Payment infrastructure is booming, but bumpy road ahead

Last year, RBI came up with a very good concept paper on Card Acceptance Infrastructure essentially analyzing ways to expand acceptance of cards through physical POS, digital POS (such as those based on QR-code), and online payment mechanisms. Since the report, Demonetization has massively pushed up the physical acceptance infrastructure.

(Source: RBI)

BCG and Google have predicted, rather bullishly, that 10 million merchant establishments will accept digital and mobile based payments by 2020. 

However, some caution is justified. The RBI concept paper captures some real barriers to POS penetration. 

• High cost of acquiring business that include high capital cost of POS machine, recurring maintenance / servicing cost, difficulty of servicing POS machines in rural areas, etc. is a major constraint.

• Low utilization of cards makes acceptance for small merchants and / or in rural areas unviable due to low card footfalls and low transaction values besides other costs associated with merchant acquiring, ultimately forcing acquiring banks to withdraw the POS terminal.

• Lack of adequate and low cost telecommunication infrastructure makes it difficult for merchants to access networks which are required to accept electronic payments and process these transactions. Poor telecom connectivity in many areas lead to fewer transactions and consequently affect revenue of acquirers.

• Lack of incentive for merchants to accept card payments is another inhibiting factor. Further, transparency and audit trails associated with card payments often act as deterrent for accepting card payments by merchants.

• Insufficient awareness about the costs associated with use of cash and cash handling is also a contributing factor.

• Factors from consumer perspective, such as, low levels of awareness, apprehension of using non-cash payments, especially concerning its safety and security, anonymity associated with cash payments, surcharge / convenience fees being levied for use of card / electronic payments, difficulties in changing consumer behavior, etc. also inhibit growth / usage of card of payments for purchase of goods and services.

• Merchant Discount Rate (MDR) also often acts as a disincentive. Though the regulatory policy on MDR (issued in September 2012) had indicated a cap on MDR, it is generally treated as floor, with the benefit of lower MDR not really accruing to smaller merchants. In certain segments like mutual funds, insurance, etc. a flat fee structure of charges has also been established by the industry.

Now on this last point, RBI feels that it needs to intervene heavily and has come up with "Draft Circular - Rationalisation of Merchant Discount Rate (MDR) for Debit Card Transactions" earlier this year.

At the end of the day, major growth and scale up happens when unit economics is proven and market participants pile in. MDR is key to unit economics calculations. While it is important to balance needs of different stakeholders esp when Financial firms have been extractive in some areas, price intervention is always tricky and this is going to be a bumpy ride.