Use of upi the reserve bank is proposed to allow the linking of credit cards to the upi platform the rbi said this facility will be enabled on repair credits the rupee credit cards will be linked to the upi platform this will provide additional convenience to the users and enhance the scope of digital payments rbi is given a major push to.
The digitization agenda by announcing a series of measures that are going to further boost digital adoption and the big one is linking upi with credit cards upi has become the most inclusive mode of payment in india with over 26 crore unique users and five growth merchants on the platform hi everybody on 8th of june 2022 the.
Reserve bank of india officially allowed the users to link their credit cards to all upi platforms which means within some days if you own a rupee credit card and a mobile phone you could make your credit card transactions through a upi app without using your credit card at all and as soon as this announcement happened it became such a sensation that.
Every single news channel every single newspaper started lording the npci about how revolutionary this move is and this move is so big that on one hand it could redefine the entire credit market of india on the other side it is a big big threat to women giant companies like visa and mastercard the question is why is the credit card.
Linking to the upi system such a revolution for the people of india how will it change the lives of ordinary people like you me and thousands of small businesses all across the country and most importantly why is it yet another lethal threat to giant companies like visa and mastercard to understand this we first have to.
Understand how the card payment ecosystem operates in the first place now people i had already explained this flowchart in the rupe episode about three months back so if you remember this complex flowchart then please skip to this timestamp and for those who don't here's a very very simple explanation about how does your credit.
Card system work in the first place let's say i have an hdfc visa card with one lakh rupees of credit limit and alan polly is a clothing merchant with her account in icsei this makes hdfc the issuing bank and icici the acquiring bank and this is how the transaction between us gets executed in the backend.
When i enter my hdfc card details to make a 10 000 rupees payment the website captures my card information and transmits it to the merchant's payment gateway which is razer pay here the value add of razer pay is that it will help the merchants receive payments from different sources like credit card debit card and upi and since i'm making a.
Credit card transaction razer pay will collect my card information and the transaction amount and passes it on to the merchant's bank which in this case is icsa from then onwards icsa will capture the transaction and forward the information to my credit card network which is visa this is where visa rules the transaction.
To my bank which is hdfc and request for an approval so basically visa is asking hdfc system whether i have enough funds and what is the status of my account so let's say my card is blocked then this transaction will be declined if i do not have enough credit limit then again this transaction will be declined similarly if it's a debit card and i do not have.
Enough balance then this transaction will be declined and if everything is all right and if i have the required credit limit to carry out the transaction then this transaction is authorized this approval process is known as authorization after that hdfc sends the response back to visa wherein htfc says everything is.
Perfect and assigns and transmits an authorization code along with its response and this way 10 000 rupees is put on hold from my htfc account then visa sends this approval to the merchant's payment processor which is razer pay who in turn sends the approval to the acquiring bank that is icse icsa then routes the approval code to the.
Merchant's terminal and depending on the merchant or the transaction type the merchant's terminal prints a receipt for the customer to sign so if it's a website you will see a digital receipt if it's a swipe machine you will get a receipt printed this is how the transaction is processed now we come to the business part of the.
Process to carry out this transaction the issuing bank or the customers bank and the credit card network charge their fees together which accounts for three percent which is three hundred rupees and this percentage could range anywhere between one to three percent in this case considering three percent fees on.
Ten thousand rupees three hundred rupees is deducted and nine thousand seven hundred rupees is transferred to the merchant's account and this transaction fee is known as mdr or merchant discount rate apart from that razer b will levy a charge of 0.5 percent which will eventually give the merchant 9650 rupees this is how the payment ecosystem works.
Together to process our transactions it's just that for debit cards there are two simple differences instead of credit limit the amount gets deducted directly from your bank account so the repayment process is eliminated and secondly the mdr for credit card is way more than debit cards so while debit card mdrs are capped at 0.9 percent for.
Credit cards the mdr is typically one to three percent now listen to this very very carefully people this mdr now is split into two variables the first variable is something called interchange fee and the second is something called switching fee in this case if you see the issuing bank is actually taking a risk by paying 10.
000 rupees to the vendor on your behalf as a result the issuing bank needs to be paid for providing the value of de-risking this is the reason why the customer's bank charges the merchant's bank a fee and this fee is called as the interchange fee secondly to carry out this transaction.
Visa is also spending an exorbitant amount of money to maintain this humongous infrastructure to make sure that this payment is carried out without any hassles so visa also charges a fee to the customer's bank because it is enabling its customers to make a transaction this fee is called as the switching fee.
So mdr is not some random deduction but a very very important payment made for an important value adding processes that are carried out by the customers bank and the card network which in this case is visa and both these fees are deducted from the merchant's revenue as merchant discount rate and this is where ladies and gentlemen.
The major concern of the financial players of india comes in the discussion around the mdr or the merchant discount rate is heating up again with the finance minister having announced last month uh that the merchant discount rate will not be applicable for upi uh as well as rupee related transactions start those modes.
Which are getting notified will not have charges under the mdr being levied on them now having a zero mdr charge was a long-standing demand of the payment council of india now if you remember from our rupee episode the government of india boldly stated that there will be zero mdr for rupee debit cards and upi transactions.
So if you pay 1000 rupees from your rupee debit card the seller will receive 1000 rupees without any deductions of mdr and to compensate for the losses incurred by the banks in 2021 the government put out 1 300 crores for a period of one year to compensate for all the losses incurred by the banks in this process.
But now that upi is going to be linked with credit cards everybody is afraid that rbi might impose zero mdr for credit card transactions also so the question over here is this is such a great step right merchants will be able to make money without any deductions and the customers will go more cashless and if this is already being done for debit.
Cards what's wrong with doing it with credit cards well ladies and gentlemen there are three important reasons for that number one when you make a debit card transaction your bank does not take a risk by paying the shopkeeper on your behalf because the money is just being transferred from your account to the.
Merchant's account so the money already exists but when it comes to zero mdr for credit cards your bank takes a risk by paying your bill to the shopkeeper on your behalf with the hope that you would pay it back but if rupee credit cards start incurring zero mdr then either the banks will not be rewarded for the credit risk.
Or the government again has to pay a very hefty amount to compensate for their losses secondly if rupee incurs zero mdr and visa and mastercard incur 2.5 mtr then automatically the shopkeepers will stop accepting visa and mastercard so their market will collapse and this is like nationalizing the car network market of india.
And thirdly this zero mdr is great for debit cards but it could be a disaster for credit cards the question is why is that well if you look at this chart you will see that there were nearly 92 crore debit cards in india while there were only 7.4 credit cards in india but if you look at the value of payments made via debit.
Cards and credit cards in the same month you will see that while the value of debit card payments stands at 64 000 crores during the same month the value of payments from credit cards which is 84 crore units lesser than debit cards is still way ahead at 1.07 lakh crudes secondly if you look at the average spending of a credit card user versus a.
Debit card user you will see that while an average debit card user spends 700 rupees per card per month an average credit card user spends 14 500 rupees per month per card and this tells you very very clearly that the people owning a credit card are way richer and earn a significant amount of income more as compared to a majority of debit card.
Owners and obviously the places where credit card users and debit card users use their cards will also vary vastly now mind you i am not saying that debit card owners are poor i am just saying that a major chunk of debit card owners have less spending capacity as compared to a major chunk of credit card owners therefore when you say zero mdr for.
Debit cards it's a wonderful step towards financial inclusion cashless economy and digitalization because it's more likely to be used in villages towns and for small businesses but if zero mdr is applied for credit cards we could be ripping off a valuable source of income from mastercard and visa and this money is mostly coming.
From the richer class of india and is also going to the rich businesses who do not mind paying an mdr and if this is done visa and mastercard will have no incentive whatsoever to operate in india and soon enough if they quit india two things will happen number one the government will have to take the entire load of compensating for the losses.
Incurred by the banks which is going to be enormous and secondly the government's car network will become a monopoly so tomorrow if the ruling party changes and they decide to run it like a typical government company we all know what could happen with upi this is the reason why people are hoping that either the government imposes mdr.
As usual or imposes zero mdr for a limited amount of transaction like 1 000 rupees or less so that the lower economic strata can benefit without killing the income of visa and mastercard which are making money from mostly premium customers these are the concerns of the merchant discount rate and the linking of credit.
Cards to upi and this brings me to the most exciting part of the episode and that are the incredible advantages that this linking will bring for the businesses for the economy and most importantly for the people of india meanwhile if you're someone who does not like doing deep market research while investing into the.
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Advantages that the credit card linking of upi could bring for the people of india firstly from the business standpoint right now there are only 6 million card accepting point of sale machines in india whereas there are 50 million merchants accepting upi payments so you see the scope of using a credit card.
Will explode by 45 million merchants just because of this upi linking to credit cards secondly if the government introduces micro finance credit line based on upi that would be absolutely crazy for instance the government might start with 500 rupees credit for people like raju who's a daily wage worker then after he repays this small amount it.
Might extend to 1 000 rupees to 2000 rupees and so on so as the credit worthiness of an individual increases the government could keep on increasing the line of credit and after a certain cap of say 10 000 rupees raju could use his credit history to get bigger loans from sbi this way the government could take financial inclusion to a whole new.
Level in india and from our bangladesh episode we already know the power of micro finance thirdly did you know that handling accounting and minting of cash actually caused the economy of our country two percent of our entire gdp that's about 2.7 lakh crore rupees now that's a lot of money to manage money so even if a fraction of this cash goes.
Digital it's going to be an incredible opportunity for the government of india and combine that with direct benefit schemes credit line and e-rupee the possibilities are endless for india that's all from my side for today guys if you learned something available please make sure to the like button in order to make youtube bubba happy and.
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