Credit on UPI: Holy Grail or Over Hyped?
India’s Real Time Payments Network, UPI, has been one of the biggest global fintech success stories - transforming the consumer payments experience in the country and ushering in a new era of merchant digital acceptance. Even French President Emmanuel Macron raved about it in his Republic Day visit to Jaipur
Aside from the experience, the sheer scale at which UPI operates is worth admiring…powering 11 Billion payments every month and with more than 300 million users. This is one of the most efficient payment systems in the world, leaving some of the most developed countries far behind in the payment infrastructure.
Also, the network has been evolving. A bunch of interesting features have been rolled out recently with the introduction of Rupay credit cards and now even cross-border remittance via UPI.
However, there was one announcement at the Global Fintech Festival last year that got everyone more excited than anything else - the long awaited Credit on UPI.
What is credit on UPI?
Until recently, customers could link their savings accounts, overdraft accounts, prepaid wallets and even credit cards to their UPI account.
With credit on UPI, customers can finally use their UPI handle on top of a pre-approved credit limit from their bank. This credit line can then be used to make payments via UPI in the normal way, but without touching their savings - instead structured as a loan that can be repaid after 30 days or longer (usually for a nominal fee).
In simpler terms, it is a credit card-like experience without the card “form factor”. The way most banks are rolling this out today is similar to a Buy Now, Pay Later (BNPL) product with a repayment after 30 days and the ability to roll the loan beyond that. Interest rates vary from bank to bank with some offering interest-free.
The expectation was that this would unlock a massive undeserved credit demand, fuel demand for small ticket loans and make credit accessible for a large number of the population. For the bank, this can also act as a “feeder” credit product - helping then assess the credit risk of new to credit customers before giving them a larger credit limit such as a credit card.
With still less than 60m credit card users in the country; the opportunity is doubtless enormous and could potentially lead to a major financial inclusion push. However - some aspects need a closer look for the true potential to be unleashed:
- Limited lenders on the platform: RBI has allowed only scheduled commercial banks to offer credit lines to their customers through UPI. About 5 banks including Axis Bank, HDFC, ICICI, Punjab National Bank and SBI are only live, limiting the reach to select credit-worthy customers. NBFCs and fintechs have not yet been allowed to participate - which ironically may have been the groups of lenders who would innovate most on these products
- Dynamics of zero MDR : The current ambiguity around merchant discount rate (the fee charged to merchants for payment processing of transactions) makes banks dis-incentivised to invest in credit on UPI. The banks for whom these products are relevant, generally have large credit card books and would be nervous of cannibalisation of credit card MDR.
- The promise of “new to credit”: RBI have mandated that only “exitsing to bank” customers can use UPI CL. This is a classic chicken and egg problem. Only Creditworthy customers are eligible, but they are the least likely to use this considering they have credit cards.
- Tech Infrastructure Challenges: UPI has thrived on small ticket transactions. The trend could continue for ‘credit on UPI’, with millions of transactions every day, the load on the banks’ Card Management Systems, Loan Management systems and other back-end platforms could be overwhelming. For many banks, this would need a tech upgrade with significant costs involved which may further delay the scale up.
At the core though, the power of credit on UPI really is the strength of the 70m merchant acceptance network and its interoperable nature. This is what will eventually make credit on UPI so powerful - but it may take longer than expected to get there.
What do you think will help ‘credit on UPI’ take off in a big way? Tell us in the comments!
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