UPI and the Premiumisation of Cards
UPI is impacting the Credit/Debit cards through two factors – one on the consumer side and one on the business side. On the consumer side, the payment apps are often more convenient than swiping a physical card -the UPI QR Code scores over a POS machine here. From the business side, accepting payments through UPI comes at zero cost while Credit/Debit cards involve costs – anywhere between 1-2% or even more in the case of some cards. Card issuers do pass on some of this fee to the customer through things such as reward points or interest-free EMI etc. But the allure of these incentives is not very high in the case of smaller ticket payments. For bigger ticket payments, the allure of reward points and cashback and EMIs etc means that Cards can still compete or even outcompete UPI.
What this is doing to the card issuers is changing the mix of their transactions – a relatively smaller number of lower sized transactions and thus a higher share of larger ticket payments. This ought to result in an increase in the average transaction size of payments through cards. And this is precisely what we are seeing in the data. The average size of payment through credit and debit cards have increased sharply in the last few years even as that for payments through UPI has remained largely unchanged. This is creating the illusion that Card payments are getting premiumised. But that is a reflection of the impact caused by UPI.