What are the platform companies for three-way payments in India : Reserve Bank of India approves use of credit through UPI - All you need to know

The Reserve Bank of India (RBI) has recently taken a decision to authorise consumers to make payments using pre-approved credits through Unified Payment Interface (UPI) accounts, in a move aimed at driving innovation in credit products and the popularity of digital payments.

Pre-approved line of credit: This is similar to a loan in that the bank provides a certain amount of credit based on information related to the consumer's credit score. However, the consumer does not need a credit or debit card to use this credit and only pays for the amount actually used.

Let's unpack in detail what this initiative means for banks, merchants and end consumers.

Impact on banks:

As mentioned earlier, banks do not need to issue credit or debit cards in order to offer such lines of credit to their customers. First, this saves banks significant issuance and distribution costs. Second, this initiative allows banks to develop new credit products that meet the changing needs of consumers. Third, banks can extend this service to non-customers (potential customers) by allowing them to transact through the UPI interface.

Impact on merchants:

Let's say you are a business that already accepts UPI payments from your customers. Then, allowing your customers to pay for their purchases with credit through UPI will make shopping extremely convenient and more affordable. This could potentially lead to higher revenues for your business through increased sales, transactions and customer satisfaction.

Impact on consumers:

Consumers who have difficulty accessing traditional credit, in particular, will benefit greatly from this initiative. This is because lines of credit through UPI use modern, alternative methods to determine an individual's creditworthiness. They do not need to have a credit or debit card to use this credit product. It also eliminates the need for them to carry multiple credit and debit cards. Finally, they gain the convenience and credit advantages of UPI for a variety of purchases.

The following is an example to summarise:

ABC Bank offers pre-approved credit limits of up to Rs 50,000 to existing and prospective customers. They identify the list of eligible customers by analysing transaction and credit history data from bank and UPI accounts. Now, merchant XYZ has accepted UPI payments on their online shop. The merchant started allowing their customers (who are also ABC Bank customers) to use their credit line through UPI to purchase products. The customers are very happy because they now have better purchasing power and can use digital payments to buy their favourite products. Banks and merchants are also happy as a result as this will lead to more business.