open credit card transactions on the Unified Payment Interface—India’s preeminent digital payment network—is throwing up a slew of challenges from lack of clarity on merchant discount rates to confusion on merchant authentication and know-your-customer (KYC) norms, multiple fintech and bankingindustry executives told ET.
While the announcement—on Wednesday– by the Reserve Bank of India to permit quick response (QR)-based payments through RuPay cards, which are backed by the National Payment Corporation of India (NPCI), is expected to result in a five-fold increase in credit on the UPI platform, industry sources estimate it will take at least six months for a full roll-out of credit-card based payments.
At present, about 50 million people avail instant loans across banks, non-banking finance companies (NBFCs) and digital lending fintechs the expectation is that this market could go up to 250 million users, said senior banking executives who spoke on condition of anonymity.
Terming the “basic objective of linking credit cards to UPI as (a way) to provide customers a wider choice of payments,” T Rabi Sankar, deputy governor at RBI said, “How the pricing will work out, that we will have to see as we go forward.”
Currently, UPI payments are routed through debit cards and bank accounts with the RBI now permitting introduction of RuPay credit card payments.
Industry members are of the view that once final operating guidelines are released shortly by the banking regulator and NPCI, it will require sizable upgradation of the current UPI infrastructure across all fintech providers.
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“Merchant KYC (know-your-customer) guidelines are much lighter for UPI operators, as compared to the credit card ecosystem,” 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 needs to be done.”
“There needs to be incentives built in the system for these payment companies and merchants for re-KYC,” he added.
The MDR challenge
However, the dominant challenge, according to multiple industry players, will be the issue of merchant discount rate (MDR) for credit card payment on UPI and a final consensus on who will bear the cost of the MDR – the user, merchant, or the banks.
“People are still unsure of the interchange. The power of acceptance will not get unlocked unless the interchange is zero,” said Nitin Gupta, founder and chief executive, Uni Cards, who posits that “there might be a tiered-pricing model where a transaction until a certain amount will be free, after which there might be a charge.”
“To acquire a merchant is a big cost to the issuer and one cannot charge merchants, if this use-case has to grow. So, it could be that customers might have to bear the final cost,” he added.
The debate on MDR comes even as the payments industry, including banks, is caught in a tussle on the interchange to be levied for using UPI as a payment instrument to load e-wallets, as interoperability guidelines for digital payment instruments kick in.
Third-party apps on the UPI platform have been starved of MDR, after the government’s mandate to do away with the benefit on UPI and RuPay transactions, effective January 2020.
“The real challenge is that the industry has to arrive at a consensus on MDR, which may be decided by NPCI’s Steering Committee and will take some time to operationalise. The interchange on the wallet is still not solved yet,” Setu’s Kumar said.
Consent architecture and KYC upgrades
Executives at point-of-sale fintech firms and UPI payment apps, who spoke to ET, pointed out that merchants accepting credit cards have to go through a much more stringent KYC process from the acquirer. This includes providing a GST number of the business apart from other things, in order to streamline chargebacks and counter other fraudulent payments. A full KYC requires a proof of business, permanent account number (PAN) card and a proof of address
As a result, current UPI third-party apps including the likes of PhonePe,
, and Google Pay will have to undertake a re-KYC process for merchants and upgrade their technology layer for stringent KYCs, they said.
Further, the investment needed to operate credit card linked UPI payments is not limited to third-party apps with an offline footprint, but also large card network operators like Visa, RuPay and MasterCard, which will have to work with these companies to upgrade the overall quick-response (QR) infrastructure.
Card giant, Visa is already working with digital payments provider Paytm to enable users to make card payments by scanning QR codes.
Terming the move to link credit cards on UPI “as a good move, in principle,” Subhash Chandra Garg, former finance secretary of India said, “but, whether this will be a game-changer or not, we need to wait and watch,” he said
“There are challenges like the friction of MDR, who you pay to, likewise there has been a system of OTP authentication for UPI and whether that will continue. Those issues have to be sorted, it is still work in progress,” he added.
Digital lending boom
Meanwhile, several credit-line fintechs such as Slice and Kissht have been ramping up their payments products to ensure that customers get a wider acceptance network for their credit line. Last month, Slice said that it has launched UPI on its app to combine the benefits of credit-based payments. While Kissht, which raised $80 million this week, launched its buy-now-pay-later card to build a recurring payment behaviour among customers, and use their credit across even small ticket offline transactions such as groceries.
“The lending fintechs have been trying to figure out how they can help customers use credit through UPI. Several (of them) tried to allow payments to a QR through credit, but RBI did not allow it. It has been on the minds of several lending fintech companies; however, no one has been able to operationalise it. We may have a similar situation now,” said one payment industry executive on the condition of anonymity.
On Wednesday, RBI said that UPI has become the most inclusive mode of payment in India with currently over 26 crore unique users and 5 crore merchants onboard the payment infrastructure.
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