How National ID can Power Universal Payment Acceptance?

By Suresh Rajagopalan, President Software Products, FSS

The Indian market is one of the world’s fast­est growing economies with USD 2.2 trillion in GDP but still has more than 85 percent of personal consumer expenditure made by cash. Despite its growing middle class and relatively strong cardholder base of 645M card­holders, debit and credit cards usage at point of sale (PoS)) is 1.7 transac­tions per cardholder in India.

A principal reason for slow pro­gress towards greater adoption of electronic payments is the absence of available acceptance locations, pre­venting greater usage of and spending via cards. Currently, India has an ap­proximate 2.7M point of sale devices, resulting in spotty and underdevel­oped POS infrastructure coverage. Further, the acceptance network and volume that exists is concentrated in India’s primary cities, which account for an estimated 70 percent of ter­minals and spend. The India Central Bank has indicated the country needs an approximate 20M POS devices to create a card acceptance infrastructure equal in size to other BRIC countries.

Overcoming barriers to develop­ing acceptance is a key imperative for the country seeking to further expand electronic payments. Currently, an approximate 90 percent of non-cash payments are processed through es­tablished card network infrastruc­tures. At the heart of the traditional POS payment acceptance network is the interchange fee averaging be­tween 0.75 percent and 2.5 percent —usually charged by a consumer’s bank to a merchant’s bank to facili­tate a card transaction. The rate of electronic payment acceptance is low, as the high processing fee renders the value proposition non-compelling, especially for micro and small mer­chants, who form the bulk of India’s retail sector, and are the most impor­tant in serving low-income consumer segments.

Aadhaar Pay, biometric-enabled merchant payment acceptance solu­tion, leverages alternate clearing and settlement rails for person-to-mer­chant transactions originating at the point of sale. Rather than ride on traditional card rails, Aadhaar Pay leverages the real-time interbank net­work for transaction clearing and set­tlement. By disintermediating tradi­tional interchanges and riding on less expensive bank rails, Aadhaar-based person to merchant payments lower processing fee and promote higher merchant uptake. The service uses Aadhaar, a unique national identity number issued by the Government to every citizen based on their biomet­ric and demographic information, as a proxy for the customer’s bank ac­count to facilitate transactions at the point of sale.

How it Works?

FSS Aadhaar Pay exploits three critical elements -- bank accounts, mobility and digital identity -- to disrupt tradi­tional POS business models. The ser­vice leverages the universal availabil­ity of the mobile device and Aadhaar -- India’s biometrically-enabled digi­tal identity -- that covers 99 percent of the population to advance the growth of digital payments. Envisaged as an open platform, the Unique Identifi­cation Authority of India (UIDAI Stack), allows payment service provid­ers to consume APIs, “on-demand” to authenticate customers. Besides lever­aging Aadhaar for establishing user credentials, the national identity also serves as a financial address that can be directly linked to the customer’s bank account.

Any merchant with a biometric reader and an Android phone can download the Aadhaar Pay applica­tion, self-register for the service using e-KYC, and start receiving payments. Customers make payments by scan­ning the fingerprint and entering the amount at the point-of-sale (PoS) terminal. Aadhaar Pay uses Aadhaar APIs to authenticate the customer’s biometric credentials mapped to the social security number. On successful authentication, the transactions are routed to the customer’s issuing bank. In contrast to setting-up a POS ter­minal, which takes between two and three weeks, FSS Aadhaar Pay takes a few minutes to set-up. Further, the cost of the POS is 80percent lower than the cost of the conventional POS terminal.

Delivering a Multiplier Impact

Aadhaar Pay has a multiplier impact on the growth of the acceptance pay­ment ecosystem by bringing quick-to-deploy, mobile-based affordable POS infrastructure to merchants whilst cre­ating a seamless transactional experi­ence for customers.

Specifically, it triggers a virtuous cycle of growth by:

Creating a Ready Market of 900 Mil­lion Captive Customers

Traditional acceptance networks need a large base of cardholders to be prof­itable. In emerging markets with a low base of carded users and unfamiliar­ity with digital payments, adoption remains slow. On the demand-side, Aadhaar Pay creates a ready addressa­ble market of 900+ million customers by leveraging Aadhaar, as a primary transaction identifier. Customers can initiate payments using their finger­print and Aadhaar number, eliminat­ing hassles related to downloading multiple apps, swiping cards, remem­bering PIN/passwords, downloading e-wallets or carrying a phone.

Broadening the Merchant Ecosystem

On the acquirer side, Aadhaar Pay reshapes expensive acquirer distribu­tion models by allowing banks to target previously under-penetrated micro-merchant segments with an efficient technology and commer­cial framework, easing the way for rapid onboarding and expansion of new acceptance points. The smallest street vendor, with the aid of a basic 2G phone and a fingerprint scanner device, can accept digital payments. To promote rapid uptake, there are no restrictions related to transaction amount, type of business, transaction volume, time, location, demography, and goods category

Offering a Low-Cost Solution

The cost of a point-of-sale (POS) ter­minal in India ranges between INR 8,000 (USD 120) to INR 12,000 (USD 180); countervailing duties and taxes account for about 20 percent of the price. In addition, the annual operating cost per terminal ranges between INR 3,000 (USD 45) and INR 4,000 (USD 60). FSS Aadhaar Pay mobile application, in compari­son, can be downloaded online even on a 2G Android phone, connected to a biometric reader costing INR 2,000 (USD 30). The significant reduction in Capex and OPEX makes it an ideal solution for all merchant segments, especially micro-merchants with a small turnover and low transaction volumes.

Delivering Differentiated Added Value Services

The “secret ingredient” to engineer­ing the digital payments transforma­tion is software. Hardware can be replicated easily, but software and services are much harder to copy, and this is where Aadhaar Pay brings a sustainable competitive advantage. Beyond the transaction, Aadhaar Pay potentially would take on a more so­phisticated, innovative approach to VAS. Merchants, big or small, could benefit from a complete packaged business solution, with the ability to customize specific components. This includes:

• support for QR codes

• ability to dynamically configure of­fers and discounts

• electronic invoices

• analytics and reporting: to sift through payment transactions and make recommendations to merchants for optimal inventory ordering or de­livering offers to customers based on buying patterns and preferences.

Settling Transactions in Real-Time

In the traditional interchange four-party payment models, settlement fol­lows a typical T+1 cycle. Aadhaar Pay uses the bank account as a source of funds and all transactions are cleared and settled using the IMPS network (India’s real-time fund transfer net­work), ensuring immediate crediting of accounts, freeing funds and low­ering working capital requirements for merchants.

Lowering Fraud Liability

As Aadhaar Pay leverages the bank account, it offers a low-risk product, with usage directly linked to the avail­ability of funds in the customer’s ac­count. For acquirers, there is no di­rect credit risk involved in processing transactions. This significantly lowers fraud liability and enables on-board­ing of merchants traditionally deemed high-risk under the conventional ac­quiring models.

Whilst the service is in the initial rollout stages, Aadhaar Pay removes the multiple layers of friction that, merchants and customers encounter whilst making payments. For banks in India, who have recently opened Jan Dhan (no frills) accounts for the low-income demographic, a broad-based acceptance network would prevent instant encashment and improve the circulation of money in the digital for­mat. Further, with the regulator waiv­ing merchant fees, Aadhaar Pay would help to develop sustainable acceptance that can enhance and fast-track the benefits of electronic payments.

Taking an early lead in the mar­ket, FSS launched Aadhaar Pay in April 2017. Currently, one of India’s top merchant acquirers, with an ap­proximate 20 percent share of the total POS market, has implemented Aadhaar Pay.

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