How UPI's Bold Business STRATEGY will KILL VISA and MASTERCARD? : UPI CREDIT LINKING EXPLAINED

Summary

The Reserve Bank of India's proposal to link credit cards to the Unified Payments Interface (UPI) is a potential game-changer for digital payments in India. With over 26 crore users and merchants, UPI has become the most inclusive payment mode. The move could redefine the credit market, posing a threat to giants like Visa and Mastercard. The script discusses the implications of this revolution, including the potential for zero Merchant Discount Rate (MDR) on credit card transactions, which could impact financial inclusion and the economy, while also highlighting the benefits of increased digitalization and financial access for small businesses and individuals.

Takeaways

• 📢 The Reserve Bank of India (RBI) has proposed to allow linking credit cards to the Unified Payments Interface (UPI) platform, aiming to enhance digital payments and provide convenience to users.
• 💳 The linking of credit cards to UPI will enable transactions through UPI apps without physically using the credit card, expanding the scope of digital payments in India.
• 📈 UPI has become a widely inclusive payment method in India, boasting over 260 million unique users and merchants, indicating its popularity and reach.
• 🌐 The announcement of linking UPI to credit cards has been met with significant media attention, highlighting its potential to revolutionize the credit market in India.
• 💡 The potential zero MDR (Merchant Discount Rate) for UPI and credit card transactions could pose challenges for banks and card networks like Visa and Mastercard, who traditionally charge fees for their services.
• 💼 The MDR, including interchange and switching fees, is a critical component of the payment ecosystem, compensating banks and card networks for the risks and infrastructure they provide.
• 🤔 Concerns arise that if credit card transactions on UPI have zero MDR, it might lead to a loss of revenue for card networks and potentially reduce their incentive to operate in India.
• 💰 The government has previously compensated banks for the loss of MDR revenue on debit card and UPI transactions, but extending this to credit cards could be financially burdensome.
• 🏪 The expansion of credit card usage through UPI could significantly increase the number of merchants able to accept card payments, broadening the scope of digital transactions.
• 🌱 The potential for micro-finance credit lines based on UPI transactions could drive financial inclusion, offering small credit amounts to individuals and gradually increasing based on creditworthiness.
• 💼 The reduction of cash handling and minting costs through increased digital transactions could save a significant portion of India's GDP, currently estimated at around 2%.

Q & A

What is the significance of the Reserve Bank of India's proposal to link credit cards to the UPI platform?

The proposal is significant as it provides additional convenience to users and enhances the scope of digital payments in India, potentially redefining the credit market and posing a threat to traditional card companies like Visa and Mastercard.

What does UPI stand for and why is it important in India's digital payment landscape?

UPI stands for Unified Payments Interface, and it is important because it has become the most inclusive mode of payment in India with over 26 crore unique users and merchants, playing a key role in the country's digitization agenda.

How does the linking of credit cards to UPI potentially threaten companies like Visa and Mastercard?

The linking could lead to a preference for UPI over these traditional card networks due to its convenience and lower transaction fees, possibly leading to a decrease in their market share in India.

What is the role of the issuing bank and the acquiring bank in a credit card transaction?

The issuing bank provides the credit line to the customer, while the acquiring bank handles the transaction on behalf of the merchant. They are both involved in the authorization and settlement of the transaction.

What is the Merchant Discount Rate (MDR) and why is it a concern for financial players in India?

The MDR is the fee charged by the issuing bank and the card network for processing credit card transactions. It is a concern because the Indian government has proposed zero MDR for UPI and debit card transactions, which could impact the revenue of banks and card networks.

What are interchange fees and switching fees, and how do they relate to the MDR?

Interchange fees are charged by the issuing bank to the merchant's bank for assuming the credit risk, while switching fees are charged by the card network for maintaining the infrastructure to process transactions. Both fees contribute to the MDR.

Why might zero MDR for credit card transactions be problematic for banks and the government?

Zero MDR for credit card transactions could mean that banks are not rewarded for the credit risk they take, and the government might have to compensate banks for their losses, potentially leading to a significant financial burden.

What is the potential impact of linking credit cards to UPI on the number of merchants accepting card payments?

The linking could significantly increase the number of merchants accepting card payments, as there are currently 50 million merchants accepting UPI payments compared to only 6 million with card-accepting point-of-sale machines.

How could the government potentially use the UPI platform to enhance financial inclusion in India?

The government could introduce micro-finance credit lines based on UPI, starting with small amounts and increasing as an individual's creditworthiness grows, thereby promoting financial inclusion and access to credit for the underbanked population.

What are the potential economic benefits of reducing cash handling and minting for the Indian economy?

Reducing cash handling and minting could save a significant portion of India's GDP, which is currently estimated to be around 2%, amounting to approximately 2.7 lakh crore rupees, by promoting digital transactions and reducing the costs associated with physical currency.

What is the potential role of credit card linking to UPI in promoting a cashless economy in India?

The linking could facilitate a shift towards a cashless economy by enabling more digital transactions, reducing the reliance on physical currency, and promoting the use of credit for a broader range of transactions.

Outlines

00:00

📲 RBI's Initiative to Link Credit Cards with UPI

The Reserve Bank of India (RBI) has proposed a significant move to allow credit card linkage with the Unified Payments Interface (UPI) platform, aiming to enhance digital payment adoption in India. This initiative will enable users with Rupee credit cards to make transactions through UPI apps, potentially revolutionizing the credit market and posing a threat to major companies like Visa and Mastercard. The script explains the card payment ecosystem, detailing the process of credit card transactions, including authorization and the role of payment gateways, banks, and networks like Visa. It also discusses the Merchant Discount Rate (MDR) and the implications of a potential zero MDR policy for credit card transactions.

05:01

💳 Understanding MDR and the Impact of Zero MDR on Credit Cards

This paragraph delves into the intricacies of the Merchant Discount Rate (MDR), which is a fee charged for credit card transactions. It differentiates between the interchange fee, paid to the issuing bank for assuming the credit risk, and the switching fee, charged by the card network for maintaining transaction infrastructure. The script highlights concerns that the financial sector has regarding the potential application of a zero MDR policy to credit cards, which could disincentivize banks and lead to a collapse in the market for card networks if they cannot compete with zero-fee UPI transactions. It also discusses the disparity in the number of debit and credit card users in India and the significant spending power of credit card users, suggesting that a zero MDR for credit cards could disproportionately affect higher-income individuals and businesses.

10:03

🚀 The Advantages of Credit Card Linking to UPI for India

The final paragraph outlines the potential benefits of linking credit cards to UPI for businesses, the economy, and the people of India. It discusses the vast increase in the number of merchants able to accept credit card payments, the possibility of micro-finance credit lines based on UPI to promote financial inclusion, and the potential savings for the economy by reducing the costs associated with cash handling. The script also touches on the broader implications for digitalization and the government's role in managing a potential monopoly on card networks, suggesting that a balanced approach to MDR fees could support both financial inclusion and the sustainability of card networks.

Keywords

💡UPI

Unified Payments Interface (UPI) is a real-time payment system developed by the National Payments Corporation of India (NPCI). It allows users to make instant interbank transactions using their mobile devices. In the video, UPI is central to the discussion as the Reserve Bank of India proposes to link credit cards to the UPI platform, which is a significant step towards enhancing digital payments and financial inclusion in India.

💡RBI

Reserve Bank of India (RBI) is the central banking institution of India, which is responsible for the country's monetary policy, regulation of the financial system, and issuance of currency. The video discusses the RBI's proposal to allow credit cards to be linked to the UPI platform, indicating a major push towards digitization and the potential impact on the financial ecosystem.

💡Credit Cards

Credit cards are financial instruments provided by banks that allow users to borrow money to make purchases. They are linked to a line of credit and require repayment with interest. In the script, the linking of credit cards to UPI is highlighted as a revolutionary move that could redefine the credit market in India and pose a threat to companies like Visa and Mastercard.

💡Digital Payments

Digital payments refer to the transfer of funds or making transactions electronically, without the need for physical currency. The video emphasizes the role of digital payments in enhancing financial inclusion and the convenience for users, especially with the proposed integration of credit cards into the UPI system.

💡Merchant Discount Rate (MDR)

Merchant Discount Rate (MDR) is the fee charged by banks and card networks for processing card transactions. The video discusses the implications of MDR, particularly the potential for zero MDR on UPI and credit card transactions, and the impact this could have on banks, card networks, and merchants.

💡Interchange Fee

Interchange fee is a part of the MDR charged by the issuing bank to the acquiring bank for a transaction. It compensates the issuing bank for the risk taken in paying the merchant on behalf of the customer. The script explains how interchange fees work within the context of credit card transactions and the potential issues with zero MDR for credit cards.

💡Switching Fee

Switching fee is another component of the MDR, charged by the card network (like Visa) to the issuing bank for facilitating the transaction. The video script uses switching fees to illustrate the costs involved in maintaining the payment infrastructure and the challenges of imposing zero MDR on credit cards.

💡Financial Inclusion

Financial inclusion refers to the extent to which individuals and businesses have access to useful and affordable financial products and services. The video highlights how the linking of credit cards to UPI could potentially enhance financial inclusion by expanding the reach of credit card transactions to a broader merchant base in India.

💡Micro Finance

Micro finance involves extending small loans to individuals who lack access to traditional banking and financial services. The script suggests that the government could leverage UPI to introduce micro finance credit lines, which could significantly impact financial inclusion and support small-scale businesses and daily wage workers.

💡E-Rupee

E-Rupee, although not explicitly defined in the script, can be inferred as a digital version of the Indian Rupee, which could be part of the government's efforts to promote a cashless economy. The video hints at the potential of combining digital currency with direct benefit schemes and credit lines to further digitize the economy.

Highlights

The Reserve Bank of India (RBI) proposes to allow credit cards to be linked to the Unified Payments Interface (UPI) platform.

Linking credit cards to UPI will provide additional convenience to users and enhance the scope of digital payments in India.

UPI has over 26 crore unique users and five growth merchants, making it the most inclusive mode of payment in India.

The announcement of linking UPI to credit cards has the potential to redefine the credit market in India.

This move poses a significant threat to giant companies like Visa and Mastercard.

The card payment ecosystem operates with issuing banks, acquiring banks, and payment gateways like Razor Pay.

Visa and Mastercard charge a transaction fee known as the Merchant Discount Rate (MDR).

The MDR includes interchange and switching fees, which are crucial for the functioning of the payment ecosystem.

The Indian government has announced zero MDR for UPI and Rupay transactions to promote digital payments.

There are concerns that zero MDR for credit card transactions could lead to banks not being rewarded for the credit risk they take.

A potential collapse in the market for Visa and Mastercard if credit cards also incur zero MDR.

The disparity in the number of debit and credit card users in India, with credit card users spending significantly more.

The potential for financial inclusion through micro-finance credit lines based on UPI.

The economic impact of cash handling and minting, which costs India approximately 2% of its GDP.

The possibility of direct benefit schemes and e-rupee expanding the scope of digital transactions in India.

The advantages of credit card linking to UPI for businesses, the economy, and the people of India.

The potential for UPI to revolutionize financial services and inclusion in India.

Transcripts

use of upi the reserve bank is proposed

to allow the linking of credit cards to

the upi platform the rbi said this

facility will be enabled on repair

credits the rupee credit cards will be

linked to the upi platform this will

provide additional convenience to the

users and enhance the scope of digital

payments rbi is given a major push to

the digitization agenda by announcing a

series of measures that are going to

further boost digital adoption and the

big one is linking upi with credit cards

upi has become the most inclusive mode

of payment in india with over 26 crore

unique users and five growth merchants

on the platform

hi everybody on 8th of june 2022 the

reserve bank of india officially allowed

the users to link their credit cards to

all upi platforms which means within

some days if you own a rupee credit card

and a mobile phone you could make your

credit card transactions through a upi

app without using your credit card at

all and as soon as this announcement

happened it became such a sensation that

every single news channel every single

newspaper started lording the npci about

how revolutionary this move is

and this move is so big that on one hand

it could redefine the entire credit

market of india on the other side it is

a big big threat to women giant

companies like visa and mastercard the

question is why is the credit card

linking to the upi system such a

revolution for the people of india how

will it change the lives of ordinary

people like you me and thousands of

small businesses all across the country

and most importantly why is it yet

another lethal threat to giant companies

like visa and mastercard

to understand this we first have to

understand how the card payment

ecosystem operates in the first place

now people i had already explained this

flowchart in the rupe episode about

three months back so if you remember

this complex flowchart then please skip

to this timestamp and for those who

don't here's a very very simple

explanation about how does your credit

card system work in the first place

let's say i have an hdfc visa card with

one lakh rupees of credit limit and alan

polly is a clothing merchant with her

account in icsei this makes hdfc the

issuing bank and icici the acquiring

bank

and this is how the transaction between

us gets executed in the backend

when i enter my hdfc card details to

make a 10 000 rupees payment the website

captures my card information and

transmits it to the merchant's payment

gateway which is razer pay here the

value add of razer pay is that it will

help the merchants receive payments from

different sources like credit card debit

card and upi and since i'm making a

credit card transaction razer pay will

collect my card information and the

transaction amount and passes it on to

the merchant's bank which in this case

is icsa

from then onwards icsa will capture the

transaction and forward the information

to my credit card network which is visa

this is where visa rules the transaction

to my bank which is hdfc and request for

an approval so basically visa is asking

hdfc system whether i have enough funds

and what is the status of my account so

let's say my card is blocked then this

transaction will be declined if i do not

have enough credit limit then again this

transaction will be declined similarly

if it's a debit card and i do not have

enough balance then this transaction

will be declined and if everything is

all right and if i have the required

credit limit to carry out the

transaction then this transaction is

authorized this approval process is

known as authorization

after that hdfc sends the response back

to visa wherein htfc says everything is

perfect and assigns and transmits an

authorization code along with its

response and this way 10 000 rupees is

put on hold from my htfc account

then visa sends this approval to the

merchant's payment processor which is

razer pay who in turn sends the approval

to the acquiring bank that is icse icsa

then routes the approval code to the

merchant's terminal and depending on the

merchant or the transaction type the

merchant's terminal prints a receipt for

the customer to sign so if it's a

website you will see a digital receipt

if it's a swipe machine you will get a

receipt printed this is how the

transaction is processed

now we come to the business part of the

process

to carry out this transaction the

issuing bank or the customers bank and

the credit card network charge their

fees together which accounts for three

percent which is three hundred rupees

and this percentage could range anywhere

between one to three percent in this

case considering three percent fees on

ten thousand rupees three hundred rupees

is deducted and nine thousand seven

hundred rupees is transferred to the

merchant's account and this transaction

fee is known as mdr or merchant discount

rate apart from that razer b will levy a

charge of 0.5 percent which will

eventually give the merchant 9650 rupees

this is how the payment ecosystem works

together to process our transactions

it's just that for debit cards there are

two simple differences

instead of credit limit the amount gets

deducted directly from your bank account

so the repayment process is eliminated

and secondly the mdr for credit card is

way more than debit cards so while debit

card mdrs are capped at 0.9 percent for

credit cards the mdr is typically one to

three percent

now listen to this very very carefully

people this mdr now is split into two

variables the first variable is

something called interchange fee and the

second is something called switching fee

in this case if you see the issuing bank

is actually taking a risk by paying 10

000 rupees to the vendor on your behalf

as a result the issuing bank needs to be

paid for providing the value of

de-risking

this is the reason why the customer's

bank charges the merchant's bank a fee

and this fee is called as the

interchange fee

secondly to carry out this transaction

visa is also spending an exorbitant

amount of money to maintain this

humongous infrastructure to make sure

that this payment is carried out without

any hassles so

visa also charges a fee to the

customer's bank because it is enabling

its customers to make a transaction

this fee is called as the switching fee

so mdr is not some random deduction but

a very very important payment made for

an important value adding processes that

are carried out by the customers bank

and the card network which in this case

is visa and both these fees are deducted

from the merchant's revenue as merchant

discount rate

and this is where ladies and gentlemen

the major concern of the financial

players of india comes in

the discussion around the mdr or the

merchant discount rate is heating up

again with the finance minister having

announced last month uh that the

merchant discount rate will not be

applicable for upi uh as well as rupee

related transactions start those modes

which are getting notified will not have

charges under the mdr

being levied on them now having a zero

mdr charge was a long-standing demand of

the payment council of india

now if you remember from our rupee

episode the government of india boldly

stated that there will be zero mdr for

rupee debit cards and upi transactions

so if you pay 1000 rupees from your

rupee debit card the seller will receive

1000 rupees without any deductions of

mdr and to compensate for the losses

incurred by the banks in 2021 the

government put out 1 300 crores for a

period of one year to compensate for all

the losses incurred by the banks in this

process

but now that upi is going to be linked

with credit cards everybody is afraid

that rbi might impose zero mdr for

credit card transactions also so the

question over here is this is such a

great step right merchants will be able

to make money without any deductions and

the customers will go more cashless and

if this is already being done for debit

cards what's wrong with doing it with

credit cards

well ladies and gentlemen there are

three important reasons for that number

one when you make a debit card

transaction your bank does not take a

risk by paying the shopkeeper on your

behalf because the money is just being

transferred from your account to the

merchant's account so the money already

exists

but when it comes to zero mdr for credit

cards your bank takes a risk by paying

your bill to the shopkeeper on your

behalf with the hope that you would pay

it back but if rupee credit cards start

incurring zero mdr then either the banks

will not be rewarded for the credit risk

or the government again has to pay a

very hefty amount to compensate for

their losses secondly if rupee incurs

zero mdr and visa and mastercard incur

2.5 mtr then automatically the

shopkeepers will stop accepting visa and

mastercard so their market will collapse

and this is like nationalizing the car

network market of india

and thirdly

this zero mdr is great for debit cards

but it could be a disaster for credit

cards the question is why is that well

if you look at this chart you will see

that there were nearly 92 crore debit

cards in india while there were only 7.4

credit cards in india but if you look at

the value of payments made via debit

cards and credit cards in the same month

you will see that while the value of

debit card payments stands at 64 000

crores during the same month the value

of payments from credit cards which is

84 crore units lesser than debit cards

is still way ahead at 1.07 lakh crudes

secondly if you look at the average

spending of a credit card user versus a

debit card user you will see that while

an average debit card user spends 700

rupees per card per month an average

credit card user spends 14 500 rupees

per month per card and this tells you

very very clearly that the people owning

a credit card are way richer and earn a

significant amount of income more as

compared to a majority of debit card

owners and obviously the places where

credit card users and debit card users

use their cards will also vary vastly

now mind you i am not saying that debit

card owners are poor i am just saying

that a major chunk of debit card owners

have less spending capacity as compared

to a major chunk of credit card owners

therefore when you say zero mdr for

debit cards it's a wonderful step

towards financial inclusion cashless

economy and digitalization because it's

more likely to be used in villages towns

and for small businesses

but if zero mdr is applied for credit

cards we could be ripping off a valuable

source of income from mastercard and

visa and this money is mostly coming

from the richer class of india and is

also going to the rich businesses who do

not mind paying an mdr and if this is

done visa and mastercard will have no

incentive whatsoever to operate in india

and soon enough if they quit india two

things will happen number one the

government will have to take the entire

load of compensating for the losses

incurred by the banks which is going to

be enormous and secondly the

government's car network will become a

monopoly so tomorrow if the ruling party

changes and they decide to run it like a

typical government company

we all know what could happen with upi

this is the reason why people are hoping

that either the government imposes mdr

as usual or imposes zero mdr for a

limited amount of transaction like 1 000

rupees or less so that the lower

economic strata can benefit without

killing the income of visa and

mastercard which are making money from

mostly premium customers

these are the concerns of the merchant

discount rate and the linking of credit

cards to upi

and this brings me to the most exciting

part of the episode and that are the

incredible advantages that this linking

will bring for the businesses for the

economy and most importantly for the

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moving on here are the most incredible

advantages that the credit card linking

of upi could bring for the people of

india

firstly from the business standpoint

right now there are only 6 million card

accepting point of sale machines in

india whereas there are 50 million

merchants accepting upi payments so you

see the scope of using a credit card

will explode by 45 million merchants

just because of this upi linking to

credit cards secondly if the government

introduces micro finance credit line

based on upi that would be absolutely

crazy for instance the government might

start with 500 rupees credit for people

like raju who's a daily wage worker then

after he repays this small amount it

might extend to 1 000 rupees to 2000

rupees and so on so as the credit

worthiness of an individual increases

the government could keep on increasing

the line of credit and after a certain

cap of say 10 000 rupees raju could use

his credit history to get bigger loans

from sbi this way the government could

take financial inclusion to a whole new

level in india and from our bangladesh

episode we already know the power of

micro finance thirdly did you know that

handling accounting and minting of cash

actually caused the economy of our

country two percent of our entire gdp

that's about 2.7 lakh crore rupees now

that's a lot of money to manage money

so even if a fraction of this cash goes

digital it's going to be an incredible

opportunity for the government of india

and combine that with direct benefit

schemes credit line and e-rupee

the possibilities are endless for india

that's all from my side for today guys

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