Debit card usage to drop as RBI pushes for UPI-based cash withdrawals

The Reserve Bank of India’s (RBI) push to enable Unified Payments Interface (UPI)-backed cash withdrawals from ATMs is likely to cause a severe dent in the usage of debit cards, according to payment industry executives. Already a preferred mode of payments at storefronts and for small-value online transactions, UPI is now set to eat into the debit card’s last-remaining bastion of cash withdrawals.

At Rs 1.63 trillion, 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 Rs 1.43 trillion. According to a recent report by HDFC Securities, UPI accounts for nearly three-fourth of all transaction volumes below Rs 500.

Harish Prasad, head of Banking, FIS, said that banks’ issuance of debit cards had seen significant growth over the last five to seven years, reaching 935 million outstanding cards as of February 2022. This may now start to flatten out as a consequence of high UPI use for merchant payments and saturation in card issuances.

“Also, with the recently announced interoperable card-less ATM cash withdrawal facility, using UPI based authorisation, as opposed to card and PIN based authorisation, and the announcement recently to allow activation of UPI via Aadhar OTP in lieu of a debit-card-linked OTP, the need for debit cards will be further diluted, and debit card numbers could likely start to shrink over the next few years,” Prasad said.

Cash withdrawals at ATMs are the chief means of usage for a majority of debit cards issued in India, with merchant payments using debit cards starting to plateau and even seeing volumes falling on a year-on-year basis. In February 2022, the number of debit card-based ATM transactions fell to 527 million from 551 million in February 2021.

Independent fintech expert Parijat Garg said that it may take banks a few months to upgrade their ATMs and other systems at the back end to offer UPI-based withdrawals. But once that happens, the utility of debit cards for a large number of customers will practically be gone.

“Only the online payments where people may not be too comfortable using UPI on a particular device or where it’s quite a large-value transaction or where the person is leveraging the benefits available on a particular debit card, such as debit EMI, might be the instances where a debit card is used,” Garg said.
Consumers may eventually see no point in carrying debit cards as there is an annual or quarterly fee for maintaining them but UPI is practically free. Garg pointed out that merchants also prefer UPI because it does not draw a merchant discount rate (MDR), but on debit cards at POS merchants have to pay around 1%. “The consumer demand for debit cards may eventually fall and banks may also find it costly to issue them in a scenario of low usage,” he added.

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