The ATM’s 10-year old feature still at it’s best

But this unstoppable juggernaut is now showing signs of weariness. UPI’s average month-on-month growth rate for the payments system has slowed down considerably. It went from an average growth rate in volumes of 30% in 2017 to 5.6% between April 2019 and February 2020.

UPI merchant payments accounted for 35% of the overall transaction volume three years after its launch. However, that share has mostly stayed the same since, as growth in the sector is concentrated on peer-to-peer payments.

“Solving merchant payments alone is not valuable for us,” says the PhonePe executive. “Solving a common problem for the merchant and customer is when that loop becomes valuable for us and drives network effect.”

To do that, PhonePe’s product managers came up with about a dozen ideas. The ATM idea fell into that cross-section. Find a store near you with the facility on the PhonePe app. Open the tab for the store, hit the ‘Withdraw Cash’ icon, and make the transaction. All that’s left is for you to collect the cash from the shopkeeper.

The move attempts to solve three problems at once. It makes cash readily available for the customer, drives footfalls into the store for the merchants, and gives a leg-up to those who are on the fence about going digital, thereby driving traffic to PhonePe.

Nigam believes it will get those in tier-two cities and beyond to download and use the app to access petty cash with UPI instead of ATMs. “If we can market this point, it can get the next 100 million to use digital payments. If you use this four to five times, it is a simple mental leap to ‘all these merchants will take payments’. This will seed digital behaviour,” he says.

UPI users are all tapped out, however.

It is estimated that about 100 million today use digital payments. There’s also the belief that the next 100 million users are WhatsApp’s to take, due to its popularity as a messaging platform in the country.

Google Pay, too, is swarming over PhonePe for market share, and with WhatsApp’s launch of payments imminent, the ATM move is a simple hack to give PhonePe growth in transaction volumes. Even if this isn’t for a transaction that can be completed on its platform.

But the three-problem equation is not as easily solved. PhonePe gets higher transaction volumes that could potentially drive valuation, and users get quick access to cash, but merchants aren’t best served. The company doesn’t pay them any fee to extend this service. In fact, the move potentially opens merchants up to thorny accounting hassles.

Currency shock

No, not a hassle. An accounting nightmare.

The RBI’s Cash at PoS facility mentioned above is still on the fringes of the payments sector, even 10 years after its launch. By December 2019, it had seen only 8 million transactions. And the main reason for this? Disuse.

The merchants earned a Rs 5 ($0.07) incentive per transaction for giving this service. Hence, it needed to be accounted for as income and was subject to income tax.

Rajeev Agrawal, chief executive of Innoviti, which sells point of sale machines to stores, said the company had found limited offtake of this feature when introduced several years back due to the accounting and operational issues it leads to for the merchants for a small revenue increase. “Merchants did not see a return on the investment for the efforts required to manage the issues,” he said.

The merchant had to account this into his billing system, so he had to register this as a product even though this is not a good or a service. Then, they needed to get a Tax Deducted at Source (TDS) certificate from the bank for this. All this effort when a merchant’s yearly earnings from this service would be no more than about Rs 2,000 ($27.3) in a year with 30 transactions in a month.

This is why Nigam wants this service to be seen as a peer-to-peer transaction, where there are no commissions paid to the merchant. “If there is no commission paid then there is no income tax to be paid,” he reasons.

The Ken spoke to a senior income tax official who confirmed that if a commission is charged, income tax will have to be paid on this service. The official did not want to come on record as she needed permission to speak to the media.