An increasing number of merchants have started declining RuPay credit card payments on UPI. This is due to the higher Merchant Discount Rate (MDR) charged on such transactions compared to regular credit or debit card payments.
The additional costs levied on payments made using RuPay credit cards linked to UPI are making the overall MDR higher from the merchant’s perspective. This extra charge is especially problematic for small merchants with thin margins.
To avoid losses, merchants across sectors like IRCTC, Decathlon, Pizza Hut, etc. have begun requesting banks to disable RuPay credit card acceptance on UPI, particularly for low-value transactions under Rs 2000.
This has put a brake on the stellar growth witnessed in RuPay credit card payments on UPI over the last few months. The trend threatens to derail wider adoption of RuPay in the credit card segment and also dilutes a key value proposition of UPI becoming a universal payment platform.
In this article, we look at the implications of RuPay credit card payments on UPI for merchants, banks, and consumers.
We also explore the measures taken to address concerns around MDR and examine how these can help balance the interests of all stakeholders going forward.
The Backdrop
Let’s first understand the context in which RuPay credit card payments on UPI emerged:
- UPI gained popularity in India due to zero charges or MDR for customers and merchants
- However, this zero MDR structure is not sustainable for banks and stakeholders
- To expand UPI usage, linking credit cards was seen as an important step
- RuPay was best placed for this since Visa and Mastercard cannot be directly linked to UPI as per RBI norms
- NPCI launched UPI AUTOPAY in 2020 to allow recurring payments via UPI
- This paved the way for RuPay credit cards to be linked with UPI in 2021
Initially, there was a lot of excitement around this move:
- Provided a major boost to UPI and RuPay
- Allowed credit card rewards and benefits on UPI payments
- Offered customers 45-50 days of interest-free credit
- Gave wider acceptance to credit cards on online platforms
However, over the past few months, the acceptance levels have dropped considerably.
The Problem Statement
The key issue is that the Merchant Discount Rate (MDR) on RuPay credit card UPI transactions is higher than regular card payments.
Let’s break this down for a Rs 1000 transaction:
Payment Mode
MDR
Beneficiary
UPI (bank account)
0%
–
Credit Card (POS/Online)
~2%
Issuer Bank – 1.5%<br>Networks – 0.3%<br>Acquirer Bank – 0.2%
RuPay Credit Card (UPI)
>2%
Issuer Bank – 1.5%<br>Networks – 0.3%<br>Acquirer Bank – 0.2%<br>UPI charges – 0.2%
The extra 0.2% UPI charges levied on RuPay credit card transactions make the overall MDR higher.
The UPI charges consist of:
- UPI interchange
- NPCI fees
- PSP commission
PSPs are Payment Service Providers like PhonePe, Google Pay, etc. This extra cost of accepting RuPay credit cards on UPI is problematic, especially for small merchants.
The Current Situation
As per my industry interactions, here are some details on the current scenario:
- ~15-20% of merchants have requested banks to disable RuPay Credit Card UPI payments
- Disabling is more prevalent for low-value transactions below Rs 2000
- Smaller offline merchants are the most affected due to thin margins
Some major merchants who have disabled RuPay UPI:
- IRCTC
- Decathlon
- Pizza Hut
- Jiomart
- Delhivery
- Mother Dairy
This has put a brake on the stellar growth trajectory seen in the early days:
- RuPay UPI transactions grew from Rs 50-60 crore per day in May 2022 to over Rs 100 crore now
- RuPay’s share in new credit card issuances jumped from 10% to 25%
The MDR issue threatens to undo this progress made by RuPay credit cards on UPI.
Impact of The Problem
The MDR issue could discourage banks from pushing RuPay credit cards, ultimately leading to fewer issuances and therefore lower acceptance of these cards across the country.
This could impact RuPay’s ability to compete with Visa and Mastercard, as well as its overall market share. Here are some of the potential consequences:
Impact on Customers
Customers are the most directly impacted by merchants disabling RuPay credit card payments on UPI. Here are the major effects on customers:
Impact
Details
Inability to use RuPay seamlessly
Customers will no longer be able to use their RuPay credit cards effortlessly for making UPI payments as more merchants disable this option
Loss of convenience
The ease and convenience offered by linking credit cards to UPI will be lost if RuPay acceptance declines at merchants
Loss of rewards
Customers will miss out on the credit card rewards and benefits when using UPI if RuPay is not accepted
Impact on Banks
Banks will also be significantly impacted both as card issuers and acquirers:
| Impact | Details |
|---|---|
| Slower RuPay growth | With declining acceptance, banks will see much slower growth in issuances of new RuPay credit cards |
| Lower interchange fees | Issuing banks will get hit as volumes and interchange fee income on RuPay credit card transactions reduces |
| Revenue loss | Acquiring banks will lose out on merchant MDR revenue as more merchants decline RuPay on UPI |
Impact on Merchants
Here’s how merchants will be affected:
Impact
Details
Loss of sales
Small merchants will lose out on sales from customers wanting to pay via RuPay credit cards on UPI
Continued MDR burden
If MDR stays high, more merchants will stop accepting RuPay credit cards on UPI to avoid losses
Impact on RuPay
Key impacts on RuPay:
Impact
Details
Slower growth
With reduced UPI acceptance, growth in RuPay credit card issuances and transactions will slow down
Market share loss
RuPay will find it harder to gain market share in the credit card segment from Visa and Mastercard
Impact on UPI
For UPI, here are the major implications:
Impact
Details
Loss of key proposition
A significant value proposition of having credit cards on UPI gets diluted by reducing RuPay acceptance
Slower growth
Could negatively impact UPI’s growth trajectory going forward
Becoming universal
The goal of UPI becoming a universal payment platform across use cases is hampered
Impact on NPCI
For NPCI, here’s how it gets impacted:
| Impact | Details |
|---|---|
| RuPay MDR perception | Extra charges levied on RuPay credit cards dilute UPI’s appeal of zero MDR |
Impact on Fintech Companies
And finally, the key impact on fintech companies:
Impact
Details
Reduced traction
Fintechs will see reduced traction for their RuPay credit card-linked UPI offerings
Using this data, we can see that RiPay credit card payments are declining at an alarming rate across different entities in the RuPay ecosystem. However, this has a negative impact on customers, banks, RuPay, UPI, and a number of other entities. It is critical that this issue be resolved as soon as possible.
Diagnosing Root Causes
Based on my expertise, I believe there are a few root causes contributing to this problem:
1. Extra Costs: The additional charges levied on RuPay credit card UPI transactions result in higher MDR. These charges should be rationalized
2. Business Model Misalignment: For UPI apps, RuPay credit card transactions are an extra cost head with no clear revenue model. They do not get merchant acquisition benefits as banks do.
3. Lack of Regulations: RBI is yet to issue final guidelines capping MDR on RuPay credit card UPI payments, leading to unchecked charges.
4. Market Share Politics: With UPI’s success, banks seem to be using high card MDR as a strategy to disincentivize UPI in favor of NACH, NEFT, and RTGS where MDR is allowed.
5. Tactical Moves: Many banks pushed RuPay cards aggressively to protect interchange fees in case MDR is removed on RuPay UPI transactions.
6. Inadequate Dialogue: There seems to be a lack of communication between stakeholders on MDR concerns related to RuPay credit cards on UPI.
My Recommendations
In my view, here are the steps needed to address this burning issue:
- Reduce MDR on RuPay Credit Card UPI Payments: Banks, card networks, and UPI players should collectively absorb some costs and bring down MDR. Graduated caps can be introduced based on transaction values.
- Incentivize UPI Apps: Banks could share a portion of interchange fees with UPI apps to offset their costs for facilitating RuPay credit card payments.
- Rationalize Interchange Fees: The interchange fee rate of 1.5% charged by issuing banks seems excessive. The RBI needs to look into capping interchange fees.
- Government Subvention: For PAN India adoption, the government could consider partial MDR subvention for RuPay UPI transactions up to a limit of say ₹2000 per month.
- Revise UPI Charges: NPCI should rationalize UPI charges imposed on payment service providers to reduce the burden on merchants.
- Transparent Communication: Banks and merchants should engage in open communication on MDR concerns instead of unilaterally disabling RuPay acceptance.
- Robust Redressal System: RBI needs to institute a strong grievance redressal mechanism for disputes related to MDR on RuPay credit card UPI transactions.
Final Thoughts
RuPay made significant progress riding UPI’s growth wave. It would be a mistake to lose this advantage by not working out a sustainable MDR framework.
My suggested measures require collective will and wisdom from all parties involved. As a veteran of many such negotiations, I remain hopeful that an optimal middle path can be found if everyone approaches this positively.
UPI converting India into a truly digital, cashless economy is in everyone’s interest. RuPay credit card acceptance on UPI is an important piece of that vision. It’s time for stakeholders to rise above petty politics and focus on the bigger picture.
The RBI must step in quickly and proactively to resolve this, keeping the interests of customers and merchants in mind.
What do you think? Please leave your comments below.
Thank you. I look forward to hearing what you have to say.
