68. Credit Card + BNPL + Prepaid Card + UPI

On 21st December 1898, Marie Curie and her husband Pierre Curie discovered Radium. Radium is highly radioactive with a half life of 1600 years. Radium has usage in medicine and research. But back then, few people thought radium was wholesome and found outrageous usage for it (check below), and of course the outcome was not good.

Radium Cigarettes, cosmetics, drinking water (Source)

What’s its connection with a blog that talks about payments/FinTech? Nothing… maybe you can make one.

This article is about ‘credit’… Yes, the age-old financial product that comes in various shapes and forms. In the past, I covered a few topics related to credit: Credit Card Processing, Buy Now Pay Later, prepaid cards in credit, Account Aggregator. In this article, we will

cover diverse topics related to recent updates on credit cards and UPI.

Credit Card Issuance Guidelines:

RBI issued a new circular on issuance of cards and also, specific section on co-branded cards. (Deadline: 1st July 2022; 3 action items got extension till 1st Oct 2022)

RBI’s new credit card guidelines are in favour of cardholders. Summary:

• Transparency: in charges, interest, EMI, offers
• Safety: Clear info about Most Important Terms and Conditions, multiple channels for raising disputes or blocking cards, clear billing
• Convenience: One time option to change bill cycle
• No Unsolicited activities: Card issuers to seek explicit consent from cardholder to activate card, to offer additional product (e.g. insurance, credit products), upgrading card or card limit

RBI guidelines will cut off co-branding partners (e.g. Tata, Zomato, Amazon) from accessing transaction data and also prohibit them from being a part of any process or control. So a co-branding partner’s role will be limited to lead generation and initial point of contact for customer grievance (at best).

This data is important to understand the usage pattern and offer tailor made offers or build new business cases. Overall, this is a major set-back for FinTechs and large enterprises that were building co-branded card programs.

Lending beyond credit card:

Credit cards are one of the lending models. There are many ways lending is done — Secured and unsecured.

How are UPI and Prepaid cards fitting into lending?

FinTechs (and NBFCs) not only want to give credit but also play a role in facilitating consumption/spend of that credit. To achieve this, the companies have to solve (a) Issuance side (b) Acceptance side.

Let’s take the example of BNPL (Buy Now Pay Later) — At first, BNPL companies built acceptance through direct integration with merchants, Payment Aggregators (e.g. PayU, Cashfree, RazorPay etc.) or checkout wrapper (Juspay). This approach is slow and involves high effort/cost

• Require sales and partnership team to convince merchants
• Merchant should be interested in adding one more BNPL and spend time on integration

So the simpler way would be to go for universal and existing acceptance networks and issue payment instruments that work on those rails.

Card network and UPI are two such acceptance networks available in India. Here is the comparison

FinTechs and NBFCs took both routes and hit the roadblocks. Let’s revisit those:

A. Prepaid Card Route:

Prepaid cards are ‘stored value’ cards (physical or virtual) issued by a bank or PPI (Prepaid Payment Instrument) licensed entities along with a card network (Visa, MasterCard, RuPay). Although meant for store value use cases (gifting, expense management etc.) but FinTechs found a unique model where you can use the card to facilitate the credit line and these prepaid cards will act similar to a credit ‘like’ cards (emphasis on ‘like’).

To make it attractive — add some clever billing cycle (⅓ payment), give some offers on purchase, give swanky cards with amazing unboxing experience, make it mobile-app centric (where users can control card features and view offers etc.)

Roadblock: Everything was going well till RBI amended PPI guidelines and added a condition that non-Bank PPIs cannot be loaded with credit lines.

RBI is not stopping FinTech/NBFCs from issuing loan or BNPL products but just doesn’t want them to do it using prepaid cards and follow the guidelines in case of credit cards.

Many NBFCs and FinTechs are operating on this model (e.g Slice, LazyPay etc.) — so obviously these companies are not happy and trying to find middle ground or seek extension.

For now, it is unclear whether RBI will agree or not. Also, the RBI doesn’t mention banks. But if you go by the intention of RBI (i.e. do not play around with credit/lending), I am sure RBI will enforce similar rules for bank PPI as well. So time to go back to the drawing board.

B. UPI Route:

UPI is the largest payment ecosystem in India (after cash) with millions of acceptance terminals (QR Codes that we see in every shop). Also, UPI provides seamless payment experience for both online and instore purchases, and the cherry on top, no MDR (Merchant Discount Rate) for merchants or fees to UPI users.

Experiment A: UPIs on common account

Each user will get a UPI ID (VPA) that is created on top of a single bank account of the acquiring bank just that user doesn’t have MPIN (FinTechs create their own PIN for security purposes).

Difference between regular UPI and this model is that the user doesn’t have to enter MPIN (in NPCI’s common library page) but the acquiring bank will authorise it from the backend.

As expected, NPCI had concerns with the model — so they asked banks to stop it (some time Mar’22 or Apr’22).

Experiment B: UPI Payout model

This is a clever model, where the user is not actually doing any UPI transaction but a payout is done to UPI.

When a UPI QR is scanned, you get the UPI ID and then make a payment to that UPI ID.

This model works well with only one drawback that a UPI payout is not free (UPI payout is little more expensive than IMPS payout). Hence, this is an additional cost to the FinTechs.

UPI + Credit Card

UPI supports online payments, it supports offline payments, voice based payment, on-device wallet (upcoming), recurring payment. The only thing that was missing was ‘proper’ credit on UPI. Yes, I used the term ‘proper’ because UPI 2.0 supported overdraft accounts but didn’t fly.

Finally, RBI allowed Credit Card + UPI linking.

What it means: At present, users can link their bank account to UPI ID by route of Debit Card (also, Aadhar OTP). Debit card is only to link the bank account. UPI transactions are bank transactions and not card transactions that involve card networks (Visa, MasterCard, Rupay).

Now, users can link their credit cards to UPI and pay using their credit line (to begin with only RuPay CC and eventually Visa and MasterCard will be added, hope so)

This move will increase the acceptance of credit cards — offline as well as online (basically wherever UPI is accepted). Just like any other product, even here there are lot of unanswered questions:

1. MDR: At present there is no MDR on UPI (meaning: merchant doesn’t incur any charges, ideally) and it played a big role in UPI’s success among small merchants. Also, users are open to use UPI as they do not have to pay any fees. Credit will not be free — so there will be ‘some’ risk adjusted fee. The question is — will merchants and users be fine with ‘fees’/MDR.
2. Credit problem: There are far fewer credit cards than debit cards. UPI+Credit Card will solve the acceptance problem but not the issuance side. Still a bank decides whether to give credit cards and that won’t change.
3. Misuse: Unless there are proper checks and balances in place (such as a strict enforcement of MCC-merchant category code), bad merchants may exploit it.
4. P2P and P2M: Of course, credit card linked UPI will not be allowed for P2P (Person to Person) transfer and will be limited to P2M (Person to Merchant) transactions
5. Role of network and interchange fee: In the present model (UPI+Debit card), card networks do not play any role — hence they don’t earn anything.

• Will it be the case for the UPI+Credit Card model as well? (where a credit account is used for transactions rather than an actual credit card).
• And what will be the revenue for card networks, especially for Visa and MasterCard which are non-government affiliated companies?

India is a credit hungry country. FinTech/NBFCs have a big role to play in meeting the requirement. But that doesn’t mean RBI will give free way to FinTechs, especially after we witnessed wave of Chinese lending Apps, unsolicited loans cases, violation of human dignity while recovering loans and even suicides.

I am sure some smart people will find a way to build businesses while adhering to these guidelines while making sure people are not adversely impacted, just like the Radium story.