Pressure from the Reserve Bank of India (RBI) to allow cash withdrawals backed by the Unified Payment Interface (UPI) at ATMs is likely to cause a serious dent in the use of debit cards, executives say of the payment industry. Already a preferred payment method in storefronts and for low-value online transactions, UPI is now poised to gnaw away at the last bastion of debit card cash withdrawals.
At 1.63 trillion rupees, the value of merchant UPI transactions in February 2022 was well above the value of debit and credit card transactions at point-of-sale (POS) terminals, which was 1.43 trillion rupees. According to a recent report by HDFC Securities, UPI accounts for nearly three quarters of all trading volumes below Rs 500.
Harish Prasad, Head of Banking, FIS, said the issuance of debit cards by banks has seen significant growth over the past five to seven years, reaching 935 million cards in circulation in February 2022. This could now starting to stabilize due to high usage of UPI for merchant payments and saturation of card issuances.
“Furthermore, with the recently announced interoperable cardless cash withdrawal service using UPI-based authorization, as opposed to card and PIN-based authorization, and the recent announcement of allow UPI activation through Aadhar OTP instead of debit card-linked OTP, the need for debit cards will be further diluted and debit card numbers could probably start to decrease in the next few years” , said Prasad.
Cash withdrawals from ATMs are the primary means of use for the majority of debit cards issued in India, with payments from merchants using debit cards beginning to plateau and even seeing volumes decline year on year. the other. In February 2022, the number of ATM transactions using debit cards fell to 527 million, from 551 million in February 2021.
Independent financial technology expert Parijat Garg said it might take a few months for banks to upgrade their ATMs and other back-end systems to offer UPI-based withdrawals. But once that happens, the usefulness of debit cards for large numbers of customers will be all but gone.
“Only online payments where people might not be too comfortable with UPI on a particular device or when it’s a fairly large transaction or when the person pulls advantage of the benefits available on a particular debit card, such as EMI debit, could be where a debit card is used,” Garg said.
Consumers may possibly see no point in having debit cards because there are annual or quarterly fees to maintain them, but UPI is virtually free. Garg pointed out that merchants also prefer UPI because it does not apply a merchant discount rate (MDR), but on point-of-sale debit cards, merchants have to pay around 1%. “Consumer demand for debit cards could eventually drop and banks could also find it expensive to issue them in a low usage scenario,” he added.