RBI’s UPI-credit card connecting plan isn’t adding up, For banks and fintechs

Multiple fintech and banking industry executives told ET that the central bank’s move to open credit card transactions on the Unified Payment Interface—preeminent India’s digital payment network—is posing a slew of challenges, ranging from a lack of clarity on merchant discount rates to confusion over merchant authentication and know-your-customer (KYC) norms.

While the Reserve Bank of India’s announcement on Wednesday that quick response (QR)-based payments through RuPay cards, which are backed by the National Payment Corporation of India (NPCI), will result in a five-fold increase in credit on the UPI platform, industry sources estimate that a full roll-out of credit-card based payments will take at least six months.

Currently, around 50 million people use banks, non-banking finance firms (NBFCs), and digital lending fintechs to get rapid loans. According to senior banking officials who spoke on the condition of anonymity, this market might grow to 250 million people.


T Rabi Sankar, deputy governor of the Reserve Bank of India, described the “fundamental purpose of integrating credit cards to UPI as (a way) to provide customers with a larger choice of payments,” adding, “How the pricing will work out, that we would have to explore as we go forward.”

Currently, UPI payments are made using debit cards and bank accounts, however the RBI has just approved the use of RuPay credit cards.

Industry experts believe that once the banking regulator and the National Payments Corporation of India (NPCI) release final operating standards, it will necessitate a significant upgrade of the current UPI infrastructure across all fintech companies.

“In comparison to the credit card ecosystem, merchant KYC (know-your-customer) guidelines are much lighter for UPI operators,” said Nikhil Kumar, cofounder of Setu, a fintech infrastructure provider, adding that “from a technology perspective, UPI apps might have to upgrade their KYC modules, (while) the challenge could be for cohorts where physical KYC is required.”

“Incentives for these payment companies and merchants to re-KYC should be embedded into the system,” he added.

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The MDR problem

According to various industry experts, the most significant obstacle will be determining the merchant discount rate (MDR) for credit card payments via UPI, as well as reaching a definitive agreement on who would shoulder the cost of the MDR – the user, merchant, or banks.


“A lot of people are still apprehensive about the exchange.” “The potential of acceptance will not be harnessed until the interchange is zero,” said Nitin Gupta, founder and CEO of Uni Cards, who speculates that “there might be a tiered-pricing scheme where a transaction will be free until a certain amount, beyond which there may be a charge.”

“Acquiring a merchant is a significant cost for the issuer, and merchants cannot be charged if this use-case is to proliferate.” As a result, clients may be responsible for the final amount,” he noted.

As interoperability requirements for digital payment instruments kick in, the payments industry, including banks, is caught in a dispute over the interchange to be assessed for utilising UPI as a payment instrument to fill e-wallets.

After the government mandated that the advantage on UPI and RuPay transactions be phased off by January 2020, third-party apps on the UPI network have been left without MDR.

“The main challenge is for the industry to come to an agreement on MDR, which may be chosen by the NPCI Steering Committee and will take some time to implement.” “The wallet exchange is still not solved,” Setu’s Kumar stated.

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KYC improvements and consent architecture

Merchants accepting credit cards must go through a considerably more strict KYC procedure from the acquirer, according to executives from point-of-sale fintech firms and UPI payment applications who talked to ET. This includes, among other things, supplying the business’s GST number in order to reduce chargebacks and other fraudulent payments. A proof of business, a permanent account number (PAN) card, and a proof of address are all required for a thorough KYC.

Shri Shaktikanta Das(RBI Head)
Shri Shaktikanta Das(RBI Head)

As a result, current UPI third-party apps such as PhonePe, Paytm, and Google Pay will have to re-KYC merchants and upgrade their technological layer to support stringent KYCs, according to them.

Furthermore, the investment required to operate credit card-linked UPI payments will not be limited to third-party apps with an offline presence, but will also include large card network operators such as Visa, RuPay, and MasterCard, who will have to collaborate with these companies to upgrade the overall quick-response (QR) infrastructure.

Visa is already collaborating with Paytm, a digital payments company, to allow users to make card payments by scanning QR codes.

Former Indian finance secretary Subhash Chandra Garg described the plan to link credit cards to UPI as “a nice move in theory,” but added, “whether this would be a game-changer or not, we need to wait and watch.”

“There are difficulties such as the friction of MDR, who you pay to, and whether or not the OTP verification system for UPI will persist.” Those difficulties must be resolved; the process is still under progress,” he stressed.

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The rise of digital lending

Meanwhile, credit-line fintechs such as Slice and Kissht have been beefing up their payment offerings to ensure that users may use their credit line over a wider acceptance network. Slice said last month that it had enabled UPI on its app to combine the benefits of credit-based payments and mobile payments.

Kissht, which raised $80 million this week, debuted its buy-now-pay-later card to encourage clients to make regular payments and use their credit for even small-ticket offline purchases like groceries.

“Lending fintechs have been pondering how they may assist customers in using credit through UPI. Several (of them) attempted to accept credit card payments to a QR, but the RBI refused.

Several loan fintech companies have considered it, but no one has been able to put it into practise. On the condition of anonymity, one payment industry executive stated, “We may be in a similar situation presently.”

The Reserve Bank of India announced on Wednesday that UPI has become India’s most inclusive means of payment, with over 26 crore unique customers and 5 crore merchants using the payment infrastructure.

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