UPI Ubiquity Will Ease QR Code Standardisation

In December 2019, the Reserve Bank of India had set up a committee for the analysis of Quick Response or QR codes, that submitted its report in July. Among other key recommendations like scalability, security, know-your-customer, and awareness, the committee suggested phasing out closed-loop QRs in favour of interoperable QR like Bharat QR and UPI QR. Through its circular on Oct. 22, RBI has declared March 31, 2022, as the deadline for phasing out all closed-loop QRs.

As per a QR analysis report, there are roughly 40 million merchants in India and currently, 20 million are served through QRs – including closed-loop QR. I reckon only 6-7 million merchants are active on QR. What happened to those inactive 13-14 million merchants is another story to tell.

Before we proceed, it is important to understand what a closed-loop QR is, that the committee is specifically referring to. After the demonetisation of high-value currency notes in November 2016, the Paytm digital wallet became the most adopted payment instrument among customers and merchants alike, followed by Mobikwik and few others. Paytm deployed an army of people to help merchants accept digital payments, whose diligent execution led to millions of Paytm QR being adopted all over India. This Paytm QR allowed Paytm App users to pay merchants. No other app—like Mobikwik or PhonePe, or Google Pay—could scan these QRs. This was from 2017 to early 2019, when UPI was still being adopted by mass users and various UPI apps had started to popularise the concept of peer-to-peer payments. Once P2P use cases were established, payment companies like PhonePe and BharatPe started acquiring merchants on UPI by issuing them an interoperable QR. This QR, irrespective of who issued it, could be scanned by any UPI app.

What Changes?

So, is this a death knell for closed-loop QRs? Will it impact the merchants and customers? Several media outlets highlighted how it may impact large payment companies like Paytm and it is likely to create a massive overhead for companies to replace the QR. A large-scale impact on merchants and consumers is unlikely, as platforms that ran closed-loop QR codes won’t be staring at a dead-end. Paytm, for example, started offering UPI QR in 2019, so most of its active merchant users are likely already on UPI QR. Moreover, UPI QR is today actively issued by PhonePe, Google Pay, BharatePe, HDFC Bank, and Paytm among others.

Then there are several new-age retail tech startups like Udaan or Khatabook who have also started issuing UPI QR. In all likelihood, most of the active 6-7 million merchants have been covered by this combined exercise.

Let’s talk about merchants who may still be on closed-loop QR and how it may impact them and their customers. Rare is the merchant who has not yet been approached by UPI-based platforms. Some are still happy with cash and their current digital payment needs may still be served by the closed-loop QR as they aren’t likely to get more than 1-2% of their transactions through QR in a month. In absence of this QR, those 1-2% customers may switch to cash happily or move the transaction to the shop’s udhaar khata or credit ledger, the most popular mode of transactions at the neighbourhood stores across India.

No shopkeeper wants to lose any business so they will find a way out. Many merchants are also accepting money in their bank account directly, using a UPI-linked mobile number that they display the shop. Some merchants display their UPI ID, still a relatively unknown concept. That eliminates the need for a QR to an extent. These transactions are routed through the P2P mode.

QR can do a lot more than just payments, one such example is the Spot Platform on Google Pay which allows merchants to create a mini shop online and allow customers to interact with them digitally. It is nothing but a form of QR, that is closed-loop. The end action that this QR enables is payment through the Google Pay app.

It will be interesting to see if such QR implementations are covered as well, under the new regulation. So far, the RBI notification has not specifically mentioned such quasi-QR payments. There are few more startups that are now actively using QR to enable contactless menu browsing and ordering at shops and restaurants. They are most likely to be unaffected as they are focusing more on the contactless ordering experience instead of payments.

What Do Platforms Leverage Next?

One could now argue that if an interoperable UPI QR allows any UPI app to pay to any merchant, then why to fight over acquiring a merchant, especially when the merchant discount rate or MDR fee is also zero. There are a few ways that even interoperable QRs can unlock custom payment experience for customers. For example, a Paytm interoperable QR—while allowing Google Pay and PhonePe users to pay using UPI— allows users with the Paytm App to unlock a lot more payment options than just UPI. This is the reason for companies to aggressively acquire merchants, so as to unlock such custom experiences for their own users.

UPI 3.0, that in the works, is likely to provide goods and services tax benefits to merchants on digital transactions. There is also a proposal to introduce income tax benefits to customers on digital payments, as UPI 3.0 has a provision to include a customer’s PAN details. This committee has also recommended providing cashback incentives to merchants for the adoption of QR. One may recall that the Ministry of Electronics and Information Technology ran a cashback program for customers and merchants in 2019 which accelerated the growth of UPI QRs.

Well wait, we didn’t cover BharatQR which has been facing an existential crisis since its launch. There are multiple reasons for the poor adoption of BharatQR. While RBI wants to retain BharatQR, I don’t see any reason for its adoption. With new card tokenisation in UPI Apps, UPI QR itself may allow a customer to use their tokenized card to pay to a merchant. Do we really need BharatQR?

Deepak Abbot is co-founder of indiagold, and former Senior Vice President - Products at Paytm.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.