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Customers attach their bank accounts to UPI and there is no requirement of credit assessment.
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Compared with credit cards (1.5-3 per cent MDR) or debit cards (0.5-1 per cent MDR), UPI does not charge the merchants. The Indian digital revolution was already years in the making under the umbrella of India Stack (a set of open APIs and digital public goods), and it got a huge fillip with the introduction of the Unified Payment Interface (UPI) in 2016. And who doesn’t want a fast-growing business that breaks even in one-and-a-half-years, right?īut things started changing a few years ago. That’s what made the cards business so special: India’s digital penetration would rise, and within that, the penetration of cards would rise. An investment of Rs 4,000 generates Rs 2,700 after tax - break even in 1.5 years. Historically, credit costs were only 5 per cent of assets (or Rs 1,100), which brings the post-tax earning per card to Rs 2,700. The first and second above work out to Rs 3,300. Against that, the costs are three-pronged: spend-based costs, marketing & collection costs and bad debts. On an average, each card earns net interest of Rs 3,700, and fees of close to Rs 4,400. The revenue stream of the card business is two-fold: net interest earned and fees & others. Credit card companies charge 30 per cent+ rate of interest to those who roll over the balance, and 20 per cent for EMIs. Of that Rs 22,500, Rs 11,300 is rolled over by paying only, say, 5 per cent right now, and the balance later Rs 8,200 is converted into a term loan (with EMIs) and Rs 3,000 is paid in the coming months. Of that, she repays Rs 112,500 at the end of the billing cycle, and the balance (Rs 22,500) is converted to loans. On an average, a cardholder spends Rs 135,000 per year. Depending on the channel, the company spends Rs 3,000-4,500 to acquire a cardholder. The economics of a typical card issuer in India - SBI Cards, for example - is something like this. Merchants are charged for every transaction that involves the use of debit or credit cards (merchant discount rate, or MDR), and the proceeds are shared by the initiating bank, the terminating bank and the intermediary. The large players partner with local banks to issue cards, while the smaller players used to issue cards independently, though that also is changing now. The global electronic payments processing industry has two large (Visa and Mastercard) and a few smaller players (American Express, Discover and JCB). Now for a brief detour to the economics of credit cards. Well, that did play out for a few years, but things are now changing. The cards business made a lot of sense because it would be fair to assume that like in the West, India would eventually digitise and users would use more debit and credit cards. The US stood at 20 per cent, UK at 11 per cent, and some countries were in the low single digits. A decade ago, the share of cash-based transactions in India by value was close to 70 per cent - among the highest in the world and next only to Russia and Indonesia.