Daybreak - Credit-on-UPI is going to change credit card economics forever

Episode Date: July 25, 2023

The fintech sector has been buzzing after the Reserve Bank of India (RBI) permitted credit lines on UPI a few months ago. From what we know so far, banks are likely to gain the most out of it.But a credit line-backed UPI product will also change how customers use credit. While they might continue to choose credit cards for high-value purchases, for smaller purchases like groceries and clothes, they could very well start looking at the new product. The whole rewards system which had been helping issuers draw huge numbers of credit-card users, is going to change with it. In fact, it may even come to and end.Tune in.RecommendationThe Indian credit market is ripe for disruption againFree airport lounge access helped sell more credit cards. Now its come to bite banksDaybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

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With that, back to your episode. I am sure you've heard the news. People who have pre-approved credit lines from banks will soon be able to use it to make payments over UPI or the unified payments interface. The Reserve Bank of India had approved it a few months ago. Of course, it set the fintech sector buzzing.

Suhail Samir, the former Bharat-Pay CEO, even said that UPI will do to credit what the likes of companies like Bharat-Pay did to debit a few years ago. To help give you a sense of the scale that we're talking about, India has more than 960 million debit cards in the country right now. And credit cards? Just about 85 million. And what is the reason for such low credit card penetration? Customer acquisition is expensive. and it also calls for exhaustive credit assessments. But conditions in the credit market are probably headed towards a disruption very soon because of UPI.

And it makes sense, right? In all probability, credit via UPI is going to be a game changer. But to be sure, we obviously have to wait a bit more to see how it all actually plays out. But there is one area of the whole credit ecosystem where it is undeniably going to change the game. In fact, we could even go out on a limb to say that credit via UPI could even end it. Any guesses? The premium credit card reward system. Think joining bonuses and reward points to airport lounge access and the annual fee waivers and everything in between. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Da Sharma, and I Don't Chase the New Cycle. Instead,

thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Wednesday, the 26th of July. What we know so far, it is the banks, obviously, that are likely to gain the most out of UPI via credit. Their costs will be reduced. They will be able to access a much larger pool of potential credit card customers, and it also gives them more bargaining power in any revenue-sharing-enings.

with fintech. And who is going to lose the most? Apart from payment networks like Visa and Mastercard, buy now pay later players like lazy pay, simple, zest money, it is quite possible that even the biggies like Bajajaj finance will not be safe. You see, the consumption financing market can be broadly divided on the basis of the type of customer and the value of transactions. Usually, large ticket purchases such as home appliances are financed with credit cards. I mean by those who have credit cards. But people who do not qualify for credit cards turn to BNPL companies that fulfill their aspirational purchases.

You know, things like clothes and phones, stuff that usually falls in the medium to small ticket category. But a credit line-backed UPI product will change how customers use credit. They might continue using credit cards for high value purchases, but for small buys like groceries and clothes, they could very well start looking at the new UPI product. But wait, what about all the credit cards and their fancy rewards like lounge access at airports and loyalty points? Stay tuned to find out. You know how they say that even good things in excess can very quickly become bad?

That is literally what happened to credit card issuers. The crazy credit card rewards party is now coming to an almost brutal end. If you're a regular daybreak listener, then you will remember that I even spoke about how the whole lounge access at airports that credit cards had been using to bring more users ended up backfiring on them. HGFC Bank, State Bank of India and ICICI Bank have all very slowly and very carefully made reductions in the value of their reward points and even capped usage in the loss. few quarters. Plus, credit card dues from revolvers, the bank's favorite type of customer,

have also been falling. Revolvers are the most profitable customers. They are basically people who carry over a balance from one month to another instead of paying the entire due amount. These users pay as much as 40% interest per annum by revolving and they help the credit card issuer make obscene amounts of profits. But lately, like I said, dues from revolvers have been falling. Many credit card users now do things like paying rent via credit cards just to boost their spending and earn reward points or fee waivers. And these reward points and waivers have been so much that sometimes they are even enough to pay off those very credit card bills. So you see how the economics of premium credit card rewards is already falling.

apart. Then, last year in June, the RBI started opening up credit on UPI. It allowed linking of rupe credit cards to the UPI network. Experts said that it has the potential to expand the market for credit by nearly five times. Coming up next, this also means that the whole reward system, which has been helping credit card issuers, draw huge number of users, is going to change. Think of a market where users can link their credit cards to any app of their choice. And it doesn't matter which bank or which fintech that they got their credit on UPI product from. In such a market, loyal users are going to be showered with rewards from all sides. Let's take Kiwi, for example.

It is a Bangalore-based fintech startup that launched a credit on UPI product in partnership with Axis Bank last month. Right now, it is offering cashbacks on transactions, no matter. matter how small, and there are others which will follow. But you may ask, why should that disrupt the credit card reward scheme? The answer lies in transaction value. Apart from interest income, banks earn revenue from credit cards through something called MDR, which is the fee paid by merchants per transaction. The National Payments Corporation of India or NPCI, which operates the UPI has said that credit card UPI transactions below 2,000 rupees at small merchants

will be excluded from MDR. This means that small ticket transactions like paying for chai at your local tea shop will not earn banks or fintechs any income. But these are exactly the kind of transactions that Kiwi is rewarding. So far, like we talked about earlier, credit card users mainly use their cards for large ticket purchases like electronics or expensive appliances. But now, many of them also use it for far smaller purchases like groceries and other miscellaneous items. So you can understand how once credit on UPI becomes a thing and the type of reward system that it will encourage, the trend will move

towards lower value credit transactions. Yes, this could increase the total pie of credit transactions, but think of the ongoing fall in revolvers plus the reduction in ticket sizes. It will definitely make those huge credit card rewards that we have known so far seem even less palatable to card issuers. Because after all, rewards programs are designed based on the number of revolvers and the MDR that banks think they can earn from credit card transactions. But with both these things in the doldrums,

it does seem like the days of the crazy credit card revolvers. awards programs are coming to an end. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma. Your host, and today's episode was edited. by my colleague Rajiv Sien.