Credit Card Business Grows With UPI Support. The Reserve Bank of India has permitted linking credit cards to the unified payments interface (UPI). RBI Governor explained the rationale behind the decision: “This arrangement shall open more avenues and convenience to the users in making payments through the UPI platform.”The facility will enable semi-urban and rural branches to accept credit card payments without POS machines.
UPI has emerged as an inclusive mode of payment as it has onboarded 26 crore users and five crore merchants on its platforms. On the other hand, credit card spending rose by 6.4% to a record high of ₹1.16 lakh crore in July 2022, as per data released by the RBI. Credit card transactions increased by 3.1% from June to 23.5 crores in July. Bringing Credit cards and UPI together will enhance the numbers and result in the long-awaited penetration of credit cards into interior India.
John Biggins, a Brooklyn, USA-based banker, invented the credit card in 1946. Later, through a merger with Dine and Sign, the Diners Club produced the first “general purpose” credit card in 1950. Carte Blanche followed that and, in 1958, launched the American Express travel credit card. Central Bank of India issued the first bank credit cards in India in 1980, followed by Andhra Bank in 1981; both were of the Visa brand. MasterCard was introduced to India by Vijaya Bank in 1988.
UPI, introduced in 2016 by RBI, recorded 2200 crore transactions worth Rs.514880 crores last year. The credit card prevalent in India much earlier since 1980 is a poor cousin, recording below 5% of the UPI transactions. However, flaunted by the upwardly mobile nova riche in Indian society, the credit card adorns a glamorous outlook. It has universal usage and acceptance at a cost. It is ignored by the poor in preference to UPI, Paytm, PoS, Debit cards or internet banking that act as commoner’s credit cards. Credit cards and UPI marriage shall change the position soon.
Credit cards have low penetration of 5.55% in India, ranking 11th on the list of countries with credit card use, far behind the USA with over one billion cards. There are three credit cards for every 100 people in India compared to 32 cards in the USA. As per RBI data, India’s number of credit cards stands at 65.20 million as of December 2021. HDFC Bank, with over 1.76 crore active credit cards, as of June 2022, is the largest card issuer in the country. The Covid-19 pandemic has migrated most credit cardholders to online or e-commerce transactions, opening up more avenues for credit cards usage. Acceptance of digital payment, change in customer perception about debt, and a rising share of youth among the working population power this growth.
The Indian credit cards industry is growing at a CAGR of 25 per cent from 2020-2025. A study by TransUnion-CIBIL finds small cities driving the new credit cards issuance. Smaller locations in Tier II and III grew 23% compared to a -10% growth for metros. The Millennials and the young population between 18-25 accounted for 14% of new credit card issuance. UPI association will add further development.
A credit card company has three types of customers: Transactors (Those who pay their bills on time), Revolvers ( Those who delay their bill payment) and EMI availers (Those who convert into EMIs).
There are two revenue streams: Interest Income: Earned on unpaid credit card dues plus interest charged on the conversion of balance into EMI. Fee Income: MDR/ Interchange fees (which the merchant pays plus late fees penalties plus membership/renewal fees (Annual fees, joining fees) plus Fees on cash withdrawal on a credit card. On transactors, the card companies only earn the MDR since they repay on time each month. The companies make the MDR plus late fees and overdue interest income on Revolvers. The merchant pays a commission of 1 to 4 per cent of the value of each transaction on the credit card. The merchant also pays a merchant discount rate for each transaction.
Very low-value transactions reduce the profit margin, and Merchants avoid credit cards. Merchants lease or purchase processing equipment. After several days, funds are deposited into a merchant’s bank account, creating working capital gaps. UPI will change this.
Cards are popular because a transaction is often more secure than cheques. The issuing bank pays funds to the merchant the moment the transaction is authorised, regardless of the default of the consumer on the credit card payment. Cards are more secure than cash because they discourage theft by the merchant’s employees, reducing the money on the premises. Cards bring down the back office expense of processing checks/money and depositing them in the bank.
Compared to debit cards, a credit card allows small short-term loans within an approved credit line. No interest accrues when the balance is paid fully within the grace period. Cardholders’ convenience is the main reason for success. Associating API as a payment gateway for credit cards makes shopping cheaper and customer delight higher.
- Hargovind Sachdev
