Merchant Payments Infrastructure: The Achilles Heel of Cashless Payments in India

There are two sides to digital payments: a consumer-facing side, which comprises mobile wallet (Paytm, PhonePe, etc.), credit card, debit cards, and new form factors (such as OEM-native payment apps, wearables, etc.); and a merchant side, which is developing at a really slow pace. It’s not a question of whether digital payments will alter the fortunes of merchants in the future – that is a given (based on empirical data). The question is, how soon?

India has been trying to shift from cash-dependent society to a cashless society for quite some time now, and the biggest hurdle lies in the adoption of digital payments infrastructure on the merchant side.

According to the statistics published by the Reserve Bank of India, the number of point-of-sale machines (POS) has rapidly increased from 1.5 million in October 2016 to 4.4 million in August 2019 post demonetization. This number shows that the merchants have started changing their perspective towards accepting payments through credit cards/debit cards/prepaid cards despite the fees associated with it. However, according to our primary research with industry experts, we found that this number (of POS terminals) does not represent the 4.4 million unique merchants that use POS terminals for digital transactions but only ~ 2–2.5 million merchants since a merchant might have two or more POS machines for easing customer payments.

But that raises another question: how is India trying to become a cashless society if the estimated number of merchants who use POS terminals are only 2 million as opposed to the approximately 62 million merchants in India? The answer: QR codes. QR codes provided by companies such as Paytm and PhonePe are enabling small merchants to get on the cashless bandwagon, thereby easing the payment procedure for consumers. Companies like BharatPe are also making payment acceptance simple for merchants by offering merchants a single QR code for all UPI apps, and now the QR codes from these players are not only restricted to Tier 1 cities but can be frequently seen in Tier 2 and Tier 3 cities as well. Furthermore, we found that there are 10 million payment terminals in the form of POS terminals, QR codes, NFC, and others. By using the same methods of estimation as we did for POS, we found that there are approximately 2–2.5 million unique merchants that use QR codes in India.

QR codes have now been used for accepting payments, and that seems to be growing. Many believe that QR codes are the future of digital payments in India. However, with regard to merchants, QR codes only solve the need for payments, but there are larger requirements to be covered, such as order management, accounting, etc., which does not seem to be fulfilled through QR codes or POS terminals. FinTech startups such as Khatabook and OkCredit have forayed into this space by providing added functionality with payments, but still, there seems to be a place for a one-stop solution for all retail merchant needs. We can conclude by stating that QR codes might not be a perfect one-stop solution for the retail merchant, but it has the potential to reach the long-tail of Indian merchant for making India a truly digital society. So what does the future of merchant payment look like? For the large retailers, it may lean towards one-stop-shops, and for the long tail, QR codes may suffice for now.