RBI’s New QR Code Rules Set To Alter India’s Payments Landscape

Interoperable QR codes help consumers and merchants. But will this disincentivise fintech firms to push this means of payments?

Motorists refuel their vehicles as signage for digital-payment service MobiKwik, operated by One MobiKwik Systems Pvt., is displayed. (Photographer: Dhiraj Singh/Bloomberg)
Motorists refuel their vehicles as signage for digital-payment service MobiKwik, operated by One MobiKwik Systems Pvt., is displayed. (Photographer: Dhiraj Singh/Bloomberg)

QR code-based payments, where you point your phone at a sticker and see a payment go through instantly, are thought of as the lowest cost option to encourage merchants to accept digital payments.

There is no upfront cost to be paid, like in the case of a point-of-sale machine. The merchant discount rate charged is lower than other payment options. And now, after the Reserve Bank of India’s latest rules, the same QR code can across multiple payment applications.

Last week, the RBI mandated a move towards interoperable QR codes. Bharat QR and UPI QR—the two interoperable codes available—will continue, any proprietary codes will need to be phased out by March 2022, and any new QR codes introduced will need to accepted across payment options.

What The RBI Is Trying To Do

The RBI’s decisions followed the recommendations of a committee set up to assess the potential of QR-code payments. The committee, in its report in July, cited China’s successful experience with QR codes.

“In China, QR codes played a crucial role in the growth of mobile payments services. They enabled businesses to accept digital payments without investing in hardware such as a point-of-sale terminal,” the report stated. “QR codes have proved to be versatile and are useful for every payment use case.”

In India, QR codes gained popularity in the months after demonetisation, when Paytm rolled out its code-based payments across the country. Except Paytm’s QR codes were proprietary and could use be used only via the Paytm app.

Since then, PhonePe, Mobikwik, Razorpay, Freecharge and many others have pushed QR code-based payments to capture transactions made by small and informal merchants, like kirana (mom-and-pop) stores. At least some of these were proprietary. In addition to this, Bharat QR and UPI QR were launched. Both of these are interoperable.

There are about 20 million UPI QR codes and 2 million Bharat QR codes, according to the committee report. The report does not give a number for proprietary codes but industry estimates suggest that the total number of QR codes deployed are close to 40 million.

The RBI now wants that all the existing QR codes be interoperable by March 2022. Any new QR code introduced should be interoperable from the start.

According to Vishwas Patel, chairman of Payments Council of India, the RBI’s latest norms will boost acceptance of digital payments, as open-loop systems are preferable to closed-loop systems like proprietary QR codes. Patel was also a member of the Phatak committee.

“The decision will also ensure that large payments system operators do not monopolise the game in the future by developing closed-loop system,” Patel said.

Harshil Mathur, co-founder and chief executive officer of Razorpay, said interoperable QR codes will make the product more attractive for the merchants.

For merchants, it makes sense to get interoperable codes because it takes away the ambiguity on whether the customer has the right app to make the transaction. This way the merchants can accept transactions without any hassles.
Harshil Mathur, co-founder and CEO, Razorpay

Will The Transition Be Easy?

Since the RBI has given adequate time to comply with the directions, disruption to existing payment systems will be minimal, said Navin Surya, non-executive chairman at Fintech Convergence Council.

“The RBI has provided time till March 31, 2022, for all digital payments companies to fully move into interoperable QR codes and phase out their existing proprietary codes. This time would be handy for companies to ensure that their technology in the backend is capable of processing open loop transactions,” Surya said.

Not everyone agrees.

According to the head of a large payment services company, who spoke on conditions of anonymity, there are about 40-50 million QR codes in force right now across India. While a large number of these QR codes are interoperable for UPI mobile applications, other payment modes are still following a closed-loop format.

To make each and every QR code interoperable across all payment modes would be an expensive and time-consuming effort for most payment companies, the senior official quoted above said. The industry is likely to seek clarification from the industry, he added.

According to Ashneer Grover, co-founder and CEO at BharatPe, the main challenge will be to get merchants to agree to change the code itself. BharatPe provides interoperable QR code services to merchants.

The QR code is essentially a fixed interface. So if a company has produced a proprietary code, you cannot change it to be interoperable at the backend. If the service provider approaches a merchant with a new QR code sticker, there will obviously be questions and unwillingness.
Ashneer Grover, co-founder and chief executive, BharatPe

A spokesperson for Paytm did not respond to calls and messages on Friday. A follow-up email on Saturday was also not responded to. Queries mailed to large QR-code operators, such as Phonepe and Mobikwik, on Saturday did not elicit a response.

QR Codes: Pros & Cons

The reasons behind the attempt to push QR code-based payments is the belief that this mode of payment is easiest for small merchants to adopt.

If small shop owners want to go digital and look to get a point-of-sale machine, they have to first pay between Rs 5,000 and Rs 15,000 to get the device. In contrast, to start QR code-based payments, a merchant only needs a bank account, a smartphone and a data connection to accept payments. The only “infrastructure” needed beyond that is the QR code sticker.

The bank or payments company also incurs considerably lower costs as it only needs to print QR code stickers as opposed to issuing a plastic card for credit or debit card payments.

But QR codes have limitations, too.

Most QR codes that are printed on the counters of shops or for vendors are what is known as “static QR codes”. This means that the QR code only features the merchant’s details like their UPI ID and/or their registered Bharat QR identity. They don’t give you much information about the customer transacting nor about the product/service being sold.

“While there might not be much information regarding the transaction itself, the code provider does have a log on how much money has been spent by a certain UPI account or wallet at the merchant and how many times such transactions took place. This can be used for monetising the customer relationship. But this is often seen as an ethical issue,” said Patel of Payments Council of India.

According to Vivek Belgavi, partner at PwC India, the overall regulatory direction has been towards encouraging interoperability from a customer perspective and allowing for businesses to differentiate on the basis of the experience they provide to the customers or channels. Businesses will have to redefine the value proposition and their operating models, Belgavi said.