payments Interface (UPI) have made life easier for consumers by simplifying the process of digital payments and fund transfers. However, it has pros and cons: 

According to Mohit Bedi, co-founder of Kiwi, a fintech firm, linking credit cards to UPI is a “revolutionary move” but it can be detrimental if there’s a lack of financial discipline. 

Here are the benefits of consumers for adopting UPI payments linked to credit card

Linking UPI with credit cards streamlines the payment process, enabling users to perform various transactions on a single platform. This integration simplifies bill payments, online shopping, and peer-to-merchant transfers, enhancing the overall user experience. 

“Linking credit card to UPI allows the cardholder to spend via Credit Card at merchants who do not have a Point-of-Sale (POS) terminal. For example- a roadside vegetable vendor. There is no need to carry the Credit Card around anymore. By Linking ‘CC to UPI’, the cardholder can make hassle-free payments making it more efficient, seamless and convenient,” said Bedi. 

According to Mandar Agashe, founder and MD of Sarvatra Technologies, an end-to-end solutions provider for banks, linking the credit card to UPI is a very good addition for convenience to the consumer because they are so used to just taking out their mobile phone and scanning QR code. 

Additionally, UPI transactions with credit cards offer instant processing, facilitating quick fund transfers for emergencies or time-sensitive transactions. 

“UPI has gained widespread acceptance across the spectrum of merchants, offline giants, e-commerce marketplaces, and utility payments. Cardholders can leverage credit cards on UPI to make payments for all use cases without having to enter the full card details for each transaction separately,” said Bedi. 

UPI uses multi-factor authentication with biometrics and MPIN minimising the risks of fraud and unauthorised access to credit cards. 

Users also benefit from different reward points and cashback offers merchants provide throughout the year, making credit card-linked UPI transactions a rewarding choice. 

Cons of using UPI payments linked to credit card

The one major drawback of consumers linking credit cards with UPI is the increased risk of overspending, as the ease of payments may lead to impulsive purchases. 

“Access to credit layered with the convenience of UPI is the most rewarding combination that can turn detrimental if there’s a lack of or lapse in financial discipline,” said Bedi. 

To manage this, it's essential to set spending limits aligned with the funds available in the linked savings bank account and establish a budget for routine monthly transactions. 

Merchant concerns about UPI payments linked to credit card

“Connecting credit cards and UPI can make buying things super easy, but it's like a two-sided coin. On one side, it brings quick transactions and convenience. But on the flip side, there's a concern about the Merchant Discount Rate (MDR), which means merchants may have to pay more when people use credit cards on UPI,” said Jatinder Mohan Singh Shah Chief Operating Officer, Business Banking and Digital Consumer Banking at Fincare SFB. 

The Merchant Discount Rate (MDR) is a transaction fee imposed by banks on merchants for accepting digital transactions, deducted as a percentage of the transaction value. It comprises an interchange fee for the card-issuing bank, with the remainder going to merchant acquirers and networks (such as RuPay, Visa, or MasterCard).

In the context of RuPay credit card payments on UPI, merchants are acquired by UPI companies like PhonePe, Paytm, and Google Pay.

Typically, larger merchants negotiate lower MDR across all card networks, including Visa, MasterCard, and RuPay, particularly with high transaction volumes. However, for RuPay credit card payments on UPI, additional fee components such as UPI interchange, NPCI commission, and payment service provider (PSP) charges also come into play.

Recent reports indicate that UPI players may not be passing on the lower MDR benefits to these merchants, citing additional fee components as the reason for this discrepancy.

“Although the perception is that MDR rates are higher, it’s important to note that the interchange fees for credit card transactions on UPI, which significantly influences MDR pricing, are comparable to those of Visa and MasterCard. In fact, for small merchants, the interchange pricing is zero for transactions below 2,000 rupees,” said Bedi. 

He further noted that the interchange fees in this system are comparable to those of other card networks. Furthermore, all Payment Service Provider fees and other associated costs are already integrated into the existing structure.

According to Agashe, merchants who do not accept UPI payments linked to credit cards may just need proper education. He suggests that these merchants, without a PoS terminal, could attract more business by accommodating customers with credit cards using a QR code. He emphasises that the MDR is a small cost compared to the additional business opportunities.

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First Published: Nov 22 2023 | 9:03 AM IST

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