1/ Recent “Credit line on UPI” launch by @NPCI_NPCI is a pivotal point in India's credit journey, one which will breed several #fintechs.
View In 1-line: Credit line on UPI will be what Debit card EMI could never become, and much more!
View In 1-line: Credit line on UPI will be what Debit card EMI could never become, and much more!
2/ For the uninitiated, Credit line on UPI brings all pre-approved bank lines at the point of consumption, i.e. ~30M UPI merchants and 1M+ terminal merchants (carrying ~6M terminals), accessible through any UPI app.
3/ Present popular instruments that bring credit at point of consumption include Credit card, Debit card EMI and @Bajaj_Finance EMI card - each having their deficiencies.
4/ Credit cards are restricted only to the top 2.5% or 35M users, and have left several segments underserved. More on this below.
5/ Debit card EMI has failed to emerge as the instrument of choice for the non credit card audience owing to several reasons which I’ll talk about.
6/ Bajaj’s EMI card has been the true gamechanger which has built scale on the back of their 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.
7/ I’ll now talk about segments left underserved by Credit cards, how Debit card EMI has been inadequate, and how Credit Line on UPI will be a gamechanger to fill that void.
9/ Several banks in spite of large existing-to-bank (ETB) bases have not been able to run credit cards - with 75% market concentrated with just 4 banks (HDFC, SBI, ICICI, Axis) - leaving their customers underserved.
10/ It needs a separate thread to adequately detail out the back end complexity to run a credit card, but leaving the economics of credit cards for the interested - which itself are complex enough.
11/ These 4 banks have focussed on distributing credit cards to ETB base and have been conservative on new-to-bank (NTB) base, for risk reasons, leading to low approval rates of <10% - which has left NTB underserved.
12/ Banks see prohibitive CAC (customer acquisition cost) of ~Rs 5K per activated NTB credit card customer which has led to issuing small lines (<Rs 50K) economically infeasible (given the higher payback cycles) leaving the low-to-mid income segment underserved.
13/ For definitions, an activated customer is defined as a credit card customer which has done 1 online transaction, has set the PIN for the physical card, and consequently done 1 offline transaction.
14/ Credit card acceptance historically has been limited to terminal merchants (1M+) leaving the tier 2+ audience underserved given lack of terminals in those geographies - however this will change with credit cards getting acceptance on UPI network.
15/ Credit card stacks have been rigid with limited innovation in the core product for nearly two decades which left an innovation hole in the market - which was filled by likes of Bajaj EMI Card, @GetOneCardIN, @cards_uni, @sliceit_, @PayTM Postpaid, @Lazy_Pay and others.
16/ Debit card EMI was expected to fill some of the above holes, which credit cards left behind, given the wider debit card base - but it has largely failed. Reasons include -
17/ Limited acceptance i.e. only on terminal merchants very much like credit cards, and limited acceptance of DC EMI even within terminal merchants (though this is getting plugged).
18/ Restricted relevance outside of high value affordability purchases given its an interest-bearing instalment loan and not an interest-free reward-fetching credit line like a credit card.
19/ Poor consumer experience owing to a sub-optimal back end stack (I believe DC EMI is booked in core banking and not LMS) - which results in issues like lack of native support for no-cost EMIs, inability to allow repayment tracking to users etc.
20/ Poor consumer awareness around DC EMI eligibility, lines, merchant acceptance etc., having historically been looked at as ATM cards and called that, and never truly becoming EMI cards.
21/ Given above issues with DC EMI, Cardless EMI was to be its successor with industry working on it for the past few years - however, “Credit line on UPI” will now leapfrog it.
22/ Existing-to-bank credit lines on UPI network will unlock acceptance, and UPI apps like @PhonePe @GooglePay @GoKiwiNow @Paytm will unlock consumer discoverability and awareness. In light of this, a second order effect I anticipate is increased issuance of ETB lines by banks.
23/ Marrying that with the regulator's approach of not being prescriptive about the form factor of credit line will drive innovation - with fintechs partnering with banks to launch new form factors and unlocking new customer segments.
24/ We at @Stellaris_VP can't be more excited on what lies ahead for us as fintech investors. We can see opportunities like -
25/ “UPI step-up credit line” to the new-to-credit (NTC) to bring them under the ambit of formal credit, starting with small lines (<Rs 5K) and growing them with good repayment behaviour.
26/ “UPI Zero-cost EMI” as the formidable competition to Bajaj’s EMI Card by democratising access to ALL banks in a segment which is controlled by Bajaj and few banks, namely HDFC and IDFC First.
27/ Above will need subvention partnerships with brands and merchants. More about the opportunity below.
28/ I can think of a few more, and would love to brainstorm with any fintech founder planning to build in this space. DM's are open.
29/ As I close this thread, we at @Stellaris_VP wanted to express sincere gratitude to @dilipasbe, the entire @NPCI_NPCI team, @RBI, @DasShaktikanta for being global-first at “Credit line on UPI” innovation and setting an example for the world to follow again 🙏<eom>.
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