Tap-To-Phone: The Newest Way To Take Digital Payments To Small Merchants
A customers makes a contactless payment using a mobile phone. Photographer: Angel Garcia/Bloomberg

Tap-To-Phone: The Newest Way To Take Digital Payments To Small Merchants

As banks and payment operators look to reach the smallest of merchants across India, mobile point-of-sale or soft PoS card transactions are emerging as a possible new option. Technologies ranging from QR codes to UPI-based payments and now mobile PoS are being used to bring mom and pop stores, the last remaining bastion of cash transactions, into the digital payments fold.

Also known as the ‘tap and go’ or ‘tap to phone’ feature, the contactless payment service works the same as a hardware POS terminal. Through a mobile application, merchants can accept card payments using their near-field communication-enabled cellular devices. It helps avoid the cost of installing and maintaining PoS machines, which are typically cost-effective only when a relatively large volume go through the terminal.

“Typically, card transactions get limited by the need to have POS machines, and during the pandemic, it became an even bigger challenge to onboard new merchants because of that. This led to the launch of softPOS that allows financial institutions to seamlessly onboard merchants using just a mobile app,” said Nalin Bansal, head of RuPay and NFC at the umbrella entity for retail payments, National Payments Corporation of India.

As of December, the number of POS devices in the country formed just 0.6% of the total number of credit and debit cards issued by banks, according to the latest ATM/POS data on the Reserve Bank of India website. In terms of value, POS devices contributed to 30% of the overall value of card transactions in the country.

Earlier this month, NPCI tied up with the largest bank in the country, State Bank of India, to launch contactless payments for RuPay cards that work through merchants’ NFC-enabled smartphones. The service has also been adopted by other major banks and payment operators.

  • In June 2020, Mastercard, Axis Bank Ltd. and Worldline launched India’s first SoftPOS service for merchants that can be used via its app on android phones.
  • In November, HDFC Bank Ltd., in partnership with Visa, launched SmartHub Merchant Solutions 3.0—a comprehensive solution for merchants and self-employed professionals that allows them to accept payments in-store, online, and on-the-go through a single dashboard.
  • In January, merchant commerce platform Pine Labs launched its mobile app ‘AllTap’ for providing softPOS services to small merchants.
  • Last week, Paytm launched Paytm Smart POS for android phones.

Digital payments via unified payments interface have been on the rise for the last few years but the initial surge came from peer-to-peer payments.

The Covid-19 pandemic, however, led to a burst in digital payments across small merchants as social distancing norms spurred contactless transactions. Since April last year, payment to merchants via UPI more than doubled in value to Rs 70,243 crore, according to NPCI data.

Alongside UPI, small value card based payments are being encouraged. To this end, the central bank more than doubled the limits for contactless card transactions from Rs 2,000 to Rs 5,000 starting January.

"SoftPOS further democratizes payments by enabling small retailers to accept card transactions in a secure manner, without incurring relatively significant costs associated with deploying and maintaining POS terminals,” said Fali Hodiwalla, partner - financial services, consulting at advisory firm EY.

Further, the softPOS system also aligns directly with the RBI’s payments infrastructure development fund scheme that looks to increase acceptance and lower cost of digital payments in India by adding 30 lakh touch points—10 lakh physical and 20 lakh digital payment acceptance devices every year, focusing mainly on tier-3 to tier-6 cities.

The regulator’s push combined with the growing pace of digital payments has led to many believing that this could be the next phase of growth for digital payments in India.

“We believe that contactless payments will become the preferred choice of consumers for in-person payments, displacing cash usage with secure digital payments,” said Shailesh Paul, vice-president and head of merchant sales and solutions for India and South Asia at Visa, who was also part of the RBI's PIDF committee.

“The recent introduction of the low-cost tap-to-phone solution in India will further expand the ecosystem of merchants that can accept secure and convenient contactless transactions on their NFC-enabled smartphones,” he said.

The introduction of softPOS, according to Bansal, also opens up the eventuality of a super app for merchants that will allow them to accept all kinds of payment modes using a single app.

“It is more about co-existence of different digital payment modes in a single app for merchants that also allows them to digitize their own books in the process. So, now instead of having a QR code pasted on one side and a POS machine on the other, this one app will cater to all payments,” he said.

The softPOS application can also offer value added services such as digitization of payment ledgers, MIS (management information system) dashboards and reconciliation services, according to Hodiwalla.

The integrated apps of HDFC Bank and Axis Bank already provide some allied functionalities such as enabling collection reminders, inventory management, billing software, e-commerce, business-to-business payment solutions, and lending to merchants’ based on their transaction history.

"Further, a history of card transactions acquired by the merchant would enable financial services players to extend receivables finance aligned to the working capital requirements of the merchant," Hodiwalla said.

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