Daybreak - How UPI will disrupt the credit card ecosystem

Episode Date: March 22, 2024

Not long ago, Suhail Sameer, former BharatPe CEO had said UPI will do to credit what the likes of companies like BharatPe did to debit a few years back. India has more than 960 million debit cards in the country and only about 85 million credit cards.  But conditions in the credit market are headed towards a disruption because of UPI and there’s one area of the whole credit ecosystem where it is undeniably going to change the game.  In fact, we could go out on a limb to say that credit via UPI could even end it.  Tune in to find out.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. The RBI set the fintech sector buzzing last year when it announced that people who have pre-approved credit lines will be able to use it to make payments over UPI. Suhail Samir, the former Bharat-Pai CEO, even said that UPI will do to credit what the likes of companies like Bharat-Pai did for debit a couple of years ago.

Now, just to help you get a sense of the scale that he was 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 headed towards a disruption because of UPI. In what ways exactly? We don't know yet, 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 of joining bonuses and reward points to airport lounge access and annual fee waivers and everything in between. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Dar Sharma, and I Don't Chase the News Cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays,

I will come to you with one business story that is worth understanding and over to your time. Today is Friday, the 22nd of March. 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 negotiation with fintechs. And who is going to lose the most? Apart from payment networks like Visa and Mar-Nine, 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. 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 last few quarters. Plus, credit card dues from revolvers, the bank's favorite type of customer,

have also been falling. Revolvers are the most people. 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 how small, and there are others which will follow. But you may ask, why should that disrupt the credit card rewards 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 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 you. API becomes a thing and the type of rewards 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 and the doldrums, it does seem like the days of the crazy credit card rewards 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, newsletter, subscribers, 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.