Contactless conundrum: More blind spots on the nature of proximity payments

The Covid-19 pandemic has given proximity payments a shot in the arm, but clarity on their nature is still elusive

All digital transactions — where there is no touch or contact — are contactless,” asserts Ashish Ahuja, chief operating officer at Fino Payments Bank. In his view, NFC (near-field communications), RFID (radio-frequency identification) and QR code transactions are contactless. So too, is the process of onboarding customers through video-KYC (know your customer) or the bio-metric Aadhaar-enabled payment system.
 

When AGS Transact Technologies launched a solution that allows withdrawal of cash at automated teller machines by scanning a QR code, it was positioned as a “touchless” initiative, not a contactless one. “We felt that scanning via the QR code was technically touchless,” says Mahesh Patel, the firm’s president and group chief technology officer. Not surprisingly, this is confusing.

Creative interpretation
 

Since the Reserve Bank of India (RBI) has not defined “contactless”, it is being creatively interpreted to mean all modes of cashless payment. The central bank, however, appears to hint in its annual report for 2019-20 that a distinction needs to be made between in-store and online payments, when it notes: “The ratio of RuPay card transactions at e-commerce portals to point-of-sale (PoS) jumped to 237 per cent in April 2020, from 76.8 per cent in February 2020.”
 

Probir Roy, co-founder of Paymate, and an independent director at Nazara Technologies, laments that proximity technology is being conflated with remote payments, adding: “Only NFC and RFID transactions (not PIN) are contactless.” And according to Naveen Surya, chairman-emeritus, Payments Council of India: “True contactless payments are the likes of OysterPay in the UK or Octopus in Hong Kong.” He adds: “If you look at the history of such payments, they evolved from mass transport, and then found their way into the wider retail segment.”
 

There are still more blind spots.
 

The volume and value of credit card transactions at PoS machines fell from 1,072.50 lakh and Rs 26,656 crore in March 2020 to 601.63 lakh and Rs 20,107 crore in July 2020. These parameters for debit card transactions fell from 2,455.92 lakh and Rs 36,258 crore to 1,461.94 lakh and Rs 25,821 crore during this period. To the extent that pandemic-era spends at stores were on essentials, the percentage share of contactless settlements (via NFC and not PIN-driven, going by its strict definition) may show a large increase owing to the lower volumes and value of transactions.
 

There are just over 60 million credit cards and 900 million debit cards in the country; and a shade above five million PoS terminals. Not all the plastic in circulation or PoS units facilitate contactless payments via NFC. There is no data in the public domain on the percentage share of plastic and PoS units that facilitate contactless payments — and no break-up in the central bank’s data to show what percentage of volume and value of transactions are put through using NFC.

 

Why is this important? “The bifurcation of data has to be captured. You will then come to know at the granular level where transactions are taking place geographically, and what the ticket sizes are. This is important to deepen the acceptance network,” points out Mahesh Ramamoorthy, managing director (banking solutions), for Asia-Pacific at FIS, a provider of technology solutions for merchants and banks in India.
 

And for all the talk of a spurt in contactless and digital payments, currency in circulation was Rs 2,656,476 crore (on September 25, 2020), up 23 per cent year-on-year, and 13 per cent more than the end-March 2020 figure of Rs 2,349,715 crore.
 

MDR is back in focus
 

The elephant in the room with regard to contactless payments at stores is the merchant discount rate (MDR) — the charge levied on merchants every time a transaction is conducted through a PoS. This is shared by issuers, acquirers, the networks (Visa, Mastercard and RuPay), and non-bank deployers. We are talking basis points (bps) here — on a debit card transaction of over Rs 2,000, the MDR is 0.90 bps, of which 0.60 bps goes to the issuer, 0.10 bps to the acquirer; while others who make up the loop get to keep what’s left. Again, this is only illustrative; it can vary hugely, depending on how these arrangements have been crafted.

 

“The technical issue is that there is no MDR up to Rs 2,000. That is on the transaction size. It is also not to be levied at chains with a turnover of more than Rs 50-crore. If anything, sales there are higher and they should be able to absorb the MDR,” points out a banker.
 

What is surprising is that nobody has so far made a case for zero MDR — neither the Nandan Nilekani and Ratan P Watal committees on digital payments (which submitted their reports in May 2019 and December 2016, respectively), nor the RBI’s Vision — 2019-2021 document on digital payment systems in India, which favoured the creation of additional cost efficiencies wherever possible, not eliminating the MDR. They were all for market-based pricing.
 

Clearly, the jury is still out on all these contentious issues.

A shift towards mobile wallets?
 

Has there been a shift to mobile wallets (M-wallets) in a big way? The volume and value of M-wallet transactions declined from 3,782.82 lakh and Rs 13,111 crore in March 2020 to 3,205.59 lakh and Rs 12,892 crore in July 2020. It is evident that while the number of M-wallet transactions has increased in comparison to credit and debit card transactions at merchant outlets, it has not gone up substantially in value terms. There is also nothing to suggest that M-wallets have eaten into the share of PoS-linked payments in a big way.