Merchant Payments: The Next Big Battlefield For Digital Transactions

Digital payments between two people, known in industry parlance as ‘peer-to-peer' payments, have seen strong growth in the last few years. However, payments to merchants, for instance your local kirana store, are still heavily skewed in favour of cash.

It is this segment of ‘peer-to-merchant' payments that has become the next big focus for policymakers, who are hoping to reduce the use of cash in the Indian economy.

In May, the RBI, in a digital vision report, said that it aims to push up digital payments as a percentage of GDP to 15 percent by 2021 from about 10 percent in 2019. The roadmap to reach that goal included an increase in acceptance infrastructure for digital payments, particularly for merchants. A committee, headed by Nandan Nilekani, which submitted it report soon after, also focused on the problem of merchant payment by suggesting a lowering of cost of such transactions.

The key to having more merchants adopt digital payments, according to experts, lies in the technology that India chooses to push and the cost of that technology. While the current focus is on cards and the network of point-of-sale (PoS) machines, many believe that the QR-Code technology, successfully adopted in China, is an option that must also be encouraged. Each of these technologies currently have their own set of issues preventing large scale adoption.

The PoS Network

India has close to a billion debit cards and nearly 50 million credit cards but the number of PoS terminal where these cards can be used are far fewer. There were 3.7 million PoS machines active in the country by the end of March 2019, compared to 3 million in March 2018 and 2.5 million as of March 2017.

The RBI, in its digital vision report, had said that the spread of this card acceptance infrastructure must be increased.

But buying and deploying PoS machines remains an expensive proposition.

The price of a POS machine ranges from Rs 3000 to over Rs 50,000 depending on the features. While prices have dropped significantly over the last four years, the devices are still expensive as they have to be imported and then customised for the merchant, said Sunil Rongala, vice-president, strategy, innovation and analytics, at Worldline India.

The Nilekani-committee has recommended lowering of import duties on such machines but the proposal is yet to be accepted. An alternative is to use mobile PoS (M-PoS) machines, suggests the Nilekani committee.

However, Rongala says that M-PoS devices see a rate of failure and also face security and network issues. Instead Worldline is in the midst of introducing an Android-based PoS machine, with an in-built SIM card to address some of the problems they faced with M-PoS devices.

BloombergQuint could not speak to executives from Pine Labs and M-Swipe, two PoS manufacturers, despite several requests over the last two weeks.

Beyond the installation of devices, the cost of transactions also remains an issue.

As part of any card-based transaction, a merchant pays a fee to the payment processors, known as the merchant discount rate. The merchant's bank also pays a fee to the bank which has issued the card, known as the interchange rate.

Under the present regime, the majority of the interchange rate goes to the issuer banks (those that have issued cards) and not acquirer banks (who are processing the payment) and merchants, said Naveen Surya, chairman emeritus of the Payments Council of India. “The merchant bank would only receive around 30-40 basis points of the interchange rate.”

The Nilekani committee has recommended a reduction in the interchange rate, which may benefit the acquiring bank and merchants over time, Surya said. The committee has also suggested that the government consider subsidising the MDR in order to reduce the cost of digital transactions for merchants.

The QR-Code Alternative

An alternative to building out an extensive PoS network would be to focus on QR-Code based payments.

China, for instance, has relied heavily on this technology. Tencents Holdings' We Chat Pay and the Alibaba Group's Alipay have gained considerable traction by deploying QR-codes particularly in grocery stores and eateries, according to a recent report by the Wall Street Journal. Together, they account for close to 90 per cent of the market.

In India too, QR-code solutions built using the home-grown UPI or Unified Payment Interface could help increase the penetration of digital payments across small merchants, said Surya. “QR codes for UPI and Bharat-QR has helped acquire merchants at a lower cost and over time both payments systems will converge as the volume of transactions grow,” he said.

Merchants can start with these payment options and eventually graduate to the PoS network once the volume and value of transactions grow.

However, rapid adoption of QR-code technology will need a change in the manner in which this technology is currently being deployed.

At present, most private e-wallets or payment apps have rolled-out proprietary QR-codes, which means that money from a customer goes to the merchants' e-wallet and not their bank account, said a senior payment executive while speaking on condition of anonymity. What is needed is UPI-based QR-codes that are inter-operable, so that all apps can be used to transact rather than customers being forced to use a specific e-wallet application for different merchants.

To be sure, an inter-operable ‘Bharat QR' was launched under the aegis of the National Payment Corporation of India in 2017. Volumes, however, remain low and the Nilekani-commitee suggests that efforts be made to popularise this payment option.