Will UPI kill the card swipe machine?

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

Chart 1a:

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

Still, growth momentum is unlikely to continue. The RBI defines PoS broadly and includes both physical (such as PoS terminals) and digital infrastructure (such as the Unified Payments Interface QR codes). Expanding the digital infrastructure is easier and cheaper, and that’s what the emphasis is on.

Earlier this month, the RBI proposed linking credit cards to UPI. While it’s limited to RuPay cards for now and needs to fix some major issues, this move eliminates the need for a swipe machine to process payments. As it is, the growth of QR code-based payment options has removed the need for traditional PoS terminals among merchants. The final move, and the buzz of activity in the payment space, could speed up this process.

The UPI Challenge

UPI currently exceeds the number of card transactions by a factor of 10. The number of card transactions – including credit and debit cards, but excluding ATM withdrawals – has nearly doubled from 282 million in April 2020 to 554 million in April 2022. By comparison, the number of UPI- transactions has increased tenfold to 5.58 billion.

Smartphone penetration, ease of use and regulatory latitude have given UPI a boost. These transactions are not subject to merchant discount rates (MDR) or the fees that merchants pay to banks and payment processors. Linking maps to the UPI platform offers some of these conveniences. While it’s currently only open to RuPay cards (which had a roughly 13% share of both e-commerce and offline retail in 2022), it’s expected to open to Visa and Mastercard soon. Some issues around KYC standards and MDR need to be resolved. But once rolled out, it would dent the PoS terminal market.

ubiquitous QR

The QR code-based payment system is closely linked to the rise of mobile payments, including digital wallets and UPI apps by companies such as PhonePe, Google Pay and Paytm. Their stake – both Bharat QR and UPI QR – has roughly tripled from about 63 million in September 2020 to about 185 million in April 2022.

An RBI committee on QR codes noted that they were the most cost-effective way to expand the digital footprint, in the context of large expenditures for banknote printing and transportation. For merchants, it saved significant upfront costs for a PoS device, as well as maintenance costs. However, merchants will still have to pay MDR for credit cards even after being linked to the UPI platform. Since the ticket size of a credit card is about twice that of a debit card, momentum will likely come from large retailers rather than smaller ones, which have been pushing UPI volumes in the first place.

Future of PoS

While cheaper options will expand faster, they will likely coexist with traditional PoS machines for the foreseeable future. About 90% of all B2C merchants will use QR code-based payments by 2026, up from about 70-75% now, a recent report from BCG and PhonePe predicts. 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 continue to evolve with more features. They will not just be card swipers, but will be embedded “with tools for payables and receivables management, inventory management and customer relationship management,” the report said. Many believe that India is still at the dawn of the payment revolution. Hundreds of fintech companies are working on payments and competing to provide better solutions. Where PoS terminals end up in the big churn will be interesting to see.

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

Subscribe to Mint Newsletters

Please enter a valid email address

Thank you for subscribing to our newsletter.

Leave a Comment

Your email address will not be published.