UPI vs credit cards - How India's payments system is boosting savings and benefitting multiple stakeholders

While travelling in India, it is beautiful to see the widespread acceptance of cashless payments. From coconut vendors to the auto rickshaw drivers, roadside tea stalls to the fancy restaurants, everywhere consumers happily pay off for their purchases with their smartphones and merchants are loath to accept cash. In the United States, it is common to see consumers swipe their credit cards to make payments big and small. How do these systems impact household personal finance?

The Indian system has often been reliant on an electronic debit card, with money drawn from the user’s bank account. Households may be spending more due to the ease of payment. Behavioural scientists refer to cashless consumption as ‘the separation of the pleasure of purchase and the pain of payment’. Consumers may be overstepping their paying capability due to this separation. In the Indian case, the payments come from the user’s bank balance, which is immediately reduced after making it.

Impact on households’ savings

In the credit card system, the purchase draws from the future income. It is a loan that the consumer takes while making a payment. The bank, which interfaces between the consumer and the merchant, agrees to pay the merchant while billing the consumer after a given credit period of, say, 45 days. To consumers who pay off the dues in their entirety on the due date, the credit card is a free loan for that period. But data establishes that a good percentage of consumers roll this credit over. They do not pay in full, but incur high interest costs on their consumption loans using the credit card. This impacts the household’s ability to save.


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Research shows that the reduction in savings rates across Western households is linked to the expansion in credit card usage. The Anglo Saxon economies of the US, United Kingdom and Australia show a reduction in household savings rates along with a growth in credit card usage, while European nations such as Germany, France and the Netherlands—that encourage the use of debit cards over credit cards—report a higher household savings rate.

The risk from separation of purchase and payment is higher with credit cards, than with the automated debit-based payments common in India. Data shows a reduction in credit card usage in India after the widespread adoption of digital payments. Spending what you have actually earned is surely healthy for household finance, as against incurring high cost debt while swiping the card for consumption.

The credit card system hinges on the growth in consumption and its attendant economic benefits. The lending bank offers the consumer points, perks and paybacks, leading to the belief that using their credit cards would give them free financial benefits. The credit history of the consumer feeds into the credit score, which enables further borrowing from the system for cars and homes. The credit card market is driven by the MDR (merchant discount rate), where the merchant pays a percentage of the payment to the bank and the card issuing agency for the additional business generated. While large businesses are able to negotiate a lower MDR based on volumes, smaller businesses tend to find it burdensome.

How liquidity is better managed

In the Unified Payments Interface (UPI)-based payment system in India, the government sub sidised the ecosystem until large volumes were achieved. India now has the highest daily number of transactions using a direct debit-based payment system.

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Starting 15 October, however, a nominal MDR will be imposed by the National Payments Corporation of India (NPCI) on large ticket-size transactions, with a cap and a protection from passing the cost to the customer. The avenues for monetising and funding the growing user base are also underway. These include incentives for default bill payments; and tracking of revenues and cash flows for determining eligibility for loans.

Many users in India know the benefits to household finances from using the UPI’s cashless payment system, apart from the obvious avoidance of the high-cost debt trap. The ease of transacting, zero-cost burden, avoidance of theft and fraud, and convenience of online monitoring—all help to better manage household finances. The ability for person-to-person money transfers enables managing liquidity within the extended family system better.

The only risk to the consumer in this system is the lack of a protective wall between payment and its verification, and possible reversal for error and fraud. While a credit card payment can be stopped and reversed, and the issuing bank and card issuer would take the risk and recovery responsibility in case of theft or loss of card or its fraudulent misuse, there is no such protection in a direct debit payment from the bank account. The money transferred is final and the user has to resort to the lengthy criminal law process for recovery.

Benefiting multiple stakeholders

There was a time when the cashless swipe of the credit card in the West was seen as a mark of development and modernisation. The Indian solution that did not involve a credit transaction was seen as a loss leader. The former was a system of loan, which made it profitable for the bank because users tended to roll over their dues at high interest; the card issuer earned the processing and service fees for their system and operations; and the merchants benefitted from high sales volumes when the customer could buy even if they did not have ready cash on hand.

We now know that this system of easy, unsecured personal credit at very high interest rates results in a debt burden on households. The high volumes of India’s UPI system has brought immense, unexpected benefits—revenue for the merchants; compliance and data for the government and lenders; and tracking and control for spenders at zero cost. This is apart from aligning with the already prevalent cultural orientation to save for the future and to avoid debt. Other countries are eager to adopt the Indian system for its many benefits.

When I asked the flower seller busy with the Ganesh Chaturthi sales about how the UPI is helping her she was delighted to answer: “I don’t have to protect my cash from roadside vandals; my husband cannot access my earnings and misuse it; and I can pay others with my phone, exactly how my customers pay me.” That sense of equity, empowerment and egalitarianism is precious.

The Author is Chairperson, Centre for Investment Education And Learning