The humble QR code has led to the most remarkable shift in payments in India. But it is perhaps the same simplicity that made Indian banks skip the opportunity while fintechs zoomed in and profited from it.
Companies like Paytm, PhonePe, and Google Pay have led the charge in distributing QR codes but banks—big and small alike—are now muscling into the space. In addition to ramping up QR codes, they hope that their merchant-focused apps will give them a leg-up over fintechs by meeting all customer requirements in-house.
"Five years ago, banks used to own this space," said Raman Khanduja, co-founder and chief executive officer at Mintoak Innovations. Mintoak has partnered with State Bank of India, HDFC Bank Ltd., and Axis Bank Ltd., to build their merchant facing applications.
For the longest time, merchant payment acceptance has been the most seamless way to access small and medium enterprises as potential customers, he said.
That’s where the threat to banks begins as well. By tapping the merchant via a QR code, fintechs may also end up diverting the merchant’s credit, deposit, or other needs, to one of their partners or to their own payments bank in case they have one like Paytm.
The renewed push into the segment is more of a reactive move from banks, according to two private bankers and the founder of a fintech firm. All three spoke on the condition of anonymity.
Fintechs also have a lead in building models to identify credit-worthy merchants based on payment flows while banks are still in a nascent stage, the first of the two private bankers mentioned earlier told BQ Prime. While there are aggressive plans to ramp up such lending, it’s also critical for the bank to be the primary QR or current account for the merchant to be able to develop such models, the person said.
Goliath Mirrors David
"For us, we’re still staying with the market segment that we were looking at earlier with more broad-based and deeper solutions than earlier," Sanjeev Moghe, president and head of cards and payment at Axis Bank, told BQ Prime. Instead of pursuing small-sized merchants like corner grocery stores, Axis Bank is looking to directly acquire more of mid-sized or well-established merchant customers, he said.
Although point-of-sale terminals have long been a way for banks to win a merchant’s business, such devices have challenges because they are both expensive and non-interactive, Khanduja said. This has also kept their reach limited as there are only about 5 million unique merchants that accept payments via PoS devices as compared to QR codes, of which there are about 15 million, he said.
Banks have also moved to launch ‘soundbox’ replicas of their own, following the success of such products launched by Paytm and PhonePe. Soundboxes or voiceboxes are devices that announce the completion of a transaction.
"Purely from a funnel perspective, we have 50-60 lakh merchants—who are currently eligible—who do that many number of transactions which makes Soundbox a correct product for them," Bhavesh Gupta, chief operating office at Paytm, told analysts in a May 6 conference call.
So far, it’s more of a presence thing as opposed to chipping at the market share of fintechs, the first private banker mentioned earlier told BQ Prime, referring to banks across the board launching soundboxes of their own. The core idea with QR codes, the merchant apps, and the soundboxes is to offer a full suite of services so that the banks’ current account base is not at the risk of migrating, this person said.
The services could include offerings like insurance, cash management services, or working capital loans. Current accounts are also the cheapest source of money for banks since they don’t pay any interest.
"Banks are realising that if they don't act now, they might lose the SME business," Khanduja said.
Port Of Call
Of the 8.8 billion UPI transactions conducted in the month of April, about 57% flowed to merchants.
While person-to-person transactions account for a higher value of transactions overall, person-to-merchant transactions have outnumbered them on volume since September 2022, NPCI data shows. With burgeoning volumes on the merchant side, banks can obviously ill-afford to see the pitch sail by.
"It’s far more beneficial for you to be an acquiring banker at the merchant’s side rather than letting that role be played by a fintech," Jaikrishnan G, head of financial services consulting at Grant Thornton Bharat, said.
While being the acquirer will allow banks to save the fee they pay out to fintechs, avoid a settlement layer, and also get better visibility, cash-flow based lending is still some time away for them, he said.
Unsecured lending—from banks’ standpoint—will not be a preferred route to go for business loans for at least the next couple of years, Jaikrishnan said. For its part, Paytm disbursed loans worth Rs 12,554 crore in Q4 FY23, denoting a sequential growth of 26%.
In many ways, banks are currently trailing the path that fintechs carved out in the payments space. They’re building apps to offer services, deploying QR codes to preserve and enhance their customer base, and inching towards ramping up lending to merchants via digital means.
The apps will serve as the primary point of interaction with merchants since they are checked multiple times a day to ensure payments, the second of the two private bankers mentioned earlier told BQ Prime.
But banks are also typically used to building static products as opposed to apps which aren’t a one-time build, Khanduja said. That’s where companies like Mintoaks are stepping in to assist banks in building and maintaining such applications.
"There is inertia in the system. The big banks are just now waking up to this reality. Medium and small-sized banks will take some time," Khanduja said.
For now, big banks seem to have woken up to the threat of not making a mark in merchant payments. Cutting out fintechs and going to merchants directly by building and augmenting their own railroads appears to be their strategy of choice. But just how far these railroads carry them will likely depend on how well they can emulate—and consequently exceed—the services and experience offered by their fintech counterparts.
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