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Indian Payment Tech Startups Brace For Transaction Behaviour Switch In the Wake Of Second Wave

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As the second wave of Covid-19 rages through the country, disrupting normalcy again, retail payment tech enablers are already bracing for a change in usage behaviour. According to industry players that Inc42 spoke with, merchant onboarding for physical POS terminals is likely to be hit by up to 50%.

As of 2021, India has witnessed a 300% rise in the adoption of PoS terminals over the last five years at a CAGR of 38%, according to data from the Reserve Bank Of India (RBI). While RBI reported the addition of 1.4 Mn POS terminals between February 2019-2020, a little over 700K POS terminals were added between February 2020-2021. Similarly, while February 2020 witnessed a 26% year on year growth in POS transaction volumes, there was a 17% year on year decline in transaction volumes as reported in February 2021. 

With top markets like Delhi NCR, Karnataka, Maharashtra among many others reeling under a large spike in the number of infections, these regions have implemented partial to full lockdowns. Local authorities have largely left internet-based retail services out of these lockdowns as in the case of ecommerce, food delivery and cab services. However, with only essential shops allowed to remain open in many regions, these restrictions are expected to impact POS transactions across small merchants and traders. Experts and industry leaders see a shift in transaction behaviour to work around these restrictions.

According to impact observed last year, the segments that were hit hardest by the lockdowns included electronics and consumer durables, hotels and restaurants, physical retail (non-essentials), ecommerce (non-essentials) and SMEs. Of course, the impact is likely to be much more staggered this year compared to 2020 (when the lockdown was imposed in one go and lifted in a staggered manner). Yet, these segments (barring ecommerce) rely heavily on POS transactions which are likely to be impacted. Although a huge chunk of these transactions have already or are likely to shift to digital modes. 

Experts suggest that while many retailers have figured out ways to service orders online, physical POS transactions and onboarding of POS enabled merchants is likely to experience a slowdown.

“Given the kind of markets that have imposed lockdown-like restrictions over the past few weeks, we can estimate around 30-50% impact to merchant acquisition rates in these regions,” said Mihir Gandhi, partner and leader, payments transformation, PWC, India.

Gandhi notes that a chunk of transactions that happened at physical grocery stores would have moved to grocery aggregators. However, retailers have adopted digital solutions rapidly over the past year. So there is a trend towards mobilising home deliveries and accepting payments through MPOS or SoftPOS methods, added Gandhi. Around 30-40% of the retail POS user base has migrated to these solutions which do not require a physical POS terminal. 

As per RBI data, as of February 2021, there were a total of 5.8 Mn point of sale (PoS) merchants in India – a 14% growth in comparison to April 2020. According to the PWC Indian Payments Handbook 2020-25, due to the COVID-19 crisis, PoS merchant acquisition growth is likely to be low. Experts expect the growth to either remain at the same level or increase by only 1–2% in FY 20–21. 

2021 Performance Better Than 2020

As the Covid-19 second wave gathered steam, it was not until the 15th of April that regions like Delhi and Maharashtra imposed curfews on movements in their jurisdictions. 

Once curfews/lockdowns were imposed, a lot of essential shopping requirements shifted to online platforms across households that had access to these channels. Additionally, the 2021 lockdown has largely allowed internet-based services to continue including ecommerce. Despite the fact that local authorities across all the regions are confused about what qualifies as essentials, the overall transaction demand has not suffered heavily. It did help switch some of the transaction volumes that would otherwise have gone via POS terminals to the online channels.

Suhail Sameer, Group President, BharatPe a Delhi-based merchant-focused payments platform, noted that even as the volume of transactions has been hit in April compared to March 2021, it has been balanced by a larger ticket size across their merchant base. 

When we compare our numbers of March 2021 with April 2021, there is a dip of 15% in overall transactions across QR and POS. Interestingly, value of transactions has dropped much lesser (only 7%), which implies average transaction value has gone up as compared to March. There are some categories like medical and grocery that have seen large growth in transactions as well as value in April 2021,” said Sameer.

Meanwhile, the medical/pharmacy category has seen an average of 50% increase in April 2021. However, food, beverage and fashion have seen a drop due to lockdowns in many states and cities.

On the other hand, merchant onboarding for physical POS solutions has picked in smaller towns across the country which have not been ravaged by the pandemic, yet. Experts suggest that this staggered nature of lockdowns will prevent the kind of impact on physical (non-essential) retailers had seen last year. 

BharatPe has cut down on in-person merchant onboarding across major cities. However, digital onboarding processes have allowed the company to continue having new merchants on its platform across markets where they can enter a few basic details, do online KYC, and order their QR/ BharatSwipe machine.

Surviving The Second Wave

Current lockdown restrictions across multiple states and metros may cost at least around 40% of the monthly earnings of micro retailers, according to the Federation of Retailer Association of India (FRAI), a representative body for around 4 Cr micro, small, and medium retailers in India. However, the situation in 2020 is markedly different from what it was in 2021.

“This time around, we are seeing a lot more merchants- across non-essential but important segments- like consumer electronics, utility products or even stationary for instance, finding loopholes or workarounds to continue sales via home delivery despite lockdowns. This is based on their learning from last year and the fact that many of them have adopted digital transaction channels like UPI to service orders remotely,” said a fintech analyst who did not wish to be quoted. 

Such demand, coupled with the lower growth estimation for physical POS terminals, is likely to create a larger market for software and smartphone-only solutions. So, while the overall volume and value of POS transactions will increase across small retailers and merchant bases, it will be driven by a shift away from physical POS devices.