Should I get a credit card or not?

Why is the governement pushing credit line on UPI and my feelings towards it

For the past few days, I’ve been wrestling with a question that seems to be on a lot of people's minds lately: "Should I get a credit card?" Currently, when I have expenses that fall outside my budget, I rely on my friends' credit cards. While they don’t seem to mind—since they benefit from rewards—I can’t shake the feeling that I’m imposing. Naturally, it seems like I should get a credit card of my own to avoid this situation. But there’s a mental blockage preventing me from doing so, and it stems from a piece of advice my dad always gave me: “Never take loans!” What he really meant, of course, was never take loans you can’t repay on time.

But it also isn’t just me, these days many of these businesses are pushing for credit card usage.Credit cards are everywhere! Swiggy has a credit card, where you can order food now and don’t have to worry about paying in cash whether it’s UPI also. I was always adamant to do that because too much cash convenience makes it a bad habit on an individual. Althought the behaviourial part of this is a very big reason for me to not take it, I wanted to find out why shouldn’t I go ahead and just take a credit card.

So naturally I went on an research spree of fidning out the bottom of this. Primarily to understand why many UPI apps in the market is also pushing this cashless method very much than the last decade.

Finance ecosystem in a country has many players in it, banks being the most smartest and the influential in this. Let’s think about how banks came into existence. During the old times when there was wealth, Money was a way to spend your wealth(Listen to Naval’s money & wealth). To denote this transaction, cash was introduced as a paper to say IOU(I owe you). This meant cash flowing between people. Although doing this preserves your wealth with you and you don’t have to burn your assets like gold/land, it brought other problems like theft. Witholding a big chunk of cash is an easier way to lose your wealth because once money is gone, you’ll have to work hard to gain it again.

Banks are not in the business of saving, they are in the business of lending

Enter banks as a financial institution who said “Your money is safe with me“. Everyone liked this safety and the convenience of cashing out whenever they want. But how do banks profit from this? Many people like you saved money with these banks and now they can loan it out to people who are in need of big amounts. So when you go back and say I need my money they have a reserve from which they would cash it out. So in theory the money that was lended is from this reserve technically. So it’s just a bunch of numbers rotating here and there. Banks are very careful and smart how they do this. So today if the whole population of the country goes back to their banks to cash out their money then the coutry’s finance will collapse literally. Government would have to deploy army to stop you from doing that.

This is how credit works, I lend some amount from bank for a legit purpose like buying a car, expensive TV, piece of land etc., Credit cards have been existing for a long time for the same purpose. Every time you needed to make a big purchase you can use an credit card issued by your bank instead of going to the bank every time. This cashless method has fueled literally every country to grow their GDP and stay powerful. For instance, mastercard and visa got blocked in russia which was imposed by the Moscow’s invasion of Ukraine(backed by US).

India also had got onto this bandwagon of credit economy and it definitely fuels our economy. Credit in india is growing 22% YOY and it caters to 13% of the country’s economy. While this was happening, an younger child was born called UPI(Unified Payments Interface) which single-handedly propelled the country’s transactions like anything. What UPI did to finance is what IPL did to Indian cricket. I think the US $ dominance is also beacuse of the credit revolution. It’s like rails for capitalism to grow.

“We all are socialist at heart, but capitalist at mind“

UPI - The young & dynamic child on the market

UPI initially allowed peer to peer transactions. So a peer to merchant transaction is not the focus but that is the main area where this business could make money. For ex, an payee whose account is in HDFC makes a payment to a merchant whose account is in ICICI, ICICI needs to transfer a small percentage of the transaction to HDFC. Although it’s very small, think of million transactions a day! So banks naturally apply this fees on the merchants. But this new young dynamic child who has a lot of potential on the technology side, has very returns on the economy side.

But let’s talk about the UPI ecosystem and what has made it so ubiquotous that now no one thinks twice of carrying their wallet anymore. Like other cashless modes UPI has also made it convenient to pay by scanning a QR code. A code that is made up of simple dots and negative spaces(fun fact: you can scan it upside down also) which costs a very less price to print and stick it on the merchant’s shop. This cost effective method when compared to other methods like tap to pay has made it so popular among SMBs like pan shops, auto drivers etc.,

There’s also another myth that COVID has increased UPI market but UPI has been there much before the pandemic. It definitely has shown us that there are ways through technology that can solve the problems in an situation like pandemic, but the true innovation is the unification of payments. Let it be your bill payments, NEFT transfers, automatic payments and several more that are in the boquet of UPI. Today if any small business owner need to collect a payment all they have to do is just send their QR code to someone, or they customer can find them through just their phone number. There are debatable privacy and risk concerns here, but neverthless this convenience is the reason why UPI has grown rapidly.

Quoting Sajith Pai, India in the last decade has experienced something called the ‘Wang Trifecta’. It means a country’s consumer economy grows because of the marriage of three factors:

• cheap bandwidth

• a smartphone in every pocket

• a frictionless payment system

UPI is an important player in a larger plan for the country’s growth. But for this business to survive apps have to benefit everyone in the ecosystem. Loyalty programs have been growing in Indian market enormously. Banks however still need to profit more in order to grow this ecosystem.

ULI - Unified Lending Interface

It is the new avatar of UPI on these apps. Banks by nature shouldn’t like these UPI apps because there’s less profit for them. But the technology that these apps have built is something that banks can never achieve. But banks are really good at the lending business. Realising this RBI & NPCI has launched a new initative called credit line on UPI. Although everyone these days have access to digital payments(thanks to PayTM) irrespective of their technology literacy. Even though everyone is fairly literate enough now because of the smartphone penetration, credit is still inaccessible in India. So it’s natural for RBI to push this forward since every country wants their own currency to be more powerful.

There should be better ways where every small business owner and normal consumers should be able to access credit in a simpler and hassle free way. And I think ULI which is the new innovation of NPCI will help apps like GPay and PhonePe in doing that. Since all merchants are mostly on these platforms, it makes easier for them to get access to credit easily. But the challenges will lie in the underwriting, approvals and activation. Discover should be so easy on these apps in order to get the user base.

In the next coming days I’ll be researching more and finding out about the ULI guidelines and questions related to this technology. And will eventually find out whether I should take a new credit card with the current expenses I have.

If you are also interested and like to talk about the India FinTech please leave a comment which I can add to my upcoming reading