A lack of clarity surrounding the interchange fee structure and lower adoption rates among smaller merchants have hindered the uptake of credit transactions through the unified payments interface (UPI), according to industry experts.
In a bid to encourage credit transactions on the UPI network, the Reserve Bank of India (RBI) enabled payments financed by banks through pre-sanctioned credit lines. However, the absence of a defined interchange for credit on UPI, coupled with concerns regarding the potential cannibalisation of credit card balances by larger banks, has impeded widespread adoption.
Experts say volumes have been low thus far with the imposition of fees, such as the merchant discount rate (MDR), on merchants for each transaction involving credit being a deterrent. Merchants, accustomed to free UPI payments via bank accounts, exhibit limited adoption on the demand side of the payment flow.
The hurdles
| Currently, only a handful of banks offer credit on UPI, including Axis Bank, HDFC Bank, ICICI Bank, Punjab National Bank, and State Bank of India. |
Despite its potential benefits, such as flexibility and cost-effectiveness compared to traditional loans, the integration of loan accounts with UPI handles requires a sophisticated technology stack, posing a challenge for many banks.
| The ambiguity surrounding MDR charges further disincentivises mid-sized and smaller banks from investing in credit on UPI. |
Consequently, business-to-business (B2B) UPI transactions, which represent a potential proxy for credit line transactions, remain minimal.
In a bid to expand access to credit on UPI, non-banking financial companies (NBFCs) and fintech firms have approached regulatory authorities to allow their participation. However, regulatory concerns over the surge in unsecured consumer loans may impede the entry of non-bank lenders into this space.
Enabling NBFCs and fintech firms to offer credit on UPI could potentially increase transaction volumes, particularly among underbanked segments. However, regulatory oversight and adherence to know-your-customer (KYC) protocols remain pivotal to mitigating associated risks.
