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Coming soon: Now pay with UPI using your credit card

RBI has proposed to allow linking credit cards to UPI, starting with RuPay. But there are some challenges that need to be addressed first.

What’s the news? “In order to further deepen the reach and usage [of UPI], it is proposed to allow linking of credit cards to UPI,” the Reserve Bank of India (RBI) said in a press release dated June 8.

Why does this matter? Unified Payments Interface (UPI) is the most widely accepted and used digital payment method in India, but currently, you can only use funds in your bank account to pay with UPI. By extending the facility to credit cards, consumers and merchants have more options to work with. Consumers get access to a credit line for payments and merchants get to accept credit card payments without having to install and pay for swiping machines.

How will this work? We don’t know yet. RBI said that RuPay credit cards will support this facility to start with, but the nitty-gritty details are yet to be announced. “This facility would be available after the required system development is complete. Necessary instructions will be issued to NPCI (National Payments Corporation of India) separately,” RBI said. It could be a while before Mastercard and Visa enable their support (if at all) as they are already burdened by multiple other RBI regulations such as e-mandates and card tokenisation.

A solution to RBI’s new card storage guidelines? RBI’s card storage guidelines kick in on July 1, according to which merchants and payment gateways are not allowed to store the credit and debit card details of their customers. This is expected to severely disrupt online card transactions because the alternative system (card tokenisation) is not ready for mass adoption. As a result, Apple recently decided to drop support for debit and credit cards in India and shifted to UPI and net banking for purchases and subscriptions on the App Store and other Apple services. But if customers can use credit cards with UPI, merchants in India who already support UPI might be able to comply with the card storage guidelines without any hurdles, depending on how the card storage rules will apply to UPI. If UPI will also have to rely on card tokenisation, then the concerns will persist.

What are the challenges?

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  1. How will MDR work? For each transaction, the merchant pays a certain percentage of the transaction amount, known as Merchant Discount Rate (MDR), which is divided among the banks and payment service providers. But UPI and RuPay debit cards attract zero-MDR due to government regulations, which is what makes them popular among merchants. Whereas credit cards normally attract a high MDR compared to other forms of digital payments. It is not clear how MDR will be applied for UPI transactions done using credit cards.

    “The basic objective of linking credit cards to UPI is to provide a customer a wider choice of payments. How the pricing of that will work out we will have to see because that is something that the banks and other entities will have to do. At this point we will just introduce the arrangement.” – RBI Governor Shaktikanta Das

  2. Compliance requirements from merchants: “Merchants have to consent to accept credit card payments and also will have to probably sign a contract with an acquirer to become part of the UPI Credit Scheme. This could also mean more stringent KYC of the merchant,” Nikhil Kumar pointed out on Twitter.

Does UPI really offer more convenience than just a credit card? Arnav Gupta thinks not:

I want to know more: Here are two Twitter threads on this news that are worth your time:

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