The recent launch of  “Credit line on UPI” by NPCI is a pivotal point in India’s credit journey, one that will give rise to several fintechs. In essence, Credit line on UPI is set to become what Debit Card EMI aspired to be, and more.

Credit line on UPI makes all pre-approved bank lines available at the point of consumption, i.e. 30M+ UPI merchants and 1M+ terminal merchants (carrying ~6M terminals), accessible through any UPI app. Currently, popular options that provide credit at the point of consumption include Credit Cards, Debit Card EMI and Bajaj EMI Card, each fraught with its own limitations.

Credit Cards are restricted to only the top 2.5% or 35M users, leaving several segments underserved. It is the most complex financial product from a back end perspective, a 5-in-1 product encompassing payments, credit, rewards, status and credit builder. Due to this complexity, many banks, despite having large existing-to-bank (ETB) customer bases, struggle to effectively run credit card programs. Additionally, the economics of credit cards, while intriguing, are highly complex.

About 75% of the credit card market is concentrated among just four banks (HDFC, SBI, ICICI, Axis). These banks have primarily focused on distributing credit cards to ETB base, being conservative with new-to-bank (NTB) customers. This approach has resulted in low approval rates, which combined with a prohibitive CAC (customer acquisition cost) of around Rs 5K per activated NTB credit card customer, has prohibited the issuance of small credit lines ( less than Rs 50K). These small lines are economically infeasible given the higher payback cycles, leaving the low-to-mid income segment underserved. Furthermore, credit card acceptance is limited to terminal merchants (1M+), excluding tier 2+ audiences.

We believe that the introduction of Credit lines on UPI will alleviate these challenges, paving the way for fintechs to lead this revolution. History has shown that rigid credit card stacks, characterized by limited innovation in their core product for nearly two decades, have been disrupted by innovative solutions like Bajaj EMI Card, OneCard, Uni, Slice, PayTM Postpaid, LazyPay and others.

Debit Card EMI was introduced with the expectation of filling some of the gaps left by credit cards, given its wider distribution. However, it has failed to gain traction among non-credit card users for several reasons.

Debit cards have limited acceptance, primarily working at terminal merchants, much like credit cards. Moreover, Debit Card EMI is not yet available at all terminal merchants. Debit Card EMIs are restricted to high-value affordability purchases since they involve interest-bearing installment loans, rather than interest-free, reward-fetching credit lines like credit cards.

Additionally, Debits Card EMI services have provided a poor consumer experience due to their suboptimal backend stack, leading to issues such as the lack of native support for no-cost EMIs and an inability to provide repayment tracking to users. Lastly, Debit Cards have been historically viewed as ATM cards, resulting in low awareness around Debit Card EMIs – eligibility criteria, credit limits, and merchant acceptance.

The industry has been working on Cardless EMI as a potential solution for these issues, but we now believe that “Credit line on UPI” will leapfrog these efforts.

Bajaj’s EMI card has been a true game changer, scaling up on the back of its Zero-cost EMI offering, subvented by brands /merchants. However, they are closed loop and operate only in the high-value low-frequency affordability segment, primarily consumer durables.

We believe that ETB credit lines on UPI network will unlock acceptance, and UPI apps like PhonePe, Google Pay, Kiwi, and PayTM will unlock consumer discoverability and awareness. This is expected to lead to increased issuance of ETB lines by banks. Pairing this with the regulator’s approach of not being prescriptive about the form factor of credit line, fintechs will drive innovation and unlock new customer segments by launching new form factors in partnership with banks.

We foresee opportunities like “UPI step-up credit lines” for the new-to-credit (NTC) consumers to take shape. This will introduce them to formal credit, starting with small lines (<Rs 5K) and growing them with good repayment behaviour.

We also anticipate “UPI Zero-cost EMI” to emerge as formidable competition to Bajaj’s EMI Card, democratising access to all banks in a segment controlled by Bajaj and few banks like HDFC and IDFC First. This will need subvention partnerships with brands and merchants.

In conclusion, the introduction of “Credit line on UPI” has the potential to reshape the credit landscape in India, addressing the limitations of existing credit products and creating new opportunities for fintech innovation. This move has the potential to unlock access to credit for a wider range of consumers and drive economic growth in the process.

Originally published in The Financial Times: