A company called Pine Labs, earlier this month, raised an astonishing amount of money—$82 million at nearly $1 billion valuation. For a Gurugram fintech company that sells software that makes Point of Sale terminals intelligent, it seemed like a lot.
When smartphone-based payments’ growth is off the charts in India, why would investors back a company that is associated with Point of Sale (PoS) terminals? You know, those dreary-looking black-grey terminals that let you swipe a card to accept payments in a store.
It would seem like a counter-intuitive investment, but it’s not.
Banks have been the custodians of PoS expansion so far. On one end, they flooded merchants with PoS terminals when the Modi government served a diktat during the note ban in late 2016. In those three months of demonetisation, banks hooked merchants up with one million more terminals, taking it to a total of three million. This, in a country where there are close to 50 million merchants, according to trade body Confederation of All India Traders.
On the other end, banks have issued more than 800 million debit cards, only about half of which are in active use. Most are used on ATMs for cash withdrawals. So just converting existing debit card users to adopt payments can have a huge impact on transaction volumes. In India, 17% of all payments are done over PoS terminals, nearly double that of wallets, according to RBI data.
It’s been nearly two decades since PoS terminals made an entry into India and the country still has only three million terminals. It is mostly to do with the reluctance with which banks have been plodding through the landscape. A reluctance stemming from merchants’ disinterest to accept digital payments, and more simply, the unviability of the business.
Now, as opportunity rears its head again, working with aggregators such as Pine Labs, Ezetap and Innoviti makes this business a lot easier for banks. But banks would need to work harder to retain their relationships with merchants as the competition intensifies.
This relationship—between banks, merchants, and PoS aggregators—is not an equal one. Banks could end up at the bottom of the food chain, reduced to a settlement entity or a store of funds even as they look to ramp-up their PoS presence, thanks to targets from the government. “Aggregators are intermediaries between the bank and the merchant. There is obviously a need for a very strong and sensible partnership orientation to avoid a tilt in the balance of power between the bank and the aggregator,” said Sujatha Mohan, head of new initiatives at RBL Bank Ltd. As much as banks need the aggregators, working with them puts at risk the relationship that a bank has with a merchant. And even among the banks, the small banks can already sense the storm coming.
