Credit cards

Two stories about UPI and credit cards

Bank of America wanted as many people as possible to use the credit card to see if it would work, and they also needed to onboard as many merchants. But you can’t get one without the other. It was a chicken and egg problem.

So instead of traveling the entire state, they decided to conduct an experiment in Fresco, a mid-sized city in California. At the time, of the city’s 250,000 residents, nearly half were Bank of America customers.

Bank of America decided to act fast and break things.

One morning in September 1958, when residents woke up and went to their mailbox, they found an envelope from Bank of America.

Inside was a credit card, ready to use.

Overnight, Bank of America sent 60,000 working credit cards to its customers. No application process. No strings attached.

Bank of America felt that the best way to drive adoption of a new payment technology was to make it free. The idea was that once customers got used to credit cards, they would make it a habit. Bank of America paid a high price. They lost a lot of money at first due to fraud, non-payments and other issues, but slowly adoption grew and they figured out who to give credit cards to and who not to. TO DO.

And a financial revolution was born.

From there, Bank of America licensed the product bank after bank, and soon a consortium of banks formed an alliance to compete against them. So today we have Mastercard and Visa, two of the biggest financial companies in the world. They are neither banks, traders, issuers, nor creditors. They’re basically technology companies that run the payment network that everyone taps into if they want their customers to access their own money (debit cards) or money that isn’t theirs (debit cards). credit).

Anyway the reason I’m telling this story is if you want to understand what the RBI did by allowing credit cards to link to UPI last week the story isn’t too much different from what Bank of America has done with credit cards for six decades. from.

The parallels are obvious. UPI is a creation of the National Payments Corporation of India (NPCI), which is a consortium of Indian banks. It is an infrastructure layer that banks can connect to to allow their customers to transact. Until last week, customers could only access their own money, but now they can access money that isn’t theirs. It is a new payment instrument that revolutionized the financial system because it was much more convenient than its predecessors. Additionally, other payment methods in India are incredibly more restrictive than in other markets. You need two-factor authentication for any online card transaction. Recurring payments are a pain to use. And from next month, it will no longer be possible to save credit card details on websites. Compared to all that, UPI looks like a superior product.

Oh, and it was widely adopted because it was free. No application process. No strings attached.

The idea was that once consumers got used to it, they would make it a habit.

But there are differences. However, the main distinction between credit cards and UPI is the direction in which the innovation occurred. Credit cards were created by banks to counter regulations that restricted the size of large banks and the type of products they could create. Mastercard and Visa were created by banks to break the shackles imposed on them. That’s why it took them decades to finally get to where they are today.

On the other hand, the NPCI is an entity that was originally established by the RBI and is now owned by banks. UPI operates on a zero MDR model, meaning consumers and merchants pay nothing to use it, making it preferable to debit and credit cards.

And last week, when the RBI announced that UPI would be linked to credit cards, it specifically stated that it would start with Rupay credit cards. Rupay has some of the lowest MDRs in the country, which has resulted in a lot of adoption. And he got help along the way to make sure he became popular very quickly. If a company has a certain size, there is regulations which make the acceptance of Rupay cards compulsory. When the Indian government launches financial inclusion initiatives, like establishing bank accounts for unbanked Indians, the majority of them get Rupay cards. All of this helps.

And who created RuPay? Well, the NPCI of course. Like my colleague Arundhati once wrote, “the NPCI is a competitor. It’s a platform. It’s a regulator. It’s an industry association. It is a profitable non-profit association. He is a rule maker. He’s a judge. He is a spectator. »

Credit cards were a bottom-up innovation. They have been pushed to consumers due to restrictions imposed by regulators.

UPI is top-down innovation. It was pushed down by regulators due to consumer restrictions.

This is not a judgement. I think the UPI is an exceptional product and I am constantly amazed at how well it works in various situations.

But credit cards are also magic. As others have pointed out, credit cards are easier to use than UPI and are still the preferred option for millions.