A few weeks back, the Reserve Bank of India quietly put out a notification signalling the advent of a Payments Infrastructure Development Fund (PIDF) – designating a significant amount of funding towards developing digital payments acceptance in areas where it is needed the most. The Fund will serve as a corpus to support service providers in setting up card acceptance and making more digital payments possible. As unassuming this might seem, it might be prudent to explore why the PIDF could prove transformational for the Indian digital payments industry in years to come.
India’s high dependence on cash and our gradual shift away from it is no surprise especially with the ongoing pandemic accelerating these changes in consumer buying behaviour. Over 50%1 of global shoppers surveyed confirmed using digital payments more than before the pandemic, and the majority plan to continue doing so especially e-wallets and contactless cards post the pandemic too. This shift though is easier said than done, as it would necessitate easy access to digital credentials for consumers and more importantly acceptance of these credentials in areas, categories and occasions where the consumer chooses to use them.
And in a country that boasts of over 63mn MSMEs2, the consumers first choice for using these credentials often is the neighbourhood kirana store. With barely any of these MSME corner stores equipped to service the consumers’ preference for digital convenience, it is quite simply an existential crisis for these businesses in the near future. Acceptance in many ways is a virtuous cycle that if done well can trigger more consumer footfalls, convenience and prompt payments for merchants and increased stickiness for the merchants business. At its very basic, digital acceptance translates to the availability of an active PoS terminal at each merchant outlet.
The global base for installed PoS terminals stood at 161mn at the end of 20193 with a majority of them being in countries such as China, Brazil and US among others. When measured on a per capita basis, Russia has around 2,058 terminals per lakh of its citizens, in Brazil the comparative number is 3,291 and in China close to 3,0004. At the end of 2019, India has an installed base of just over 5 million interoperable card acceptance points, including over 1 million BharatQR acceptance locations and a per capita figure of just 500 terminals per lakh citizens.
Digital payments is a multi-party transaction which includes participants that offer banking services, the network that connects all players, payment gateways and enablers that help digitise the merchant. The viability of this business model lies in driving more traffic through these digital rails. A drop in the number of the transactions can have a cascading effect as there would be fewer opportunities to recoup the investment incurred in on-boarding the merchant including KYC and underwriting as well as technology costs such as device procurement and setup, consequently resulting in sluggish deployment.
This issue could be further exaggerated in a post pandemic era. As MDRs come down either due to market forces and competition or due to regulation, the acquirer who lays the rails has lesser financial incentive to do so. With most acquirers being banks thanks to regulation, it wouldn’t be surprising to see bank boards and managements de-prioritising their acquiring business given the low return on capital. This is where the notion of a development fund becomes truly relevant. Issuers of digital credentials need acquirers to onboard merchants and these acquirers in turn need to be compensated for their efforts.
The RBI on its part has been quite actively monitoring this traffic for a while. The Acceptance Development Fund (ADF), a precursor to the PIDF was proposed in 2016 to boost electronic payments and expand the acceptance network to match the visible acceleration in card issuance. The RBI’s Payment Systems Vision 2021 placed a renewed focus on acceptance, aiming at 5 million active POS by end of 2021 and substantially increasing QR codes, for a 6X growth in acceptance points in three years.5 And more recently, the Nandan Nilekani committee to strengthen digital payments too recommended that the focus be on “pivoting the ecosystem from issuance to acceptance.”6
The PIDF in many ways is the RBI walking the talk and is unique for its simple and progressive approach. Hence, issuing banks and other stakeholders will provide financial support, through the fund, to acquirers that enable merchant acceptance. Also in a global first, the RBI proposed to fund 50% of the PIDF. Additionally, payment networks such as Visa and others as well as card issuing banks will jointly contribute part of the funding too. Expectedly, the PIDF is aimed at encouraging acquiring banks and service providers to deploy physical and digital PoS infrastructure in tier III to tier VI cities and North Eastern states. Usage of the PIDF will be determined by RBI’s guidelines. An Advisory Council with representation from concerned stakeholders will provide oversight and governance.
The key beneficiaries of the fund will eventually be merchants and customers. However – in terms of specifics, the fund will be utilized to provide financial support to acquiring banks and service providers including acquirer processors, payments aggregators and fintechs who solve for growing acceptance. Our expectation is that they will have the ability to seek funding for growing acceptance in priority segments such as MSMEs or small merchants, particularly those in semi-rural and rural locations.
Other than providing financial support, we believe that there are other critical areas that will benefit from the PIDF. These include funding the development and dissemination of merchant education materials that help sellers understand the benefits of digital payments. In our experience, a combination of financial literacy and education combined with activation and usage incentives go a long way in initiating the habit of accepting digital payments.
Globally, PIDF linked projects have successfully helped countries wean citizens away from cash. In April 2011 Indonesia, as a primarily cash led society launched a program for five years to drive acceptance of digital payments and by all records helped double the acceptance of digital payments in the country. The program has been successful enough for the country to extend this for another few years up until the end of 20207. In Poland, the Acceptance Development Fund helped contribute to more than 100 percent growth in the value of consumer payment card transactions between 2009-2014. According to the Malaysian regulator Bank Negara Malaysia, the Government set up Market Development Fund for the development of POS infrastructure and plans to have 800,000 POS terminals in the country by 2020-end8. The Malaysia acceptance development fund was set up by the government and administered by an independent firm.
In most countries, these funds were invested in priority areas – geographic expansion, new acceptance channels, segment development, technology innovations and quality assurance. Various campaigns were executed including training and promotions as well as merchant activation for payment methods such as low cost mPOS devices.
Can India do better? To begin with, the PIDF should be governed by a well-represented advisory council that includes nominations from banks, networks and key acquirer entities. This will aid in transparent decision making, reporting and dispute resolution, if any. Additionally, the advisory council should outline its priorities and areas of focus. These could include funding technology innovations such as deployment of low-cost card acceptance products as also support infrastructure and promotion activities to increase interoperable digital payments. PIDF could also focus on high frequency high volume payments – government payments, fuel, education and public transportation / transit – encouraging open innovation and low cost solutions.
From a policy perspective, the government could extend its helping hand by incentivising local production of PoS terminals as also reducing taxes and import duties for POS terminals. Regulatory intervention could also play an important role in helping on-board small merchants. For instance, the current merchant on-boarding process for card payments takes 5-7 days with a multiplicity of documents which can easily be changed change to a near-instant experience with the right impetus.
And most importantly, a relentless focus on encouraging open loop payment platforms that encourage use of cards and credentials issued by any participating entity to be used at a merchant activated by another participant. This ensures that the investment in on-boarding a new merchant will yield benefits to a much larger set of users and beneficiaries, compared to closed loop systems. The sheer scale of such an open platform will incentivize innovation amongst the participants help innovate use of technology such as NFC and tokenisation for tap to pay using mobile phones for example.
While we’re witnessing an upswing in digital payments amid the pandemic, there remains a widespread reliance on cash in India. Shifting to digital payments confers a range of benefits, including formalising transaction trails and clamping down on the informal economy, thereby saving an estimated $28 billion9 cost of printing cash.
As an industry – we are fully supportive of RBI’s target of 30 million card acceptance points in the next three years, including 5 million active PoS terminals by the end of 20211. With special focus on tier III to tier VI cities and North-eastern states, the successful implementation of PIDF can aid in achieving the target1 of 35% of transactions at PoS by 2021. In sync with its objective10 of empowering every Indian with access to a bouquet of e-payment options that are safe, secure, convenient, quick and affordable, setting up the PIDF11 is yet another masterstroke by the RBI.
- by T R Ramachandran, Group Country Manager, India & South Asia, Visa
1 Global Online Payment Methods 2020 and COVID-19's Impact
2 Digital payment solutions very valuable for Indian MSMEs
3 POS Terminals and Wireless M2M Market Assessment 2019-2024
4 BIS, World Bank World Development Indicators
5 RBI announces creation of Payments Infrastructure Development Fund
6 Nilekani-led committee recommends making all digital transactions to govt free
7 Perspectives on Accelerating Global Payment Acceptance: Visa Study
8 Card payments in Malaysia set to cross US$80bn by 2023
9 Introduce incentives to widen digital payments in India
10 Payment & Settlement Systems in India: Vision-2021
11 RBI announces creation of Payments Infrastructure Development Fund