Digital Payments in India

The digital payment space is undergoing a major change on all sides. Consumer adoption is increasing and many payment collection options are evolving. Let us look at what we should know as a business owner, product manager, solution architect or marketer.

The Payment Process

There are four parties in a payment process: User (consumer), Merchant (seller), Payment Gateway/Processor, and Bank. Money moves from the user's bank to the merchant's bank typically through a payment processor. Merchant signs up with a payment processor for offering payment service to their users. The payment processor deducts a transaction fee and transfers the remaining money to the merchant's bank.

Payment Workflow Considerations

Let us ask these questions to assess our business's digital payment needs:

1. Do you want to accept payments in-app? Are you accepting it on a website?
2. Is your business relatively low-margin (say, grocery) or high-margin (say digital content, beautician services etc)? If your margins are lower you will prefer less-transaction fees over consumer convenience.
3. Are you accepting digital payments across the counter (shop, delivery person etc)?
4. Do you offer dynamic discounts (offer codes)? Do you have to support affiliate commissions?
5. Are your customers domestic (or international too)?
6. What is your customers' preferred nature of payment? Internet banking for example is very popular in India.
7. Do you need shopping cart (or will customers be comfortable buying one by one)? A grocery website would need a cart. An e-book store can manage without it, since customers don't usually don't buy 36 books on a single day.

These are the same questions we consider while building B2B solutions for our customers. We will cover these aspects in the following sections.

Nature of Business

Your choice of payment processing depends on your line of business. Broadly business offerings can be classified into two:

1. Physical Goods - From a payment perspective, many Physical Goods (say retail segments like Grocery etc) have low margins and a major consideration of Payment method chosen by merchant is the transaction fees. Even 2% is high for many merchants.
2. Digital Goods and Other services - In digital offerings (say e-book, in-app virtual goods) and services (say beautician services etc), the ease of payment and other aspects are more important. This is very well depicted where most of the in-app payments pay a transaction fee of 30% to the App Stores like Google Play or Apple Appstore. These in-app payment systems are well tuned for impulse buying (ease of use, in-context and one-click) so the merchants gain from more sales (more on this below). Users dropping off at payment gateway is a major concern for merchants.

Until recently we personally were not concerned of the transaction fees, since our offerings were purely digital. We were paying between 2% to 30%. Now, for some of our customers who, offer physical products, the transaction fee pressures are mounting.

Modes of Payment

To accept payments in-app or on a website, merchants should sign up with a payment gateway. The following are the various ways of accepting payments. The payment provider you choose should support many (if not all) of these:

1. Credit / Debit Cards - Users type in the card number and security information at the payment page and proceed.
2. Internet Banking - Users are taken to the Internet banking page of their bank of choice. Your chosen payment gateway should support enough number of banks.
3. Stored Wallets - Users will have to pre-store money into the wallet and use it to pay on the merchant sites. One-click payment is a benefit, the dis-advantage being un-used money remaining in the wallet.
4. UPI (Unified Payments Interface) - This is a new (and a potential game changer) mechanism just launched in India. Users install a UPI app (generally from their own bank, but can be any UPI provider or another bank) and do a one time setup. If a user choose UPI as a payment option on the merchant site, the consumer mobile app will ask for authorisation, where consumers type in the UPI m-pin and make the payment. For a user who has setup the app, this is the easiest mode of payment (compared with a wallet there is no problem of un-used money remaining in wallet). Merchant still have to sign up with a payment provider for UPI support (since a bank has to sponsor the UPI implementation, and merchant may not be in a position to do so).

The choice of payment options for consumers is important. In one of our consumer products, we had to avoid a specific payment provider due to inadequate internet bank support. In this specific consumer product, 90% of the website payments happen through internet banking.

Person to Person Payments

If your business wants to collect non-cash payments across the counter (say in a Grocery shop) or if you want to just pay your friend, these are the options.

1. Bank Provided: Use a UPI App or use the good old bank-to-bank transfer(RTGS/NEFT). Here UPI has the additional advantage that you need not disclose the bank account number. UPI works using a virtual payment address (created by each user, say xyz@hdfcbank). Transaction fees are minimal and generally fixed (independent of the transaction amount).
2. Wallet: Both parties should have the wallet app installed and need to just know the peer mobile number for the payment. Money moves from one wallet to another wallet (generally no transaction fee). If you however wants to withdraw the money from the wallet to bank, then the wallet provider charges a transaction fee. Wallet transactions beyond certain limits, require KYC verifications.
3. PoS Devices/Apps: Point of Sale card machines is very common in shops. Recently PoS apps are also evolving - consumer keys in the card info in the merchant app.

These modes of payments are not directly suited for in-app or website payment collections since these require to be manually triggered by the buyer/payer (not automatic as the usual online payments). Some payment gateways have integration for UPI and Wallet. So if you go through them, you can use it on your website/app.

Timings

Money leaves the consumer account/card/wallet instantly, but the time it takes to reach the merchant varies. During this period, money is with the payment processor. Some payment gateways even allow consumers to dispute and block payments to merchants during this period (purchase protection).

1. Payment gateways: Generally takes 2 to 3 days time to settle the amount to the merchant account.
2. Wallets: Money appears in merchant wallet immediately, but withdrawing to the bank generally takes days.

International Payments

Many domestic payment gateways do not have the capability to accept payments from international customers. In such a situation, merchants will have to additionally sign up with an international payment gateway. Websites and apps can show both (domestic and international) options to the consumers and they will choose appropriately. You can alternatively geo-detect and show the payment gateways (though this is not foolproof).

Some international payment gateways are able to accept payments from both domestic and international cards. So, you may be inclined to use one of those instead of the pain of signing up with two gateways, but as per the latest understanding, an Indian merchant is not allowed to accept domestic payments through a foreign gateway. Authorities don't want the money to unnecessarily go abroad and come back.

Payment Gateway Charges

Setup Fees: The majority of the payment gateways don't charge any setup fees. Some still do. Some charge annual fees and in turn reduce transaction fees.

Transaction Fees: This varies between 0.5% to 5%, more common being around 2%. Some gateways charge higher fees for digital goods or in-app payments (even up to 30%). Credit card handling costs are higher than internet banking charges and some payment gateways pass on this benefit to the merchants. This variation in transaction fees is also a function of the merchant's monthly transaction volumes, negotiation capability, etc.

Subscription Payments

Subscription payments are currently not easy in India since a one-time password (OTP) is mandated for most transactions. International payment gateways however are able to do this. So a merchant can offer automatic subscription payments to international customers. Their card gets charged every month automatically.

You may have to request domestic customers to manually initiate payments every month (or charge upfront, say for 12 months)

In-App Payments

Google Play and Apple Appstore have clear terms disallowing the use of external payment gateways if the goods sold are to be consumed in-app, digitally, etc. Read their terms carefully to see if your offering comes in this definition. They charge 30% as a transaction fee, but you will benefit from the one-click convenience users get and overall sales volumes could be positively impacted. They are also able to seamlessly charge domestic and international cards, even without OTPs. I guess through special approvals. Payment via Internet banking is out of the question. Some debit cards face challenges.

If you are selling other goods (typically non-digital), you are free to integrate any payment processor in-app.

Conclusion

In the current times, there is nothing stopping a business owner from accepting digital payments, be it across the counter, on your website, or in-app. A high-level understanding of the space is required, but the onboarding is reasonably smooth.

This post was originally written by us on LinkedIn and now also maintain it on our own website for reference