Synopsis–Over the last two years, UPI has vastly changed the dynamics of the payments industry. Companies don’t want to miss out on the next big wave — NFC-enabled payments. The RBI’s decision late last year to raise the limit on tap-and-pay transactions is indeed encouraging. But the question is: can the technology, which transforms smartphones into point-of-sale machines, replicate UPI’s success?
“There is an app for just about anything” — readApple’s tagline when the company launched its mobile-applications store for iPhones back in 2008. More than a decade since, the promise has been fulfilled — thanks to thousands of entrepreneurs and developers around the world who have created apps such as WhatsApp and Google Pay. And when it comes to transactions, there are multiple apps today for processing card payments at brick-and-mortar stores, thereby blurring the line between hardware and software.
Over the last few months, several payments companies have been trying to popularise point-of-sale (PoS) transactions facilitated with smartphone applications. The Reserve Bank of India’s (RBI) decision in December 2020 to raise the limit on such payments from INR2,000 has indeed proved to be an encouraging sign for the industry. Now, smartphones with inbuilt near-field communication (NFC) chips can connect with debit and credit cards enabled with the short-range wireless technology to make payments of up to INR5,000 without PIN authorisation.
Following the RBI move, several banks have been sending NFC-enabled cards to their customers although the cards that they are currently using are valid. The National Payments Corporation of India (NPCI) has also been popularising its NFC-enabled RuPay cards, which most public-sector banks disbursing to their customers.
So, can NFC-enabled payments replicate the success of Unified Payments Interface (UPI)?
Here’s a conversation between Dr Prime and our fictitious tech-junkie John in which they discuss the emergence of this new trend as well as several other innovations in the card-payments industry. Let’s tune in.
John: Recently, I got a new credit card with a Wi-Fi symbol even though the old one hasn’t expired. Can you tell me how this thing works?
Dr Prime: Okay. To begin with, let’s talk about the merchants. They will now have NFC chip-enabled smartphones as the payment-gateway machines instead of card-swipe machines that we are familiar with. Merchants could be using applications built by payment-gateway giants such as Pine Labs or mobile-wallet firms such as Paytm ,or even a private-sector lender such as Axis Bank. For instance, if the merchant has an account with Axis Bank, she can opt for the Soft PoS solution offered by the bank. Or else, if she already has a Paytm for Business account for processing the QR code-based transactions, she can opt for Paytm’s Soft PoS offering and manage all the transactions under one app.
And John, it’s the symbol of NFC and not of Wi-Fi. For transactions below INR5,000, customers need to simply take out their NFC chip-enabled card and tap on the merchant’s smartphone to make the payment. Entering the PIN or swiping or inserting the card is not required. For bigger transactions, customers will have to enter the PIN as mandated by the RBI. However, one needs to ensure that the amount entered in the smartphone app is the same as the bill amount before tapping.
John: But why are banks and merchants switching to this?
Dr Prime: The technology is backed by all payments-technology firms such as Visa, Mastercard, and RuPay. Many payments firms and private banks are trying to popularise this method, citing that it is easier and faster than UPI, which apparently has multiple steps and a higher rate of payment failures due to patchy mobile network, technical or server errors as well as wrong PIN entry.
Banks and payments-gateway companies often get merchant discount rate (MDR) while making payments through Mastercard and Visa. Hence, they are preferred over UPI though the latter has gained massive scale and acceptance across the country since early 2020 with transactions doubling amid the pandemic. This is one of the main reasons why small merchants and even some large ones who have shunned digital payments through PoS devices have embraced QR technology for wallet and UPI payments.
John: Okay, I get it. But can’t the PoS machines be made ‘smart’ instead?
Dr Prime: It’s possible, and it’s happening simultaneously. There is also another hardware-based PoS system that has seen decent adoption among bigger merchants. Android PoS is a chunky device that comes with a large, six to eight inch screen which displays QR codes for UPI or wallet payments apart from NFC card payments. It also has slots for swiping or inserting cards.
John: NowI am confused. If all this ‘smartness’ is already available in the market, why do we need this technology? Who benefits from it, and how?
Dr Prime: See, the existing PoS machines come with installation charges starting from INR3,000 and monthly fees of around INR400 or more depending on the payments partner chosen. It also comes with the MDR. Because of these charges, most small-and-medium shopkeepers have been hesitant to adopt this mode, especially since customers are willing to pay in cash for small transactions.
So, small merchants operating with low margins and high costs have been reluctant. However, the pandemic has forced a behavioural change with many customers and small businesses adopting contactless payment modes. Meanwhile, the burgeoning growth in UPI payments has upstaged the incumbent payment companies in the ecosystem.
For instance, when you pay with an HDFC Visa card through a Pine Labs’ PoS, the bank, Pine Labs, and Visa earn a commission from the shopkeeper. Now, consider the same transaction using UPI. You pay from your bank, which earns no commission, while the QR code could be by Google Pay or PhonePe, wherein again there is zero commission. The merchants don’t pay anything for facilitating such transactions. Hence obviously, financial institutions prefer the card-payment model.
Moreover, a free-to-download app is more appealing to small merchants as any old smartphone or a refurbished one can be easily converted into a PoS machine. These applications will have several paid features such as book-keeping or inventory management, which may be chargeable. Once a merchant is hooked onto the system, paid services can be offered.
John: Interesting. So, does it mean that increasing UPI adoption has nothing to do with simplicity? Tap-and-pay surely seems to be simpler and faster. Do you think it will see the kind of growth witnessed in UPI?
Dr Prime: It is indeed easier for consumers. But adoption by merchants is largely due to the low cost. Let us see what the payments-industry executives have to say about this. UPI’s growth was also facilitated by cashbacks and rewards which have been reduced or even stopped in some cases. But it nevertheless created a habit among customers, and that is tough to change.
Like Kunal Shah, founder of credit card bill-payment app, Cred, points out in his tweet, NFC cards may indeed grow in popularity in the years to come. However, he is missing out on a point or two here.
Those who use credit cards have continued to do so even during the pandemic. But UPI has converted a new set of customers who used to pay in cash to digital. Among them are affluent customers and also the ones who started using digital modes of payment for the first time.
Coming to Shah’s comment, what is amiss here is that even though many affluent customers still preferred using credit cards, several low-to medium-value cash transactions shifted to UPI since many merchants did not have PoS machines. Hence, people started carrying their smartphones instead of cash or cards to pay for groceries and vegetables. This is a behavioural change. So, even though tap-and-pay is faster and easier, people may find it difficult to get back to the habit of carrying their wallets for grocery shopping. It may eventually happen, but for the time being UPI QR code seems to be the widely preferred mode of payment.
John: Can’t debit and credit cards be made virtual so that one can tap and pay using his or her phone?
Dr Prime: That is an interesting question. In fact, seeing the popularity of tap and pay, Google Pay had launched a virtual card jointly with Visa in 2019. But it hasn’t gained much traction though the app was the most-used UPI app at the time. Both Google Pay and Apple Pay work at merchant locations globally through this tokenisation method and payments are made using NFC technology. Even in a mature card market like the US, around 12%-15% of users are estimated to use Apple Pay, Google Pay, and Samsung Pay. Of course, these are tokenised card payments and hence banks and card companies benefit, too.
John: Why isn’t NFC technology gaining popularity in India?
Dr Prime: The NFC ecosystem was not well developed and by the time people and merchants adopted digital payments, mobile wallets and UPI had grown immensely popular due to the cashbacks and rewards. In India, there is another problem with NFC. Most of the smartphones sold in the country are below INR20,000 and they don’t come with NFC chips since it is not the preferred mode of payment in the country. But in Europe and several East Asian markets, most popular models of Xiaomi and Realme below this price range are sold with NFC chips. This will take time to change. But since debit and credit cards come with NFC chip these days, the likelihood of phone makers launching models with NFC chips in India is low.
To be sure, the cost of the chip is not the only deterrent. The average per-unit cost of NFC chip is often less than INR25, but it comes with additional integration expenses and space constraints. Phone makers rather focus on providing bigger batteries, which is a major selling proposition in the Indian market. Further, the target group of customers does not use such payment modes and the ecosystem is not developed either.
Now, coming back to the Soft PoS model, companies are set to face several challenges in popularising this method. Even if merchants can repurpose an old smartphone, it has to be above the INR20,000 price tag. Merchants can buy used or refurbished phones with NFC chip at a low price, but they could still cost as much as a hardware PoS device. Hence, it is too early to say if tap-and-pay could be a big success in India although the payments industry has high hopes on the model.
Of course, the tap-and-pay model simplifies card payments and can be used at regular NFC-enabled PoS machines. Cards with NFC chips can help banks compete better with UPI players. Facilitating billions of transactions with zero revenue from them is much more expensive than making cards with NFC chips.
John: Why are we seeing a rapid spurt of innovations in different directions in the country’s payments ecosystem?
Dr Prime: The explosion of smartphones has helped India leapfrog in the era of technology. A large segment of the country’s population was introduced to digital payments through mobile phones. Some customers, who had never swiped their cards for payments before, started using UPI for making payments during the pandemic.
Since India is highly a price-conscious market, several local PoS machine makers such as Mswipe, Innoviti Payment Solutions, and Ezetap have developed solutions with a better understanding of the Indian market. However, this has also resulted in fragmentation and cut-throat pricing with most of these firms making losses. Over the last two years, UPI has been a threat to these payment-gateway firms. The rapid growth of e-commerce is also a challenge.
From mobile wallets to banks and payment-gateway firms, everyone wants to play a role in the next big revolution. After all, developing an app is not a process that consumes a lot of time and resources.
John: So, why should merchants go for these PoS solutions?
Dr Prime: Payment gateways are today less reliant on MDR, and increasingly so in India. Companies now collect a plethora of customer and merchant data, which is used to deliver customised marketing and advertisement solutions to these merchants and brands. Mswipe, Ezetap, Innoviti, and Pine Labs offer such solutions that now contribute more than 70% of their revenues. PoS has become both a service and a data goldmine during the last few years. Hence, with hardware becoming cheaper and commoditised, companies are investing in innovations to improve their software and services.
These PoS companies also provide several add-on digital services such as inventory management and book-keeping solutions for merchants. All these add to their revenues as well as create an opportunity to lend to merchants based on their business potential. In a Soft PoS solution, while the phone might be smart, it is probably the dumbest part in the whole transaction. Everything is on the cloud.
John: Where do you see the payments solutions in India over the next few years?
Dr Prime: Unlike in the West, in India, consumer behaviour is still evolving when it comes to payments. New innovations and bringing more customers into the fold are likely to help expand the overall digital-payment ecosystem in the country. India is a large retail market and cash is still the preferred mode of transaction. So, there is a lot of scope for growth and new breakthrough technologies like UPI could emerge. But unlike the West or China, the country’s market is likely to be fragmented for a long time, as various segments of the society are in different stages of development. However, the customer stands to benefit from such intense competition, as they will have plenty of choices and will be showered with offers.
John: Thank you, Dr Prime for your time and for sharing such interesting observations. Hope to catch up with you soon.
Dr Prime: Always a pleasure to share what I know. Have a good day, John. See you soon.
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