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With the Reserve Bank of India’s (RBI’s) move to link credit cards with the Unified Payments Interface (UPI), speculations have been growing around the merchant discount rate (MDR) for these transactions. 

The MDR is a fee that is paid by the merchants to the banks for processing every card payment. While the card-issuing bank gets a share of it, the remaining amount is distributed between the payment network and point-of-sale terminal providers. 

A Business Standard report quoted a source from the payment industry as saying that the central bank’s decision to allow credit cards for payments via the UPI is likely to attract a MDR. However, the RBI will give subsidies to smaller merchants for MDR. 

“…one thing is for sure, this will not work without charges. There has to be a commercial model. If the commercial model is viable for the merchants, they will accept credit card transactions,” the source was quoted as saying.

The central bank said that the facility for credit card linkage with UPI will only be available on RuPay credit cards to begin with, and will then gradually be expanded to other credit card networks.

Currently, the MDR for credit cards is at 2-3% of the transaction amount, while no MDR is levied on the usage of debit cards on the UPI.

Last year, the Centre had approved a INR 1,300 Cr incentive scheme to promote RuPay debit cards and low-value BHIM-UPI transactions of up to INR 2,000. 

Experts believe that the move to link credit cards with UPI will lead to an uptick in the credit card transactions in the country. However, MDR charges are likely to prove to be a deciding factor for its success.

According to an RBI report, out of all modes of transactions, credit cards had the lowest penetration at 5.5% in India. As of March 2022, the value of credit card transactions stood a little over INR 1 Lakh Cr.

Meanwhile, a report by Goldman Sachs said that the MDR on credit card transactions via the UPI can be capped at a marginally lower rate to incentivise its usage. 

The report said that the volume of credit card transactions has grown at a CAGR of 15% to reach $130 Bn in FY22 as compared to $97 Bn in FY20. This volume is anticipated to grow at a 22% CAGR to reach $285 Bn by FY26 without integrating credit cards into the UPI system.

However, the report said that every 5% increase in credit card transactions due to UPI linkage would lead to $38 Bn in additional annual credit card volumes or $760 Mn in MDR charges if the charges remain the same as now.