July5 , 2022

Will UPI kill the card swipe machine?



These are heady times, and existential times, for point-of-sale (PoS) terminals, the machines merchants use to process payments via debit and credit cards. Between April 2020 and April 2021, the number of PoS terminals in India inched up 3% from 4.39 million to 4.52 million. Since April 2021, the number has surged 36% to reach 6.13 million by April 2022, shows data from India’s central bank.

Chart 1a:

One factor was growing retail sales after the covid-19 lockdown. A regulatory push also helped. In January 2021, the Reserve Bank of India (RBI) launched a fund to subsidize the deployment of PoS infrastructure in smaller towns and north-east states. According to the FIS Global Payments Report, credit cards and debit cards account for 36% of payments in retail stores in India.

Yet, the growth momentum is unlikely to sustain. The RBI defines PoS broadly, to include both physical (like PoS terminals) and digital infrastructure (like the Unified Payments Interface QR codes). Expanding digital infrastructure is easier and cheaper, and so the emphasis is on it.

Earlier this month, the RBI proposed linking credit cards to UPI. While it’s restricted to RuPay cards for now, and some key issues need to be ironed out, this move obviates the need to have a swiping machine to process payments. As it is, growth of QR code-based payment options has been edging out the need for traditional PoS terminals at merchants. The latest move, and the buzz of activity in the payments space, could accelerate this process.

The UPI Challenge

UPI is presently outnumbering card transactions in volume terms by a factor of 10. The number of card transactions—including through credit and debit cards, but excluding cash withdrawals from ATMs—nearly doubled from 282 million in April 2020 to 554 million in April 2022. By comparison, the number of UPI transactions surged 10-fold to 5.58 billion.

Smartphone penetration, ease of use and regulatory leeway have boosted UPI. These transactions don’t carry merchant discount rates (MDR), or the fees that merchants pay to banks and payment processors. Allowing cards to link with the UPI platform will offer some of these conveniences. While it will be open only to RuPay cards right now (which had about 13% share in 2022 across both e-commerce and offline retail), it is expected to be opened to Visa and Mastercard soon. Some issues around KYC norms and MDR need to be ironed out. But once it rolls out, it would dent the market for PoS terminals.

Ubiquitous QR

The QR code-based payments system is closely associated with the rise of mobile payments, including digital wallets and UPI apps by companies such as PhonePe, Google Pay and Paytm. Their deployment—both Bharat QR and UPI QR—has jumped about three-fold from about 63 million in September 2020 to about 185 million in April 2022.

An RBI committee on QR codes noted that they offered the most cost-effective way of expanding digital footprint, in the context of large expenditure on printing and transportation of currency notes. For merchants, it saved significant upfront costs for a PoS device, as well as maintenance costs. However, merchants will still have to shell out MDR for credit cards even after they are linked to the UPI platform. Given that the ticket size of a credit card is about twice that of a debit card, the momentum is likely to come from large retailers rather than smaller ones, which drove UPI volumes in the first place.

Future of PoS

While less expensive options will expand faster, they are likely to co-exist with traditional PoS machines in the foreseeable future. About 90% of all B2C merchants will use QR code-based payments by 2026, from about 70-75% now, predicts a recent report by BCG and PhonePe. It will increase digital payments in offline segments (as a percentage of all digital payments) to 75%, from 50% now.

Meanwhile, PoS terminals are likely to evolve further to include more features. They will not merely be card-swiping machines, but will be embedded “with payable and receivable management, inventory management and customer relationship management tools”, the report said. Many believe India is still at the beginning of the payments revolution. Hundreds of fintech companies are working on payments, competing to provide better solutions. Where PoS terminals end up in the great churn will be interesting to see.

www.howindialives.com is a database and search engine for public data.

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