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Small merchants; huge opportunities

Monday, August 07, 2017
By Vaibhav Lodha

Vaibhav Lodha
Co-founder, ftcash

The owner of a small recharge outlet in Varanasi, Laxman would make a nifty sum of about Rs. 1000-1500 rupees each day until last November when the government announced its decision to withdraw the 500 and 1000-rupee currency notes. Vijay, like many other small merchants in his locality was left confused and scared at the prospect of losing money and business due to the unavailability of cash.

Vijay, who until then only accepted digital mobile wallet payments from friends discovered a fast, exciting and most importantly hassle-free medium to conduct transactions with his customers. He was so thrilled with his discovery that he also began encouraging other merchants and vendors around him to adopt it. Further down south in Telangana, farmers’ markets experimented with an electronic payment system of their own which allowed customers with Aadhar-linked bank accounts to buy vegetables using tokens which they could purchase through debit cards or m-wallets at designated booths and kiosks.

There are over 60 million micro merchants and entrepreneurs in India, of which only 1.25 million accepted digital payments before November 2016. Although this figure bumped up to 2.25 million in the months following demonetization, it is however, still a meagre number when compared to the total number of small merchants operating in the country. While demonetization gave digital transactions a much-needed push, the lack of a well-developed digital infrastructure in the country is a major impediment to the large-scale adoption of digital payments in India.

A recent study conducted by Deloitte India among small merchants in the country states that as of February 2017, only 7% of merchants in the country accept payments from both cards and m-wallets, while nearly 56% merchants still do not accept any form of digital payments. Acceptance of digital payments by merchants often depends on factors such as their annual turnover, location and nature of their business. The higher a merchant’s turnover, the greater is his willingness to offer customers the option to make card payments. Another factor influencing this decision is the minimum monthly card transaction volume that merchants must maintain, which generally ranges between Rs. 20,000 and Rs. 25,000. Hence, a merchant will have to attain a monthly turnover of Rs. 1,50,000 to avoid paying the monthly commitment charge, assuming card transactions constitute about 7-8% of a merchant’s total monthly revenue. Hence, there needs to be a way to make acceptance of card payments a more lucrative proposition for small merchants with annual turnovers of less than Rs. 15 lakhs.

The government’s intensified focus on creating a digital economy has led to the emergence of several digital payment tools that are simple, efficient and cost-effective even for small merchants who have a low annual turnover. Aadhar Pay, which is built on a zero MDR (merchant discount rate) regime is one such tool that incentivizes digital payments for small merchants which means that conducting transactions through it would not require these merchants to pay any additional fee.

The development of the Immediate Payments Service (IMPS) is perhaps one of the most important developments in the Indian digital payments infrastructure. IMPS is an interoperable push payment system that allows banks and wallet providers across India to transfer funds within seconds and round the clock using ATMs, mobiles, and web interfaces. The Unified Payments Interface (UPI), created based on the IMPS technology, allows banks to directly transfer money to each other simply through an Aadhaar number or a mobile phone number with pin. UPI is by far one of the most significant payment tools in the country so far, taking India five years ahead of the US with a well-advanced digital payments technology.

Besides some of the more obvious benefits that digitization offers, an ecosystem of small merchants backed by digital transactions will help small and micro entrepreneurs to capitalize on a systematic approach to recording and tracking purchases, revenue inflows, etc. The primary benefits of digital transactions to merchants will be in the form of the ability to earn higher revenues and reduce the burden of handling cash and the risks that go with it.

While demonetization has expedited the acceptance of digital payments in the short term, the long-term sustainability of it depends largely on the merchants and their ecosystem. The faster they acknowledge the demand of their customer for frictionless payment methods, the easier and more beneficial it will be for them to accept digital payments in a similar way as they did with cash payments.

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