The Reserve Bank of India (RBI) introduced Credit Line on UPI in September 2023, a move designed to bridge credit gaps and make credit more affordable and convenient for the underserved population.
Additionally, the decision could also encourage credit card users to switch to UPI credit lines, providing a seamless credit alternative other than conventional credit cards.
While various Indian banks, including HDFC Bank, ICICI Bank, PNB, and Axis Bank, have wasted little time going live on this product. At the same time, Fintechs, including PhonePe, Cred, etc, have either rolled out or are planning to launch Credit Line on UPI for merchants and customers.
This blog post sheds light on the meteoric rise of UPI credit lines and what banks and other service providers need to do to compete in India’s dynamic financial landscape.
Major Players Embrace Credit Line on UPI (CLOU): Product Launch and Strategic Partnerships on Rise
The introduction of UPI credit lines has planted the seeds for innovation and will transform how users will access credit. Banks and Fintechs are working in tandem to launch new products and gain an early advantage.
Here are a few noteworthy partnerships and product rollouts.
ICICI Banks and PhonePe Partner to Offer Credit Line on UPI
ICICI Bank has joined hands with PhonePe to provide credit lines on UPI for a few select users. The new service will allow ICICI Bank customers to avail of a credit line to make UPI payments of up to INR 2 lakhs within 45 days.
The collaboration will allow both players to attract new customers and create an extra source of revenue.
Cred to Power Credit Line on UPI by the End of 2024
Cred, one of the major Fintech players in the country has announced plans to roll out a credit line of UPI payments by the end of 2024. The decision is fueled by the rising number of credit card users who also use UPI to make payments and establish a solid footing in the Indian ecosystem.
HDFC Banks and Zeta Collaborate to Offer Credit Line on UPI
HDFC Bank and Zeta, one of the most reputed providers of advanced technology to financial institutions, will collaborate to offer credit lines on UPI.
The move allows HDFC to leverage Zeta’s cutting-edge Digital Credit-as-a-Service (DCaaS) solution to launch new credit products under NPCI’s CLOU scheme.
Why UPI Credit Lines Is Poised for Success?
Although credit instruments like overdrafts, cash credits, promissory notes, bills of exchange, etc exist, the arrival of UPI credit lines will be a game-changer for the 622 banks and 260 million UPI users.
Let’s talk about the advantages of UPI credit lines.
Merchant Discounting Rate (MDR) Is Not Applicable
Businesses and other merchants who accept credit card payments have to compulsorily pay merchant discount rate (MDR) that is shared between network providers, the POS terminal provider (acquirer bank), and the issuer bank (credit card user’s bank), leading to 1-3% loss for merchants.
However, the arrival of UPI credit lines with eliminate the network provider’s cut since the government’s UPI stack is the primary network, resulting in lower transaction costs for merchants.
Higher QR Code Acceptance
Credit cards require a specialised payment or POS machine, which is not the case with UPI payments since users can scan a merchant’s QR code or pay them by entering their unique UPI ID.
Additionally, more and more merchants are likely to switch to UPI-powered QR payments due to the lower transaction fees.
Higher Security Than Credit Cards
UPI Credit Line safeguards your savings accounts from fraud and other malpractices since you do not need to enter account or credit card details to make small transactions. Additionally, the UPI tech stack comes with advanced security features, including biometrics, tokenisation, encryption, etc.
Low Entry Barrier for Banks and Financial Institutions
At present, there are around 10-15 commercial banks that offer reliable credit cards in India. As mentioned earlier, more than 600 banks are live on UPI, making it a preferred network for credit accessibility and payments.
There is a clear winner here, which makes UPI credit lines one of the most bettable financial instruments today.
Additionally, the high capital expenditure involved in designing and implementing the operational tech stack for credit cards is significantly higher than that of setting up UPI credit.
Financial Inclusion
UPI credit lines perfectly align with the financial inclusion goals of the Indian government, Fintech companies, and other players in the financial landscape. It will open up new channels for the underserved population to access credit and improve financial stability.
Although banks have ramped up efforts to make their financial services more accessible to the marginalised and underserved population, mass adoption of credit cards in these communities is a far-fetched dream due to steep eligibility and infrastructure barriers.
The average customer acquisition cost can be around INR 3,000 to 5,000 per customer for credit products, which can be financially taxing for banks.
However, banks can lower acquisition costs for UPI credit lines with sachet credit and new-to-credit (NTC) schemes, attracting new and creditworthy customers.
Parting Words
The rise of credit lines on UPI is inevitable as it is a great opportunity for banks and Fintech companies to improve their credit offerings and offer seamless credit access to customers.
The convenience of UPI, coupled with the enhanced security features, lower transaction costs for merchants, and financial inclusion, make credit lines on UPI an attractive credit instrument.
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